Project Materials

CHAPTER ONE

INTRODUCTION

1. Background of the Study

Small and Medium Enterprises (SMEs) are considered as the engine of the modern economy, whether we are referring to developed countries or emerging new power economy block. These companies are a fundamental for economy growth, flexibility in the market and dynamic operating firm. The success of SMEs depends a lot on a good environment that they operate and the person that manages the business.

Different factors which influence business success can be found in the work of Cooper and Gascon (2014). Because of the inconsistency of the results found in the literature, these authors suggest paying more attention to: firstly, to the development of a more consistent theoretical framework; secondly, to the contingent relations that take place among different conditions and interactions; thirdly, to the methods used to measure success and their implications, as well as to the use of an appropriate analytic technique. In line with the suggested arguments, Man, Lau and Snape (2012) have developed a theoretical framework using the concept of competitiveness for SMEs and the competency approach to study the entrepreneurs’ characteristics. According to the competency approach, the underlying quality of the most valuable workers lies in their “competencies”. Whereas the traditional approach to the job position focused on work elements, the evaluation of competencies studies people who are successful in their working career. An empirical study done by many researchers found that higher entrepreneurial competencies possessed by the owner/manager lead to better business success in SMEs (Man & Lau, 2015; Ahmad, Ramayah, et al., 2010; Nasuredin, Halipah, & Shamsudin, 2016). Sa’ari, Adenan, Hashim, and Jamaludin (2013) confirmed that entrepreneurial competencies have led to high success in the organisation and gained competitive advantages over the competitors.

Entrepreneurs of new ventures often do not have enough of a concept, historical earnings, or assets to justify funding in early stages. This lack of access to capital is commonly referred to as a funding gap for entrepreneurs. In mature economies, this funding gap is often filled from many sources such as cash from friends and family, bootstrapping via credit cards, personal savings accounts, and second mortgages on homes. After the start-up phase, a relatively small percentage of potential high-growth ventures will qualify for investments by private equity (PE) investors, that is, angel groups and venture capitalists. These seed-stage companies in established economies are thus able to draw on the resources of a well-established market and various funding sources to obtain the capital needed for development and growth. The existence of this profound financing gap preventing efficient deployment of private capital in Nigeria can be largely attributed to a lack of visibility of these companies to early-stage investment. Many of these investors do not feel comfortable investing in SMEs on the grounds of un-established credibility and lack of trust. Many entrepreneurs are therefore forced to finance the growth of their businesses independently. The issue of funding gaps, in the provision of debt and equity, as a constraint on the development of small businesses is not new. The issues involved in understanding funding gaps are complex and nuanced. In this research work, examination of the extant literature to identify stylised facts, relationships between the flow of finance and entrepreneurial competencies will be taken in consideration.

1. Statement of Problem

In most developing countries including Nigeria, due to the high rate of unemployment, the level of poverty has increased resulting to a poor standard of living. Most unemployed graduates depend on the government for ‘white collar’ jobs and this results to cases of youth restiveness and crimes. It is therefore clear that government alone cannot provide the needed jobs for the increasing population of unemployed youths hence the need for self-employment (entrepreneurship). As an integral part of the Nigerian government economic empowerment policy, the government has made a concerted effort to assist owners/managers of emerging small companies to develop. These endeavours are provided through measures including affirmative procurement, incubation programmes, funding and training and development. The high failure rate of these emerging businesses is what led to the present investigation of the entrepreneurial competencies and financing gaps of owners/managers of emerging small businesses (ECDP, 2015). The persisting question is “How is business success affected by financing gaps and entrepreneurial competencies?” Small businesses are confronted with many challenges. The government development programme is intended to address these challenges. A recent study by the Department of Human Settlements has underlined constraints such education and training gaps, access to finance, delay in payments, lack of financial management skills, restricted movement of labour, and industry and skills mismatch (Department of Human Settlement 2010). The skills gap that most authors refer to, relates to managerial and technical areas. Not enough attention is paid to entrepreneurial skills and financing gaps.

1.3 Research Question

1. How is business performance affected by funding gaps versus entrepreneurial capabilities?
2. What is the relationship between funding gaps and entrepreneurial competencies on small business success?

1.4 Research Objectives

The general objective of this study is to examine the bridge between entrepreneurial competencies and finance gap as a determinant of business success among SMEs.

The specific objectives are to:

1. To establish the relationship between funding gaps and entrepreneurial competencies on small business success
2. To establish the varying degree of impact of funding issues against entrepreneurial competencies on small business ventures
3. To identify the more critical element between funding and entrepreneurial skills in business success
4. To explore the impact of funding challenges on SMEs

1.5 Research Hypotheses

Hypothesis 1

H0: There is no significant effect of Entrepreneurial competence and financing gaps on business success among SMEs

H1: There is a significant effect of Entrepreneurial competence and financing gaps on business success among SMEs

Hypothesis 2

H0: There is no significant relationship between funding gaps and entrepreneurial competencies on small business success

H1: There is a significant relationship between funding gaps and entrepreneurial competencies on small business success

1.6 Significance of the Study

As this is one of the few studies on entrepreneurial competencies and financing gap as a determinant of small business success in Nigeria, it could be used to inform training and finance interventions.

It is generally accepted that the broad goal of SME policy is to accelerate economic growth and in so doing alleviate poverty. While there are many developmental constraints on the SME sector, bridging the financing gap between SMEs and larger enterprises is considered critical to economic growth.

1.7 Scope of the Study

The study is restricted to the bridge between entrepreneurial competencies and finance gaps as a determinant of business success among selected SMEs in Lagos state, Port Harcourt and Abuja as the case study.

1.8 Operational Definition of Terms

Entrepreneurial Competencies: This was used to mean the combination of the owner-managers’ identifiable characteristics, skills and motives that are vital in managing a business.

SMEs: The SME’s nomenclature used to mean small and medium enterprises.  It is sometimes referred to as micro, small and medium enterprises (MSMEs).  The SMEs cover non-farm economic activities mainly manufacturing, mining, commerce and services.

Success: success is a constant progression. It is success an achievement of an action within a specified period of time or within a specified parameter. Success can also mean completing an objective or reaching a goal. Success can be expanded to encompass an entire project or be restricted to a single component of a project or task. It can be achieved within the workplace, or in an individual’s personal life

1.9 Summary of the Research

Chapter 1 is a description of the introduction and background to the research; it contains the research problem, objectives, questions, hypotheses and significance of the study.

A literature review is presented in Chapter 2. Chapter 3 contains the research methodology and discusses the research setting and the data collection process.

The results are presented in Chapter 4 and a comparative analysis and discussion. Chapter 5 contains a summary, the conclusion, recommendations, and recommendations for further research.

Thereafter the references used for this research are provided, followed by the Self Rating Questionnaire in Appendix A.