THE EFFECTS OF POLITICAL ENVIRONMENT ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE BUSINESS IN NIGERIA (A CASE STUDY OF THREE SELECTED SME’S IN AGBADO-IYAYE LGA LAGOS)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Business performance is the effort expended by a business firm in achieving its objectives of customer satisfaction, employee satisfaction, societal satisfaction, and ultimately profitability. Several studies such as Richard, Devinney, George and Johnson (2009), and Ibeto (2011), have shown that the effort expended by small and medium scale enterprises business managers in actualizing their goal in Nigeria has not been much achieved.

Richards et al (2009), assert that the splendid performance of small and medium scale business depends to a high extent on the political environment of the country. According to these scholars, political environment has to do with forces and issues arising from the political decisions of government, which has the capability of altering the desired outcome and value of a given economic action, by distorting the probability of achieving business goals.

Ibeto (2011) explained the political environment as factors emanating from innovations in government policies and programs, which affects the ability of economic entities in actualizing their goal.

The small and medium scale business managers in Nigeria operates in a fluctuating political environment made up of risks of multiple taxation, currency devaluation, inflation, repatriation, expropriation, confiscation, campaigns against foreign goods, mandatory labor benefit legislation, kidnapping, terrorism, and civil wars (Griffen, 2013).

Actions executed by government such as regulatory, legal framework, and political changes may reduce business profits and pose as barriers to foreign investment. Though it has been ascertained that the political environment has a connection with business performance, there are inadequate literature and empirical evidence in Nigeria that link the political environment to the performance of small and medium scale business.

The political environment in Nigeria affects businesses and could bring about a risk factor that could warrant them to suffer a loss. The political environment could deviate as a result of the actions and policies of governments at all levels, from the lowest level to the federal level. Businesses must plan for the variability of government policy and regulations.

The political environment in a country affects its economic environment. The economic environment, in turn, affects the performance of a business organization. One way to curb political risk is to procure political risk insurance.

Businesses that have international affiliation use this type of insurance to reduce their risk exposure as a result of political instability. There are indices that give an idea of the risk incident an organization has in some countries. For instance, an index of economic freedom grades countries based on how political interference influences business decisions in each country.

The political environment can influence business establishments in many ways. It could multiply a risk factor and cause a major loss. Political factors have the power to change outcomes and also affect government policies at local to federal level. Business organizations should be prepared to deal with the local and international results of politics. Innovations in the government policy make up the political factors. The innovation can be economic, legal or social.

It could also be combinations of these factors. High or low tax could be an example of a political element. Government might increase taxes for some business organizations and lower it for others. The decision will have a direct effect on your businesses.

One must constantly stay updated with such political factors. Government interventions like fluctuation in interest rate can have an effect on the demand patterns of an organization. Some factors create Inter-connections in many ways. Some examples are:

Political decisions affect the economic environment; Political decisions influence the country’s socio-cultural environment. Politicians can influence the rate of emergence of new technologies. Politicians can influence acceptance of new technologies.

The political environment is surely among the less predictable factors in the business environment. A cyclical political environment erupts, as democratic governments have to go after re-election every four years. This external element of business involves the effects of pressure groups. Pressure groups seem to change government policies.

As a political system in different areas differs, the political impact differs. The population of the country democratically elects open government system. In totalitarian systems, government’s power derives from a select group. Corruption is a blockade to economic growth in Nigeria. Some organizations survive and grow by offering bribes to government officials.

The success and growth of these organizations are not based on the value they offer to consumers. An attempt to investigate this relationship and expand the frontier of knowledge in this area of study led to the hypothesis that political environment has no significant relationship with business performance of small and medium scale enterprises companies in Nigeria.

1.2. STATEMENT OF PROBLEM

Small and medium scale business  are the engine of growth and development of most developed and developing nations in the world, but unfortunately the state of economic growth of Nigeria appears to be very low despite the large concentration of businesses in the country.

