The performance of all enterprises is greatly affected by the
environment in which they operate. Hallberg (2000:9) for example, argues
that a well-developed physical infrastructure that includes reliable
transportation, warehousing and port facilities, and communications
networks has an influence on MSEs development. (1) Similarly Tolentino
(1995) notes that macroeconomic framework and policies directed at
providing support to MSEs development are likely to determine and
influence the demand for their products and service. A biased policy
framework against MSEs therefore can, among others, restrict access to
essential inputs such as start-up and working capital, machinery and
equipment, and raw materials (Mead and Liedholm, 1998).
Tolentino (1995) and Hallberg (2000) also argue that a legal and
regulatory framework which results into excessively complex registration
and licensing requirements and demands tedious and costly reporting
practices is likely to impose constraints on the business activities in
addition to placing heavy burden on entrepreneurs and their businesses.
In addition to stimulating the creation of new enterprises and fostering
their viability and growth, an environment that is supportive to MSEs is
likely to contribute to the effectiveness and sustainability of support
programs. A conducive and enabling policy and regulatory environment are
therefore crucial to the development of MSEs.
Following the implementation of liberalisation policies in African
countries during the last two decades, the African business environment
has witnessed various changes. Such changes, among others, involve the
opening of business opportunities within the private sector
(Kristiansen, 2002b). In pursuit of these business opportunities,
however, MSEs seem to be hindered by formal procedures and bureaucracy.
Despite the implementation of various economic adjustment programs,
there is a growing shade of opinion that small businesses are still at a
severe disadvantage (Helmsing and Kolstee, 1993; English and Henault,
1995; Kristiansen, 2002b). While various studies (Levy, 1991; Parker et
al, 1995; Kristiansen, 2002b) have been conducted in the past in
relation to small business environment in Tanzania, most of them focused
on identifying the various factors that affect the environment for MSEs.
This paper, however, goes beyond this level and conducts an analysis
that gives careful attention to the impact of these factors to
enterprise development in the country. Based on this analysis the study
develops a model that suggests corrective measures to the identified
One basic premise to this study is that there are a significant
number of smaller enterprises, which do not fit into the conventional
enterprise recognition in Tanzania. According to the informal sector
survey of 1991, small enterprises operating at that time in the informal
sector alone numbered more than 1.7 million businesses, engaging about
three million persons, accounting for about 20% of the country's
labour force (URT, 2003). Similarly unemployment at present is a
significant problem the country has to deal with. Estimates indicate
that there are about 700,000 new entrants into the labour force every
year. About 500,000 of these are school leavers with few marketable
skills. The public sector currently is able to employ only about 40,000
of the new entrants into the labour market, leaving 660,000 to join the
unemployed or the underemployed reserve. (2) Most of them end up in the
MSE sector, and especially in the informal sector. In addition to job
creation, it is also estimated that about a third of the country's
GDP originates from this sector. Despite the current data on the small
business sector in Tanzania being sketchy and unreliable, still the
above statistics give a reflection of the role this sector plays in the
This paper is organised in seven sections. A discussion of the
informal sector is presented in the next section, followed by a review
of the theoretical background to the study. Section four describes the
study methodology. A discussion of the study results follows in section
five. Section six presents the likely consequences of the country's
existing regulatory and tax regime. The paper concludes with policy
implications and the model on reforming the regulatory and tax regime.
The Informal Sector
The term informal sector has remained obscure due to the
difficulties in clearly establishing what constitutes the sector and on
what the boundaries are between the informal and formal sectors
(Sethuraman, 1981). At best this term seems to be synonymous with the
dualistic nature of economies. (3) Dualistic conceptualisations
according to Peattie (1987) have been presented for both developed
economies and the developing world. The concept of dualism as applied to
developing countries has been attributed various meanings by different
social scientists. In an attempt to organise his fieldwork with poor
city dwellers in Ghana, Hart (1973) used the term informal sector to
describe "the urban sub-proletariat" in that country. Hart
argued that the informal sector could be used to denote the existence of
informality in the income-generating activities of the sub-proletariat.
