In developing countries like Ethiopia, the role of micro and small enterprises in addressing"rnpoverty reduction and economic growth goals is indisputable. However, in Ethiopia, thisrnsector is commonly challenged by many constraints such as inadequate working capital,rnlimited access to market, lack of product diversification, insufficient technical and designrnskills, lack of infrastructures, and limited innovation and technological capabilities, amongrnothers. Nonetheless, several studies conduct so far in the areas of micro and smallrnenterprises in general and in clothe producing enterprises in particular are often overlookedrnthe analysis of value chain structure and its dynamics in the course of identifYing thernopportunities and constraints faced by these enterprises. It is in light of this that this study isrninstigated to look closer into the analysis of value chain with the purpose of identifYingrnfactors that enhance or hinder upgrading practices of clothe producing enterprises. Thisrnstudy examines key elements of value chain structure and its dynamics based on surveyrncovering 121 randomly selected clothe producing enterprises in four " sub cities of AddisrnAbaba. For the purpose of data triangulation, 50 buyer firms and 20 input suppliers werernselected by using random and snowball sampling techniques. 34 interviewees were alsornpurposely selected from different categories of value chain participants and supportingrninstitutions outside the chain. Data analysis was done using descriptive statistics, a logisticrnregression analysis, and content analysis methods. Results show that both micro and smallrnenterprises adopted some sort of strategies to upgrade their process and product althoughrntheir functional and channel upgrading practices are found low. The study also indicates thatrnvalue chain in which micro and small scale clothing enterprises have been participating isrnhighly fragmented in terms of linkages between value chain actors and is challenged byrnnumerous upgrading discouraging factors. It is recommended that supporting institutions,rnpolicies, and programs that aimed at sustaining clothe producing enterprises; therefore,rnneed to focus on enhancing collaborative and mutually beneficial linkages between firmsrnparticipating in the value chain.