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An assessment of the business environment for micro and small-scale enterprises in Tanzania.
The environment in which micro and small-scale enterprises (MSEs) start up and operate is shaped by a number of influences. This paper examines the environment surrounding Tanzanian business starters. Findings from the study indicate that the environment for MSEs in Tanzania consists of regulations, bureaucratic and judicial licensing structures, and a tax regime that create barriers to micro and small entrepreneurs' endeavours. This environment seems to push MSEs into illegal trading thus undermining government revenue. In an effort to mitigate the identified constraints the paper develops a model that recommends several reforms to the country's tax and regulatory regime. Although this model purely relates to the Tanzanian environment, it provides clues that might be relevant to other developing countries in addressing similar environments.

L'environnement au sein duquel les micro et petites entreprises (MPE) se developpent est faconne par diverses influences. Le present article examine l'environnement des entreprises tanzaniennes debutantes. Les resultats de cete etude indiquent que cet environnement consiste en regulations, en structures de reglementation professionnelle, et en un regime de taxation qui sont autant d'obstacles pour les petits entrepreneurs. Cet environnement semble pousser les entreprises concernees vers un commerce illegal qui sape les revenus du gouvernement. Dans le but de limiter les contraintes ainsi identifiees, cette etude developpe un modele qui recommande plusieurs reformes au regime de taxation et de regulation du pays. Bien que portant seulement sur l'environnement tanzanien, ce modele fournit des indications qui pourraient etre utiles a d'autres pays en voie de developpement et faisant face a des environnements similaires.

Businesspeople (Management)
Entrepreneurship (Management)
Small and medium sized companies (Services)
Small and medium sized companies (Economic aspects)
Small and medium sized companies (Growth)
Gross domestic product (Forecasts and trends)
Satta, Tadeo Andrew
Pub Date:
Name: Journal of Small Business and Entrepreneurship Publisher: Canadian Council for Small Business and Entrepreneurship Audience: Academic Format: Magazine/Journal Subject: Business, general Copyright: COPYRIGHT 2004 Canadian Council for Small Business and Entrepreneurship ISSN: 0827-6331
Date: Summer, 2004 Source Volume: 17 Source Issue: 3
Event Code: 200 Management dynamics; 360 Services information; 010 Forecasts, trends, outlooks Computer Subject: Company business management; Company growth; Market trend/market analysis
Geographic Scope: Tanzania Geographic Code: 6TANZ Tanzania
Accession Number:
Full Text:

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 constraints.

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 country's economy.

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 self-employment.

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 same environment.

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 sector.

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 cross-tabulated data.

Survey Results

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)

Enterprise Characteristics

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 school.

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 businesses.

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 regulatory procedures.

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 work force.

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 expansion.

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 pre-reform period.

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 survey findings.

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.


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 business operations.

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 formal sector.

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.


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 corrupt practices.

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 business.


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Contact Information

For further information on this article, contact Tadeo Andrew Satta, The University of Manchester.

Email: and

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 country definitions.

(2.) Ibid.

(3.) Ibid.

(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 form.

(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 Dar-es-Salaam.

(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.

(9.) Ibid.
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

ISSUES    enterprises

Number        136
  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

                                   Micro-      Small-scale
                                 enterprises   enterprises
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)
  information to
  MSE sector

Source: Survey data.

* Figures in parentheses denote percentages.
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