In Hart's view, the distinction between formal and informal income
opportunities is based essentially on that between wage earning and
In an effort to distinguish the informal sector from the formal
sector, the ILO/UNDP (1972) employment mission on Kenya suggested that
(a) the informal sector is one where free entry to new enterprises
exists; (b) enterprises in this sector rely on indigenous resources; (c)
they are family owned and small scale; (d) they are labour intensive;
(e) their workers rely on non-formal sources of education and skills;
(f) they operate in unregulated and competitive markets; (g) owners lack
entrepreneurial skills and technical skills, and possess little or no
capital of their own. Using this framework, ILO attempted to define the
informal sector as that "sector which consists of small-scale units
engaged in the production and distribution of goods and services with
the primary objective of generating employment and incomes to their
participants notwithstanding the constraints on capital, both physical
and human, and know-how."
Although the use of the informal sector concept is likely not to
identify a phenomenon or set of phenomena in the world, Peattie (1987)
notes that the use of this concept in policy and planning is in itself a
real phenomenon. In Peattie's view, the informal sector concept has
become popular because it responded to a gap in the working apparatus of
development economics in a way which could be seen as congenial by
groups with quite different axes to grind. Peattie further argues that
the dichotomy between a "formal sector" and an "informal
sector" can be viewed as the latest in a series of dualistic
conceptualisations which have stressed the contrast between two sets of
economic activities, one being relatively disadvantaged. A common way of
describing the informal sector therefore appears to be in the form of
contrasting it with the formal sector. Specifically Peattie (1987: 852)
notes that there are dimensions of scale and history in the dualistic
scenarios; the "modern" or "central" firms tend to
be larger, organised in a more formal and bureaucratic way, and have
more modern technology. Central to the contrast is always a difference
in capital/labour ratios; the privileged firms have more capital, not
only fixed capital and working capital but even, it turns out, human
capital, since the smaller and less privileged firms naturally have to
fall back on cheaper and less skilled labour. The "modern"
firms are often seen as favoured and given special access by
governments; the other firms, however, may derive advantages from
escaping regulation and the costs of regulation (illegal trading).
Following various efforts by academics, researchers and policy makers in
developing countries, there seems to be a wide recognition of the
existence of an informal sector, a sector which encompasses a wide
variety of economic activities that tend to be "overlooked" in
statistics (Fluitman, 1989). In Africa, Thomas (1992) notes that
informal as well as formal sector entrepreneurship have a long history.
The co-existence of a formal and informal sector according to Fluitman
is due to constraints that do not apply equally to all businesses in the
Despite its effort to describe the informal sector, the ILO work in
Kenya contrasted with the early work of Lewis (1954), who saw the
existence of this sector as representation of social welfare problems
directly to the individual in the sector rather than a societal issue of
economic growth management. However, according to the ILO study, the
informal sector, in terms of developing policies, does not compete with
but rather supports the overall goals of economic growth. The ILO work
saw income inequality to be the reason behind the generation of the
informal sector, which can neither grow adequately itself nor transform
the rest of the economic system. Peattie (1987), in support of the
ILO's characterisation of the informal sector, similarly argues
that the concept provides a strong backing to a variety of economic
activities, which would otherwise have been ignored in policy.
Consequently the concept of an "informal sector" has come into
more and more general use because it appears to serve the purposes of
many different groups with a number of different purposes.
De Soto (1989), in his work on Peru's informal economy, views
the thinking that the informal sector is a problem characterised by
clandestine, unregistered, illegal businesses that pay no taxes and
compete unfairly with businesses that pay taxes, to be erroneous. The
informal sector according to De Soto is seen in many ways to be more
authentic, hardworking, and creative than the one that hypocritically
calls itself legitimate. De Soto further argues that because of legal
limitations, informal businesses, which make up the informal sector,
cannot grow and cannot plan for the future. One of the key measures in
assisting the informal sector, a sector into which MSEs appear to
represent a large proportion, seems to be a change in the policy
environment in which businesses operate. Clearly there is a greater need
to appreciate the merits of the sector. Unless positive policies are
adopted it may not be possible to mount various forms of support to this
Theoretical Background to the Study
The basis for business environment analysis by this study is
established by considering various theoretical contributions. One such
contribution relates to the ability to find new business opportunities
in a society or the capability to innovate (Schumpeter, 1934;
Leibenstein, 1966). North (1993), in search of sources of economic
growth, emphasises the role of institutions in societal change. Formal
rules and guidelines by these institutions, for example, have an effect
in shaping the business environment. Furthermore, North argues that
formal rules that are created and conducted by principals, agents and
state bureaucracy hinder innovations and economic growth. Formal
institutional rules and constraints arguably vary with contextual
settings. In developing countries Kristiansen (2002b), for example,
argues that interests of the elite normally have a strong dominance over
the wishes of ordinary people. In Kristiansen's view the principals
use their agents at different levels of state bureaucracy to enforce
their rules, to limit opposing interest, and to hinder differing
economic actions by non-elite groups.
