MODELING SURVIVAL TIME TO FAILURE OF MICRO AND SMALL ENTERPRISES IN EAST HARARGE ZONE: APPLICATION OF FRAILTY MODEL

Abstract

Micro and small scale enterprises play a critical role in countries across the world by creating employment opportunity, contributing to economic growth and addressing societal needs. Despite, they are recognized in economic contribution, their survivability’s are constrained with different factors. The main objective of this study was aimed to model duration time to failure of micro and small enterprises in East Hararge Zone during 2009 to 2014 by applying survival model considering the frailty effects across the location of enterprises. The retrospective study design was employed. Ownership characteristics; enterprise and industry specific characteristics were used as determinant indicators. The data used for the econometric model was collected from randomly selected enterprises based on inventory data which is yearly collected by micro and small enterprises development office in purposively selected six districts in East Hararge zone. The survival experiences of different groups of enterprises were estimated by Kaplan-Meier and tested by log-rank test. Then, using different baseline parametric and shared frailty distribution models were conducted to select an appropriate model for the survival time to failure of the enterprises based on information criteria (AIC and BIC) of the model. The effect of unobserved heterogeneity between the clusters was tested by likelihood ratio test. Out of sampled enterprises 156 were operating their work and 152 experienced the event of interest. Among the fitted models, log-logistic gamma shared frailty model was appropriate and selected as final model. The clustering effect was significant in modeling time-to-failure of micro and small enterprises. The final model reveals that age, gender of manager, size of enterprise, industry type, availability of training, access to working place, market linkage and sources of startup capital were identified as determinants of duration time to failure of enterprises in study area. The government should have to promote survivability of micro and small enterprises by facilitating necessary credit services, working premises, market connectivity, training and experience sharing among different woreda to update their knowledge. And also it is advisable to give special attention and support for micro enterprises as well as enterprises that are managed by female.