Business Failure and Organizational Capacity of Contractors in Ethiopia

Abstract

Business failure is a risk across all industries, but construction firms face heightened vulnerability due to industry fragmentation, intense competition, and high-risk exposure. Even well-established companies struggle with survival, particularly in developing countries. Since organizational capacity directly influences business performance, often reflected in project outcomes, many construction projects in these regions suffer from delays, cost overruns, and quality issues. This study is aimed to assess business failure trend and organizational capacity of contractors in developing countries focusing on the case of Ethiopia. Business performance trend of contractors with an age of over twelve years were studied. One hundred forty-two questionnaire responses were collected from professionals working in construction companies. Interviews with key professionals of selected contractors were conducted. In addition, document analysis on trends of registration, procurement practice and involvement in sectoral associations was conducted. The findings indicated that there is a significant rate of’ business failure. The trend of  companies’ establishment shows a domination of non-visionary startups that make insignificant progress in the business. Most contractors cease to exist in a period of five to ten years after startup. A maximum of one-third of registered contractors are able to renew their trade license every year and sustain their business in the past ten years. The industry is dominated by young firms of small capital whose fate is likely failure because of their inadequate organizational capacity. Developing countries’ construction industry shares common characteristics, hence, findings of this study would be applicable to related situations.