North (1981) similarly notes that one of the primary objectives of
institutions is to maximise the utility of the rulers by specifying a
pattern of wealth and income distribution. Tax regulations and formal
rules are but some of the examples to this assertion. Several recent
studies underline the need to study economic theories of
entrepreneurship and emphasise the wider societal setting within which
the entrepreneurial endeavour emerges and evolves (Zafirovski, 1999;
Kupferberg, 1998). In Tanzania a common argument maintains that heavy
government involvement in the economy after independence caused major
market distortions, resulting in sub-optimal allocation of economic
resources and the development of an environment that was not conducive
to private business development (Kristiansen, 2002b). On the other hand,
while macroeconomic intervention in the economic environment through
various structural adjustment programs has been praised for creating a
level playing field for MSEs, many observers believe that small
businesses are still at a severe disadvantage. Despite private business
entrepreneurship becoming legitimate in the eyes of the Tanzanian
government, several practices that affect the business environment are
still in existence. Existing evidence, for example, indicates that laws
and regulations have been highly restrictive to small businesses and
private entrepreneurs (Toroka and Wenga, 1997; Parker et al, 1995;
Bagachwa, 1993; Levy, 1991). This restriction can be traced back to the
dominance of government institutions and parastatals between the late
1960s and late 1980s. These institutions according to Kristiansen
(2002b) were given the power and priority in the distribution of credits
and all kinds of licenses.
In a theoretical context this study takes a closer look at the
elements of an enabling environment for MSEs in Tanzania. The study
attempts to go beyond the neo-classical micro-foundation of structural
adjustment policies by examining the thinking and acting of real
entrepreneurs. The analysis by this study is partly based on the
argument that business contexts are perceived differently and affect
commerce variously at different stages of the entrepreneurial process.
The Study Methodology
This study uses survey as its main methodology for data collection.
The survey technique is used to allow an examination of a sample of
selected MSEs and generalisation of the results to a larger population
from which the smaller group was chosen (Neuman, 2000). In addition to
the survey, we also review the new policy document on the development of
micro, small and medium enterprises in the country. The survey was
undertaken by conducting face-to-face interviews with 136 entrepreneurs
in 9 sampled regions out of 25 regions, using a pre-designed
questionnaire. These regions are Dar-es-Salaam, Morogoro, Mwanza,
Arusha, Mbeya, Kilimanjaro, Tabora, Zanzibar urban and Zanzibar south.
The questionnaire was designed as a series of questions split into
two parts. The first part focused on obtaining data relevant to MSEs
characteristics. These were entrepreneurs' personal data (gender,
age and educational level), investment in technology, sources of
finance, marketing activities, business prospects and entrepreneurship
commitment, business premises, and commercial registration. The second
part of the questionnaire examined the business environment surrounding
MSEs. In line with the focus of the study, entrepreneurs were
specifically asked if they viewed licensing procedures, information
availability and tax regulations to be a hindrance to their operations.
Follow-up questions were similarly asked during the interview to obtain
an insight into how these factors affected their operations. Enterprises
covered by the survey were classified into manufacturing, trade and
services sub-sectors. They include 110 microenterprises and 26 small
enterprises, of which 91 were urban based and the remaining 45 were
peri-urban based. (4)
Table 1 summarises the surveyed enterprises. Given the qualitative
predominance of the questionnaire the study basically uses cross
tabulation to analyse and present enterprise characteristics and the
factors affecting entrepreneurship environment. The survey findings,
therefore, are mainly drawn from qualitative information and impressions
gathered from the interviews as well as the analysis of the
The analysed data are presented in two parts. Initially general
information that characterises MSEs in the country is presented. This is
followed in the second part by a discussion of the identified factors
thought to affect the enterprise environment. This part is also
integrated with a review of the new policy document on micro, small, and
medium enterprise development. (5)
General information on enterprise characteristics specifically
focuses on entrepreneurs' gender, average age, educational
background, business premises ownership, and business registration
status. This information is summarised in Table 2. Results indicate that
most MSEs are owned and operated by men (about 77%). This finding is
consistent with other findings across the globe where women-owned
businesses were found to account for 25% to 33% of all businesses
(Employment NOW Community Initiative, 1998). Entrepreneurs' average
age is about 35 years. Most of the studied entrepreneurs do not achieve
beyond the primary, secondary and vocational levels of education (88%).
