CONTRIBUTION OF SMALL AND MEDIUM SCALE ENTERPRISES TO ECONOMIC DEVELOPMENT OF NIGERIA.
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CONTRIBUTION OF SMALL AND MEDIUM SCALE ENTERPRISES TO ECONOMIC DEVELOPMENT OF NIGERIA.
1.1 Introduction.
Many developing countries around the world have made economic development one of their top priorities. Developing countries have a number of challenges, including high levels of poverty and unemployment, which have hampered socioeconomic growth. Industrialization and meaningful employment are essential indicators of economic development in any country.
This is frequently represented by income per capita, equitable income distribution, and the welfare and quality of life enjoyed by the citizens of that country.
Small and Medium Scale Enterprises (SMEs) have shown to be an important strategy used by industrialised countries to achieve socioeconomic growth. In recent years, the small-scale industrial sector has been seen as the backbone of modern economies. Prior to the late nineteenth century, cottage industries, primarily small and medium-sized firms, dominated Europe’s economy.
The Industrial Revolution altered the status quo by introducing mass production (Thomas, 2001). The twin oil shocks of the 1970s damaged the mass production paradigm, prompting an unexpected reevaluation of the role and relevance of small and medium-sized businesses in the global economy (Wendrell, 2003).
The introduction of SME in Nigeria may be dated back to 1945, when the important document No. 24 of 1945 on “A Ten Year Plan of Development and Welfare of Nigeria 1946 was presented”.
Small and medium-sized enterprises were once seen to be an absolute requirement; however, they have grown in popularity and are predicted to become even more important in the future.
In a growing country like Nigeria, the role of SMEs in the process of social economic growth cannot be underestimated. The importance of SMEs in the country’s development has been summarised in Nigeria’s third national development plan 1975-1980 as the generation of employment opportunities, stimulation of indigenous entrepreneurship, facilitation of effective mobilisation of local resources such as capital and skill, and reduction in regional disparities (Rahanaty, 2009).
Furthermore, in a country like Nigeria with an adverse balance of payment position, the increased contribution of SMEs to Nigeria’s export portfolio contributes significantly to generating foreign money and smoothing out the adverse balance of payment situation.
This is significant for the economy because a considerable portion of their production inputs are sourced domestically, lowering pressure on limited foreign exchange profits and contributing to the elimination of some of the balance of payment deficit.
According to Ikherehon (2002), SMEs constitute the very basis of the national economy in terms of the development of local technology, stimulation of indigenous entrepreneurship, mobilisation and utilisation of domestic savings, employment creation, structural balancing of large and small industry sectors in both rural and urban areas, supply of high quality intermediate products, thereby strengthening the international competitiveness of manufacturer’s goods, stimulate technology
Discovery has also demonstrated that SMEs have resolved the predicted role contribution of large-scale enterprises to the economy in terms of GDP growth, job creation, boosting local value added, and technical advancement, among other things (Nwoye 2010).
Small and medium-sized businesses are critical to an economy’s growth and development (Ariyo, 2005). They may appear small or insignificant, but they are the foundation of any economically stable nation.
SMEs have the potential to benefit any economy by contributing to its output of goods and services, creating jobs at a low capital cost, providing a vehicle for reducing income disparities, and developing a pool of skilled and semi-skilled workers as a foundation for future industrial expansion, among other things.
According to the World Business Council for Sustainable Development (WBCSD, 2004), in OECD economies, small, medium, and micro enterprises account for more than 95% of firms, 60-70% of employment, 55% of GDP, and the majority of new jobs.
In developing countries, more than 90% of all firms outside the agricultural sector are SMEs and microenterprises, which account for a major share of GDP.
Morocco is highlighted as an example, with 93% of industrial enterprises classified as SMEs, accounting for 38% of production, 33% of investment, 30% of exports, and 46% of employment.
