and medium-sized enterprises (SMEs) are businesses whose size of workforce is
below certain limits set by global or national trading arm of a country. The abbreviation
“SME” is used in the parlance of reputable international institutions such as European
Union (EU), International Monetary Fund (IMF), United Nations (UN), Economic
Community of West African States (ECOWAS), African Development Bank (AfDB),
United Nations Conference on Trade and Development (UNCTAD), World Trade
Organization (WTO) amongst others. Small and Medium scale enterprises has
proliferated more than large and multinational firms and, consequently, employ
much more people (Wikipedia Encyclopedia).
The Central Bank of Nigeria describes
small and medium enterprises in Nigeria based on some factors such as size of
asset and size of workforce. According to the CBN, a small and medium
enterprise is the one with an asset size of less or equal to 5 million naira
and possess a workforce size of at most 100 (CBN, 2009).
Small and medium scale
enterprises contribute tremendously to the growth of economies, especially in
developing countries. They are thus engine and catalyst of sustainable and
inclusive growth. SMEs are drivers of innovation and competition in key sectors
of the economy, serves as source of employment creation, promotes technological
and industrial advancement, strengthens the use of local resources and
technologies, propels the level of capacity utilization etc. (Fabayo, 2009; Adisa, etal, 2014).
Furthermore, they are labour intensive, capital saving and capable of creating
plenteous new jobs to the teeming population of the country. The operations
and activities of SMEs are fundamental to the citizenry’s level of living
standards and accelerate the pace of economic growth process of the nation.
Even, Fabayo (2009) adduces that large scale industries need SMEs to thrive.
Thus, SMEs are agent of positive change, reduces absolute and relative poverty,
creates jobs prospects and adds to national productivity.
Since the adoption of the economic reform programme in 1986, there
has been a has been an awareness of the need for a decisive shift from
grandiose, capital intensive and large scale industrial projects based on
import substitution to small scale industries with immense potentials for
developing domestic linkages for sustainable industrial development. Apart from
SMEs potential for self-reliant industrialization using local raw materials,
they are in a better position to boost employment, guarantee even distribution
of industrial development and facilitate the growth of non-oil exports.
Fissaeha (1991), states that SMEs employ 22% of the adult
population in developing countries while Fabayo (1989) observed that small
firms are major source of employment opportunities for a wide cross-section of
the workforce: the young, old part-time workers and the cyclically unemployed.
Kombo, et al (2011), submitted that “SMEs have contributed greatly to the
growth of Kenyan economy, accounting for 12-14% of GDP, through creating
employment opportunities, training entrepreneurs, generating income and
providing a source of livelihood for the majority of low income households in
Hence, promotion of such enterprises in developing economies like
Nigeria will bring about great distribution of income and wealth, economic
self-dependence, entrepreneurial development and a host of other positive
economic uplifting factors (Aremu 2004).
SMEs are veritable engines for attainment of national objective in terms
of employment generation at low investment cost, development of entrepreneurial
capabilities and indigenous technology. They reduce the flow of people from
rural to urban areas and can easily be established with minimal skill. They
also contribute substantially to the country’s gross domestic product, export
earnings and development of employment opportunities.
Despite the bright prospects of
SMEs as highlighted above, SMEs in Nigeria have been bedeviled with series of
challenges such as inadequate financing, excessive taxation, technical and
managerial deficiencies, lack of sound business management, harsh economic
environment and lack of functional infrastructures. Thus, they have been unable to contribute
significantly to growth process of the Nigerian economy. Successive governments
have implemented various development plans, programs and strategies to enhance
the effective functioning of SMEs in Nigeria, but none have succeeded in
achieving its targeted objectives of improving SMEs.