These findings are in line with a common perception that most micro and
small entrepreneurs achieve an education level of no more than secondary
The categories of business undertaken by enterprises as presented
in Table 1 support a common perception that MSEs in developing countries
are primarily vendors and small traders (Mead and Liedholm, 1998). Most
enterprises (67%) operate from rented premises (Table 2). An assessment
of enterprise commercial registration status reveals that most MSEs are
registered (89%). All of the commercially unregistered enterprises are
micro and operate in regions (Tabora, Mwanza, Arusha, and Kilimanjaro)
where they are considered as street vendors and therefore not required
to register commercially. In these regions local government officials
collect a fixed monthly levy and allow microenterprises to operate their
The Enterprise Environment
Although the environment in which MSEs start up and operate is
shaped by a number of influences, the assessment of the enterprise
environment by this study focuses on policies, legislations and
The Policy Framework
While it is not clear to what extent administrative and legislative
burdens hinder business growth, Bridge et al. (1998) find it reasonable
to assume that anything that absorbs time and resources that would
otherwise be devoted to business development is likely to have a
deleterious effect. Bridge et al. also argue that it is indisputable
that government policies have a major impact on the trading performance
of small businesses. Policies therefore seem to be important in
underpinning the development of entrepreneurship as they influence the
performance of MSEs in the broader economy. Furthermore, policies
underpin the formation of legislation and regulations, which in turn
determine governments' activities (White, 1999: 21). Existing
literature also provides an overview of a variety of instruments through
which government policy can influence MSE activity (Tolentino, 1995).
They include monetary and credit policies, taxation, regulatory and
control policies such as registration requirements and procedures,
permits and licensing laws, trade and export policies, and education
policy particularly promoting the development of a skilled and educated
The creation of an enabling environment is therefore partly
dependent upon a favourable overall policy framework, which allows the
development, and promotion of enterprise and entrepreneurship
respectively. The success of a policy framework in turn is dependent on
the use of stable, well-designed policy instruments and mechanisms, and
policy areas that combine to create an overall policy environment for
MSEs. So far the Tanzanian government has taken a number of initiatives
to encourage the establishment and growth of MSEs. First, market
enlargements in Tanzania as a result of the liberalisation process since
the late 1980s are regarded to be the main reason for growth of small
businesses during the last decade (Trulsson, 1997; Bagachwa, 1993).
Secondly, the government has attempted to create a level playing field
through macroeconomic intervention using various economic reform
programs and reduction of discriminatory practices against MSEs. A
recent and probably significant effort by the government is the
formulation of the micro, small and medium enterprise policy document.
Despite these efforts many observers find that small businesses are
still at a severe disadvantage competitively (Kristiansen, 2002b). Laws,
regulations, multiple taxes and bureaucracy in addition to problems in
generating business ideas and picking business opportunities are still
mentioned as problematic in the country (Satta, 2003).
Although the new policy document for small business development
attempts to address a significant number of key issues, it lacks any
policy or program link between microenterpris development programs such
as support for self-employment and small and medium enterprises (SME)
development programs, particularly one which promotes the graduation or
growth of an enterprise from micro to small and eventually medium. In
addition, though this document covers micro, small, and medium
enterprises, more emphasis appears to be on SMEs than on
microenterprises. Despite being the majority (see Table 1) less weight
seems to be attached to the role of the smaller MSEs in terms of job
creation, service provision and productivity.
The enterprise environment in Tanzania also exhibits significant
gaps in information about the MSE sector and its potential for
development. Most of the interviewed entrepreneurs (91%) indicated that
relevant information to MSE sector development is not readily available
(Table 3). Several studies point to the important role information plays
in small businesses' growth. Stiglitz (1989) and Kristiansen
(2002a), for example, consider information to be one of the areas where
market failures are most apparent and that these failures are easily
regressive, continuously marginalizing micro and small entrepreneurs.
Several recent studies also identify access to information as one of the
important factors behind entrepreneurial success (Kristiansen, 2002b).