According to NCI (2003), a small-scale industry is an enterprise with a total cost (including working capital but excluding cost of land) of N1.5 million but not exceeding N50 million, with a labour size of 11 to 100 workers, whereas a medium-scale industry has a total cost (including working capital but excluding cost of land) of N50 million but not exceeding N200 million, with a labour size of 101 to 300 employees.
In contrast, the new operational guidelines of SMEEIS (2005) describe a small and medium firm as one with a maximum asset base of five hundred million naira (N500m) (excluding land and working capital) and no lower or upper limit on workforce.
The inconsistencies in the definitions of SMEs provided by NCI and SMEEIS testify to various perceptions of what SMEs truly are by different schemes. As a result, their approaches to small and medium-sized enterprise funding differ.
Economic development is often defined as the continuous, concerted actions of policymakers and communities to improve the standard of life and economic health of a certain place.
Economic development can also be defined as both quantitative and qualitative developments in the economy. Actions may include human capital development, key infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other activities (Satope & Akanbi, 2014).
Economic development is different from economic growth. Growth, in general, can be defined as a rise in output (per unit of input), whereas development entails an increase in output combined with a change in the technological and institutional arrangements involved in production.
Growth can occur without development, but a country cannot attain economic development without first achieving economic growth. Thus, economic growth is a subset of economic development, which is not solely an economic phenomenon.
According to Tejvan (2011), economic growth is defined as an increase in real GDP, which implies an increase in the value of goods and services generated in an economy.
The rate of economic growth represents the annual percentage increase in real GDP. In the long run, economic growth is driven by factors influencing the expansion of Long Run Aggregate Supply (LRAS), the economy’s PPF. If LRAS does not rise, an increase in Aggregate Demand will only lead to inflation (Tejvan, 2011).
Development is concerned with improving human welfare, which entails expanding the availability of commodities and services to people.
The more work created, the greater the wealth and benefits. Development is thus primarily concerned with expanding the volume of business turnover, or the volume of goods produced for sale (Satope & Akanbi, 2014).
In many nations, there has been a renewed interest in the development of small and medium-sized businesses (SMEs) in recent decades. Several researchers have recognised the relevance of these firms in the development and expansion of diverse economies (Ming-Wen, 2010; Afolabi, 2013).
Small and medium-sized enterprises have been correctly referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country” (Anthony and Arthur, 2008).
They represent a real opportunity to achieve national macroeconomic goals such as job creation, enhanced growth, and poverty reduction at a cheap investment cost, as well as the development of entrepreneurial talents, including indigenous technology (Adebiyi, 2004).
Small and medium-sized firms improve regional and sectorial economic balance by dispersing industrial activities among sectors and locations, as well as promoting effective resource utilisation, which is considered vital to engineering economic development and growth (Mukole, 2010).
1.2 Statement of Problem
Over the last few years, there has been a significant growth in the number and volume of Nigerian government programmes aimed at encouraging the unemployed, young people, welfare beneficiaries, and disadvantaged sectors of the population to start their own small businesses. The government also established various microfinance institutions to provide credit and loans to SMEs.
Microfinance institutions include the Nigerian Bank for Commerce and Industry (NBCI), the National Economic Reconstruction Fund (NERFUND), the People’s Bank of Nigeria (PBN), Community Banks (CB), and the Nigerian Export and Import Bank (NEXIM).
It was also envisioned that the country’s SMEs would contribute approximately 34% (gross value of manufacturing to GDP ratio) to the national product, produce 60-70% employment, and increase at a steady rate each year.
The impact of small and medium-sized firms on economic growth and development has gained more empirical attention in the literature (Anthony & Arthur, 2008; Bamidele, 2012; Afolabi, 2013).
However, there is a scarcity of such work in Nigeria, particularly in terms of assessing the contribution of SMES to economic development. The majority of previous studies in this area in Nigeria did not consider the features of the time series data utilised to assess the long-term link.
This has, however, reduced the credibility of these investigations. Furthermore, very few studies seek to establish a link between investment in SMEs and economic progress. As a result, the purpose of this study is to determine the role of SMEs in economic development.
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