The poor contribution of Small and medium scale business to the development of the country may be due to some internal and external business environmental factors such as management inefficiency, marketing and sales problems, inadequate infrastructure, market competition, and financial inadequacy that are militating against the performance of Small and medium scale business in term of their profit, sales and employment generation.

Small and medium enterprises (SMEs) in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development of Nigeria, (Basil, 2013).

Year in year out, government at federal, state and local level make an effort in support of entrepreneurship development, but still the contributions of Small and medium scale business to economic development is low.

Inspite of the large volume of studies on Small and medium scale business in developing countries, there is a death of literature on studies relating to business performance evaluation particularly in the West of Nigeria.

Most of empirical studies conducted in developing countries particularly in Nigeria are mainly related to the problems of Small and medium scale business, but the question of the extent to which political environments factor(s) affect the profit, sales and employment of Small and medium scale business and assessment of their performance in Agbado-Ijaye LCDA has not been thoroughly investigated

1.3 AIMS OF THE STUDY

The major aim of the study is to examine the effects of political environment on the performance of small and medium scale business in Nigeria.  Other specific objectives of the study include;

1. 1. To assess the level of Small and medium scale business performance in Agbado-Ijaye LCDA Lagos state.

1. 1. To examine the impact of political factors on the profit of Small and medium scale business.

1. 1. To examine the nature of business and political environment in Nigeria.

1. 1. To examine the effect of political environment on performance of Small and medium scale business.

1. 1. To examine the growth strategies of small and medium scale business in Nigeria.

1. 1. To examine the relationship between political environment and performance of small and medium scale business.

1.4 RESEARCH QUESTIONS

1. 1. What is the level of Small and medium scale business performance in Agbado-Ijaye LCDA Lagos state?

1. 1. What is the impact of political factors on the profit of Small and medium scale business?

1. 1. What is the nature of business and political environment in Nigeria?

1. 1. What is the effect of political environment on performance of Small and medium scale business?

1. 1. What is the relationship between political environment and performance of small and medium scale business?

1. 1. What are the growth strategies of small and medium scale business in Nigeria?

1. 1. RESEARCH HYPOTHESES

Hypothesis 1

1. 1. : There is no significant effect of political environment on performance of Small and medium scale business.

1. 1. : There is a significant effect of political environment on performance of Small and medium scale business.

Hypothesis 2

1. 1. : There is no significant relationship between between political environment and performance of small and medium scale business.

1. 1. : There is a significant relationship between between political environment and performance of small and medium scale business.

1.6 SIGNIFICANCE OF THE STUDY

Knowledge acquired from this study would help the businesses to become more sensitive to the uncontrollable factors that are external to their environment which impinges on their business performance; how these factors can be effectively managed and top opportunities for enhanced productivity and profitability.

This study would be useful to the government in the formulation of policies towards SMEs development in Nigeria. It would also help the government in identifying the importance of small and medium enterprise sector in the achievement of economic development and national growth in Nigeria

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the effects of political environment on the performance of small and medium scale business in Nigeria

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 OPERATIONAL DEFINITION OF TERMS

Small Scale business: – The definition of small scale enterprise varies with people and countries such that it is better defined based on the characteristics. In the Nigerian context, small scale enterprise is any processing, serving or manufacturing industry with an investment in machinery and equipment above N500,000 [Waboi, 2012].

According to the centre for management development in a policy proposal to Federal Government in 1982, A small scale enterprise is a manufacturing, processing or service enterprise involved in a factory or production type operation employing up to 50 full time employees, investment in plant machinery are utilized in its operation.

Entrepreneur: – According to Hagen, an entrepreneur is an individual who conceives the idea of business, design the organization of the firm, accumulates capital, recruits labour, establishes relations with supplies, customers and the government and converts the conception into a functioning organization business.

Environment: It includes physical, chemical and other natural forces. Living things live in their environment. They constantly interact with it and adapt themselves to conditions in their environment. In the environment there are different interactions between animals, plants, soil, water, and other living and non-living things.