Among the wide-ranging demands for information in Tanzania are a broad
profile of this sector, including its characteristics, problems,
products and services produced; profile of owners, including aspects
such as gender and age; communities involved in enterprise development;
and markets in which MSEs operate. Information availability is also
necessary for an appropriate identification and description of the
providers of MSE development services, as well as evaluation of the
performance and impact of business development services.
The gap in information seems to result from the absence in the past
of any comprehensive and systematic assessment of the MSE sector
dynamics. This has resulted into limited and unreliable availability of
information with regard to the needs, problems, potential and
opportunities to this sector. Parallel to information gaps, few
recognised national or regional business associations that can represent
the MSE sector exist (URT, 2003). Among other problems, the absence of
these organisations makes it difficult to obtain a collective general
opinion from the MSE sector on the policy environment and what should
eventually be done to facilitate enterprise growth.
A number of studies in developing countries also place the
acquisition of professional business skills among the necessary
conditions for entrepreneurial success (Nafukho, 1998). In Tanzania,
however, it appears that no deliberate measures have so far been taken
to promote entrepreneurial skills and competencies in training
institutions. Currently only few institutions offer a few short-term
programs. (6) Despite their wide recognition in terms of economic
development contribution, small businesses also continue to be under the
broader portfolio of the Ministry of Industry and Trade, which for a
number of years had its main focus on industrial development.
The Framework and State of Regulations and Procedures in Tanzania
Regulations and procedures in the context of this study are taken
to be tools that are used to enact legislation and pursue policy
outcomes. The systems for regulatory and procedural activities in
Tanzania are partly centralised and partly decentralised. Currently
there are four major tiers of government operations in Tanzania, the
highest being the central government in Dar-es-salaam. Below this level
there are 25 regions (provinces) manned by regional commissioners. All
central government ministries and departments are represented at the
regional level. Below regions there are districts under district
commissioners. At the lower end are wards and villages for urban and
rural areas respectively.
The central government provides the overall direction of policy and
the legislative basis on which development occurs. In most cases both
policy and legislation are implemented through a variety of government
agencies operating at central, regional and local levels. Two forms of
mechanisms are used in policy implementation. At the top level there are
government ministries, departments and executive agencies. These are
responsible for designing and introducing policy as well as undertaking
regulatory functions such as business registration, taxation, and
issuing of licenses. At the lower end is the local/regional government
structure which directly impacts upon the legal and regulatory framework
that MSEs find themselves in. The local and regional government, for
example, are involved in land use and planning, provision of sites and
premises for business operations such as market stalls and industrial
estate, health and safety compliance, and local government taxation.
Several studies on entrepreneurship in developing countries
emphasise the bureaucratic hindrances to the establishment and growth of
MSEs (Saabbarwal, 1994; Rondinelli and Karsada, 1993). A recent
comparative study of ethnic entrepreneurship covering three ethnic
groups in South Africa (Mitchell, 2003) found that regulations and
higher taxes were perceived as the most problematic policy areas. In
Tanzania, Kristiansen (2002b), Toroka and Wenga (1997), and Bagachwa
(1993) observe that laws and regulations have been highly restrictive
for MSEs. Findings from these studies note that long after the process
of liberalisation started in Tanzania, many micro and small
entrepreneurs find government regulations and the bureaucratic maze to
be a severe hindrance for their progress. Laws and regulations feature
high in the list of constraints by businesses according to the above
mentioned studies. An earlier study by Levy (1991) covering Tanzania and
Srilanka found that tax and regulatory burdens in Tanzania were the next
heaviest constraint (after lack of access to finance) on small business
A study by Parker et al. (1995) that covered five African countries
(7) concluded that between 61 and 96 percent of MSEs in Ghana, Mali and
Tanzania rated taxes as one of the problems hindering the business
environment. A study by Kristiansen et al. (1999) covering tailors and
furniture makers in Tanga Region/Province note that paying (corruption)
to get out of tax and license duties is common in the Tanzanian system
thus undermining government revenues. Taxes are considered to be very
prohibitive and the general feeling among small entrepreneurs is that
they see no benefits from their payment according to this study. A
fairly recent study in Tanzania also reveals that the majority of
companies studied complained about the multiplicity of taxes, duties and
fees (Nkya, 2002). According to this study, no less than 19 different
compulsory contributions are paid to government institutions by firms.