STATEMENT OF PROBLEM
Shehu et al. (2013) posited that small business owners create
about 75% of job opportunities in Nigeria. But inspite of this, the Small and Medium Enterprise Development Agency of Nigeria
(SMEDAN) reported that 80% of small and medium
scale enterprises wind up after five years of commencing business operations. According to Aremu and Adeyemi (2011), “most
SMEs in Nigeria die within their first five years of existence, a smaller
percentage goes into extinction between the sixth and tenth year while only about
five to ten percent survive, thrive and grow to maturity.” Several reasons are
responsible for the premature death of SMEs, principal among them are:
insufficient capital, irregular power supply, infrastructural inadequacies
(water, roads and other social amenities etc.),
lack of focus, inadequate market research, over-concentration on one or
two markets for finished products, lack of succession plan, inexperience of
business management, lack of proper documentation of records, inability to
separate business and family or personal finances, lack of business strategy,
inability to distinguish between revenue and profit, inability to procure the
right plant and machinery, inability to engage or employ the right caliber
of staff, cut-throat competition. The
specific business problem is that some small business owners have limited or no information on key factors that
can contribute to business sustainability for
longer than and beyond 5 years.
The internal problems of SMEs in Nigeria can be angled in the context
of inadequate working capital, stiff competition from larger companies,
difficulties in sourcing raw materials, low capacity utilization, lack of
management strategies, poor educational background of operators, and huge
financial problems while the external problems include: policy inconsistencies,
multiple taxation, harsh regulatory requirements and trade groups.”
However, some external
factors have also been found to be inimical to the progress of SMEs and these
include issues related to capital shortage, taxes, regulations, patents and
franchising abuses, political instability, volatile macroeconomic conditions,
insecurity amongst others.
1.3 OBJECTIVES OF
The main objective of
the study is to examine the relationship between the effect of political
environment and the performance of small scale business in Nigeria.
More specifically, the
study is targeted to examine the effect of critical economic data such as
exchange rate, interest rate, inflation rate, economic growth rate, gross fixed
capital formation, employment rate and domestic credit to private sector on the
performance of small and medium scale enterprise in Nigeria.
The study attempts to
provide satisfactory answers to the following research questions:
1. What is the relationship between the effect of political
environment and the performance of small scale business in Nigeria?
2. What are the effects of critical economic data such as exchange
rate, interest rate, inflation rate, economic growth rate, gross fixed capital
formation, employment rate and domestic credit to private sector on the
performance of small and medium scale enterprise in Nigeria?
A hypothesis is a
proposed or supposed statement made on the basis of limited as a starting point
for further investigation. The hypothesis is stated as
H0: It has no significant impact on
the performance of SMEs in Nigeria.
H1: It has significant impact on the performance
of SMEs in Nigeria.
1.6 METHOD OF ANALYSIS
data were used to analyze the empirical aspect of the study. A model was built
in which the performance of small and medium enterprise in Nigeria was taken as
the dependent variable and economic data such as exchange rate, interest rate, inflation rate, economic
growth rate, gross fixed capital formation, employment rate and domestic credit
to private sector were adopted as the independent variables.
The ordinary least
square was then employed via the multiple regression analysis to empirically
estimate the coefficients of parameters estimates of the independent variables.
The choice of this technique was informed by the optimal and desirable
properties of the OLS such as linearity, minimum variance, minimum mean-square
error, unbiasedness, consistency and sufficiency. Also, the technique was
adopted because it is vastly used in researches to examine the causal effect of
independent variables on dependent variable.
1.7 SIGNIFICANCE OF THE
This study through its
findings pinpoints the contributions as well as constraints confronting the
SMEs in Nigeria. This is needed in order to ensure that prospective SMEs avert
the failure of premature dissolution as evidenced in majority SMEs.
The study also informs
entrepreneurs and owners with sound business management ethics and knowledge on
how to manage businesses devoid of dissolution and bankruptcy.
The study is equally of
immense benefits to the government through its agencies such as Ministry of
Trade and Investment to formulate effective policies that will ensure smooth
functioning of SMEs in Nigeria.
Lastly, the study
serves as a guide to researchers, students, academics and other stakeholders in
their prospective research undertakings in this line of study.
1.8 SCOPE OF THE STUDY
The study examines the
relationship between the effect of political environment and the performance of
small scale business in Nigeria with strong emphasis between 1985 and 2015.
This time frame was picked because of the need to explore the recent trend in political
environment and performance of SMEs in Nigeria.