Overall, small-scale entrepreneurs saw no significant changes in the
current tax policies and bureaucratic maze, as compared with the
Survey results from this study reveal that bureaucratic procedures
that affect the business environment for MSEs revolve around the
relations between these business starters and a wide range of regulatory
authorities in the country. These authorities include (a) Tanzania
Revenue Authority (through VAT and Income Tax Departments), (b)
licensing authority, (c) health authorities (covering food-related
enterprises), (d) providers of public utilities (power, water,
telephone), (e) National Social Security Fund which requires all private
businesses in the country with 5 or more employees to make pension
contributions on behalf of their employees, and (f) labour ministry
officials (in relation to labour laws). Bureaucratic difficulties seem
to be substantial with Tax and Licensing Authorities according to the
An assessment of the tax system reveals that despite various
reforms within the tax regime in the country, there are no significant
changes in the current tax policies. The study found Tanzania's
formal tax and regulatory requirements to be demanding. A significant
number of entrepreneurs (93%--Table 3) raised various taxation issues
that affect the growth of their businesses. One of the issues cited, for
example, is the current practice of estimating tax to be paid rather
than basing it on actual results.
Another problem with tax authorities is the practice of demanding a
payment of an estimated tax amount upfront on all small businesses
before setting up. In addition to having tax rates that do not
distinguish between smaller and larger businesses, the tax structure
itself has several different taxes to be paid by enterprises. An
interview with one entrepreneur who owns a bar and guesthouse business
in Dar-es-Salaam, for example, reveals that he annually pays a total of
13 different types of fees and taxes. Fees according to this
entrepreneur cover license fees for drinks, bar, and snack activities
separately. Other fees paid by the business include health fees for
staff, inspection fees by health inspectors, and refuse collection fees.
Taxes include income tax, stamp duty, hotel levy, and development levy.
Income tax, stamp duty and development levy are charged separately for
guesthouse and bar activities. Related to the tax system problem is the
existence of official and unofficial levies. According to most
entrepreneurs the unofficial levies problem is exacerbated by too many
inspection visits that are made to MSEs. These include visits by
inspectors for value added tax, income tax, health, refuse collection,
sign boards and business registration authorities.
The business licensing process is another area most entrepreneurs
(94%) consider to be bureaucratic (Table 3). Generally centralisation of
licensing is considered to play a major part in bureaucratising the
whole process. (8) The practice of renewing the business license
according to interviewed entrepreneurs also increases the cost of MSEs
remaining formal as it involves obtaining clearance from the same list
of authorities that are involved in the initial process of granting the
license. Apart from consuming entrepreneurs' time, this procedure
encourages corrupt practices. Though difficult to quantify, Kristiansen
et al. (1999) consider bureaucracy to be a major contributory factor
towards corruption practices in Tanzania.
The net effect of all the above discussed business environment
hindrances seems to impose entry and expansion deterring costs on MSEs.
They include financial costs and the opportunity costs associated with
the diversion of scarce entrepreneurial time and effort. While this
study does not uncover findings that are distinctly different from
previous studies in the country, an attempt is made to go beyond the
assessment of the MSEs business environment, by examining the likely
impact of bureaucratic regulations and unfriendly tax regime.
Furthermore, the paper develops a model for mitigating these hindrances.
Likely Consequences of the Current Regulatory and Tax Regime
Illegal business activity is viewed as the darker side of
entrepreneurship (McClennahen, 1998; Baucus, 1994). A common illegal
business activity related to findings from this study is the trading of
legal goods and services by avoiding the payment of duties or taxes.
Another one involves trading without proper licensing by authorities.
Sardar (1996:51) argues that illegal business practices are deeply
interwoven within the political, social and economic fabric of many
developing countries and consequently leads to the "parallel
economy." De Soto (1989) similarly argues that when legality is a
privilege available only to those with political and economic power,
those excluded have no alternative but illegality.
Given the strong apparent links between illegal business activities
and entrepreneurship, and the paucity of studies in this area, there is
a need to examine this relationship and explore its potential effects on
government revenue (Fadahunsi and Rosa, 2002). Despite the lack of a
systematic entrepreneurial theoretical model of illegality in general
and illegal trading in particular, illegal trade opens up increased
opportunities, and potentially very profitable opportunities for
opportunity seeking entrepreneurs through non payment of duties and
taxes amongst others. (9) However, it should be noted that although most
MSEs may be generating profits when operating illegally, they would
still prefer to operate in a less stressful and impartial legal system.
In Fadahunsi and Rosa's view, entrepreneurial advantage lies in the
business itself and making it work, not its illegality. Informals,
according to De Soto (1989), run the risk of being penalised for not
having obtained permits, paid taxes, or applied for the authorisation
required by law.
[FIGURE 1 OMITTED]
The combination of cumbersome and punitive formal tax and licensing
requirements and ubiquitous enforcement as voiced by interviewed
entrepreneurs in Tanzania are thought to create substantial
opportunities for government revenue losses through corrupt practices
and illegal trading. Specifically, multiplicity of taxes and higher tax
rates are likely to contribute significantly to the creation of an
unconducive business environment for MSEs leading to illegal trading.
Bureaucratic licensing and renewals of licenses (which are dependent on
prior lengthy clearance processes from various authorities) are likewise
likely to impose a significant burden on entrepreneurs' scarce
time. Illegality on balance is seen to be more harmful than beneficial
for economic development. Specifically it makes it difficult for small
businesses to be productive when government regulations hamper the
pooling of resources. This is also the case when taxes and tariffs
distort the price of materials and products.
Given these findings, the paper develops a working model that
explores the likely effects of the costs of multiplicity of taxes,
higher tax rates, unfriendly tax estimation practices and bureaucratic
licensing procedures to MSEs in the country (Figure 1). The central
argument emanating from this model is that the current small businesses
licensing procedures and tax regime is pushing micro and small
entrepreneurs into illegal trading. Specifically, multiple taxes, higher
tax rates, estimated tax demand instead of tax payments based on results
and the practice of demanding upfront payment of taxes before businesses
set up on the one hand and bureaucratic licensing procedures on the
other, seem to push micro and small entrepreneurs into the informal
sector. This in turn undermines government revenues as well as affects
the development of the MSE sector due to increased uncertainty on small
Conclusions, the Model on Reforming the Regulatory and Tax Regime,
and Policy Implications
The current business environment according to findings by this
study (and several previous studies) appears to constrain MSEs'
potential for growth. Specifically the business environment for MSEs
seems to be affected by a presence of multiple taxes, higher tax rates,
unfriendly taxation practices, and bureaucratic licensing procedures.
The presence of these hindrances is believed to be playing a significant
role in pushing MSEs into illegal trading through unlicensed trading and
avoiding paying taxes and duties. Although illegal business by MSEs
might be providing livelihoods for thousands if not millions who would
have no jobs without it (that is, it makes opportunities accessible to a
much greater range of entrepreneurs), it undermines government revenue
in addition to increasing uncertainty in MSEs operations through
increased business operating hassles.
Given these findings, policy initiatives are therefore required to
improve micro and small entrepreneurs' ability to utilise their
business contexts since the current policy framework seems to constrain
the entrepreneurship process. Clearly reforms seem to be necessary on
the current tax regime and licensing procedure reforms are necessary if
MSEs are to expand and contribute to economic development in the
country. The ideal solution would be therefore to remove the obstacles
and convert any political incentives into legal facilities in order to
free and increase the vendors' entrepreneurial energies and allow
them, within the competitive process, in which they are immersed, to use
their talents to the full and serve the community more effectively.
Initially the paper develops a working model (Figure 1) that explores
the likely effects of the costs of an unfriendly tax regime and
bureaucratic licensing procedures to the government and small
businesses. The paper then builds on that working model and develops a
model for mitigating the identified hindrances to MSEs business
environment (Figure 2). This model aims at pushing more MSEs into the
Among other things, harmonisation of various taxes charged to small
businesses (to reduce multiplicity of taxes), application of separate
tax rates to small enterprises from large ones, and considering charging
micro and small entrepreneurs personal income tax rather than corporate
tax are some of the policy issues advocated by the model. Similarly, tax
authorities in the country should consider reviewing their unfriendly
approach to taxation by abolishing, for example, the practice of
charging a new business an estimated tax amount upfront before setting
up. This is likely to provide an incentive for the establishment of more
MSEs. Another relevant policy input is on extending the current practice
of granting tax holidays of between 3 and 5 years to foreign investors,
to MSEs. Alternatively, micro-enterprises could be exempted from paying
taxes until they graduate into small enterprises. Parallel to this
should be a consideration of tax rates in terms of the size of the
enterprise in a progressive way.
[FIGURE 2 OMITTED]
A reduction in bureaucracy in registering businesses is likely not
to be achieved by simply replacing the body that used to be responsible
in the past with another one. Among others, the new body should consider
decentralising the business licensing process so that it becomes less
costly to businesses outside its base (Dares-salaam). The
decentralisation process should involve the establishment of one-stop
licensing centres in regions/provinces. These centres should bring
together all relevant authorities under one roof. A review of the whole
process including current registration requirements in order to do away
with all the outdated ones could also make a significant difference in
promoting the establishment and development of MSEs in the country.
Parallel to streamlining licensing procedures, the model recommends more
transparency by all relevant regulatory authorities to discourage
In terms of policy implications, recommendations from this model
are likely to (i) push more MSEs into the formal sector through proper
licensing and payment of relevant fees and taxes; and (ii) have a
positive impact on government revenue through receipt of various taxes
and fee payments from MSEs. In line with social sciences research
practices of attempting to extrapolate general trends from specific data
in a particular study and relate this to a broader theoretical
framework, the key question for this study therefore was on how far
these results can be generalised to gain wider insights into business
environment and MSEs growth. Although the surveyed entrepreneurs are
possibly not representative of the several thousands of business
starters in the country, the model developed by this study mitigates
problems that were also identified by several previous studies. This to
some extent makes the case for generalisation of the results in the
country much stronger. This model also provides a basis for further
consideration by several developing countries that experience similar
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For further information on this article, contact Tadeo Andrew
Satta, The University of Manchester.
Email: firstname.lastname@example.org and email@example.com
Tadeo Andrew Satta, Institute for Development Policy and
Management, the University of Manchester
(1.) So far there is no universally accepted definition of MSEs
(Allal, 1999). The current practice is that individual countries are
expected to come up with their respective definitions. At the time of
this study no definition had been produced in Tanzania. As a result this
study adopts an ILO (Allal, 1999) definition that microenterprises are
characterised by 1 to 10 employees and small-scale enterprise by 11 to
50 employees. It should, however, be noted that at the time of this
study authorities in Tanzania were in the process of coming up with
(4.) Peri-urban area for the purpose of this study is a radius of
50 kilometres around the sampled regional towns.
(5.) At the time of this study this document was in its final draft
(6.) So far, institutions involved in short-term entrepreneurial
skills promotion include the Small Industries Development Organisation
(SIDO), College of Business Education and the University of
(7.) Countries covered by this study were Tanzania, Senegal, Mali,
Malawi, and Ghana.
(8.) Recently the government, in recognition of the existence of
complicated and bureaucratic licensing procedures, established a new
body (an executive agency) to be responsible for business regulation.
Table 1: The Survey Sample
ISSUES Microenterprises (ME)
M/f * Services Trading All ME
Number 15 37 58 110
Urban 6 25 40 71
Peri- 9 12 18 39
ISSUES Small enterprises (SE)
M/f Services Trading All SE
Number 6 9 11 26
Urban 4 6 10 20
Peri- 2 3 1 6
Urban 91 (67%)
Peri- 45 (33%)
Source: Survey data.
* M/f stands for manufacturing.
Table 2: General Characteristics of the Surveyed MSEs
EDU. LEVEL PREM. O'SHIP
ENT. Uni. Primary/Secondary
ENT. AV. AGE Level /Vocational level Own Rented
Micro 37 12 98 39 71
Small 32 4 22 6 20
Total * 16(12) 120(88) 45(33) 91(67)
COMM. REG. GENDER
ENT. Reg. Unreg. F M
Micro 95 15 27 83
Small 26 -- 4 22
Total * 121(89) 15(11) 31(23) 105(77)
Source: Survey data.
* Figures in parentheses represent percentages.
Table 3: Key Factors That Affect Enterprise Environment in Tanzania
Factor Response (ME) (SE) Total *
Business licensing Yes $108 20 128 (94)
bureaucratic No $2 6 8 (46)
Unfriendly taxation Yes $104 22 126 (93)
structure No $6 4 10 (7)
Availability of Yes $2 10 12 (9)
relevant No $108 16 124 (91)
Source: Survey data.
* Figures in parentheses denote percentages.