THE ROLE OF SMALL AND MEDIUM SCALE BUSINESS AS MEANS OF ECONOMIC DEVELOPMENT
ABSTRACT
The work is an academic exercise in which the author attempts to investigate the problems and prospects of small and medium-sized businesses in Nigeria. By conducting this survey, the researcher was able to uncover the contributions of small and medium-sized businesses in changing a depressed economy. The major findings and recommendations were derived from the formulation of research questions.
One of the findings is that small and medium-sized businesses contribute significantly to the economy of any country. It is therefore recommended that, in order for small and medium-sized enterprises to play a role in the growth and development of the Nigerian economy,
the government reform educational systems to make them more functional, relevant, and need-oriented and driven. There is also a need to restructure and strengthen policy in favor of rapid growth and development of small and medium-sized enterprises in order for them to serve as the hub of industrial transformation.
CHAPTER ONE
INTRODUCTION
1.1 THE STUDY’S BACKGROUND
Experience has shown that industrial development in any country provides the best chance for generating sustenance growth, job creation, savings and investment, and overall economic development. Nigeria, like any other developing country with a low per-capital income,
sees industrialization and structural transformation as necessary in the quest for development. One of Nigeria’s most pressing development issues is the need to design and implement policies and strategies for an effective, competitive, and diverse industrial system. This is especially significant when one considers the country’s endowment. Olatoke (2005)
Because large business establishments make headlines in our news media, people underestimate the importance of small and medium-sized businesses. However, a careful examination will reveal that small and medium-sized businesses are also extremely important in our societal development.
Most of today’s business giants began with humble beginnings, from the dreams and dedication of perhaps one person, while the backbone of our economic system hangs on those businesses e.g. (Oil and steel companies, etc.), but the small scale industries constitute the muscle that enables such business giants above is obvious; that small medium scale businesses cannot compete directly with big business.
Experience has shown that the small businessman is most successful when he meets a need that cannot or is not currently being met by his larger competitors. “This act of providing something better and different provides vitality to Nigeria’s small businesses.” Ihekwoaba (2007)
The federal government of Nigeria has recognized the importance of small and medium-sized businesses in the development of the economy. The federal government introduces import substitution industries in her first National Development Plan (1962–68).
In her second National Development Plan, released in the early 1980s, the main industrial policy strategies were foreign exchange policies and trade regulations, investment incentives, and special incentives to provide credit and technical assistance to small scale industries. Udi and Omorokpe (2006)
Under the structural adjustment programs (SAP) framework, having recognized futile expenditure with increased petroleum revenue, a new industrial policy was launched in 1989, which re-emphasizes direct government realization process for the first time, the national identified small and medium scale enterprises or the main focus and strategy for achieving the goal of economic self-reliance. Ihekwoaba (2007)
Small and Medium Enterprises (SMEs), as defined by the National Council of Industries, are businesses whose total costs, excluding land, do not exceed two hundred million naira (N200,000,000.00). A lot has been said and written about SMEs all over the world. It has also been the topic of many seminars and workshops, both locally and internationally.
Similarly, governments at various levels (local, state, and federal) have focused on Small and Medium Enterprises in one way or another. While some governments developed policies to facilitate and empower the growth, development, and performance of SMEs, others focused on assisting SMEs to grow through soft loans and other fiscal incentives. International agencies and organizations (World Bank, United Nations Industrial Development Organization (UNIDO),
International Finance Corporation (IFC), United Kingdom Department For International Development (DFID), European Investment Bank (EIB), and others) are not only interested in strengthening and revitalizing SMEs in developing countries,
but have also heavily invested in them. Locally, several Non-Governmental Organizations (NGOs) such as Fate Foundation, Support and Training Entrepreneurship Program (STEP), Nigerian Investment Promotion Commission (NIPC), Association of Nigerian Development Finance Institutions (ANDFI), and individual
Development Finance Institutions (DFIs) have been advocating for better support structures for SMEs in Nigeria through advocacy and capacity-building initiatives, and have continued to canvass for better support structures. All of the attention and support lavished on SMEs stems from the widely acknowledged fact that SMEs create jobs and wealth. (Olatoke, 2007)
In justifying the introduction of SMIEIS, Sanusi (2003) stated that “with a concerted effort and renewed commitment from all stakeholders, this scheme will surely succeed and realize its intended objective of revamping the SMEs as engines of growth in the economy and a veritable tool for the development of indigenous technology, rapid industrialization, generation of employment for our teeming youths, and the pivot for sustainable development.”
Small and medium-sized enterprises (SMEs) are celebrated in almost every country or state. Because of their (SMEs’) important roles in the development and growth of various economies, they have been aptly referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country.”
SMEs are a veritable vehicle for achieving national economic objectives such as job creation and poverty reduction at a low investment cost, as well as the development of entrepreneurial skills and indigenous technology.
Other intrinsic benefits of vibrant SMEs include access to infrastructural facilities brought about by the presence of such SMEs in their surroundings, the stimulation of economic activities such as suppliers of various items and distributive trades for items produced and or required by the SMEs, resulting from rural urban migration,
and the improvement of the standard of living of the SMEs’ employees and their dependents, as well as those who are directly or indirectly associated with the SMEs. Ihekwoaba (2007)
In recognition of the enormous potential roles of SMEs, some of which have been outlined above, the government has devised special measures and programs, as well as policies that have been enunciated and implemented, to encourage their (SMEs) development and thus make them more vibrant in Nigeria. Udi and Omorokpe (2006)
These measures’ highlights include:
i. Fiscal incentives and fiscal policies that are protective
ii. Specialized financial institutions and SME funding schemes
iii. Affordably priced tariff structure
iv. The SMIEIS funding program
v. Preferential treatment and selective exemption from excise duties
vi. Creation of Export Processing Zones
vii. Exclusive manufacturing of selected items in the SME subsector
Despite the government’s full weight and support for NEPAD and AGOA activities and operations, it is concerning that, despite incentives, policies, programs, and support aimed at revitalizing SMEs, they have performed somewhat below expectations in Nigeria. Various individuals, organizations, and operators have advanced various explanations for why SMEs have been unable to live up to their billing.
While the average operator would always blame his failure on a lack of access to finance, others argue that inappropriate management skills, difficulty in accessing global markets, a lack of entrepreneurial skills and know-how, poor infrastructure, and other factors are largely to blame.
In 2004, the Association of Nigerian Development Finance Institutions (ANDFI) issued the following statement in response to why SMEs perform poorly in Nigeria: “Finance is usually regarded as one of the major constraints of SMEs.”
While this may be true, empirical evidence suggests that finance only accounts for about 25% of the success of SMEs. As a result, the establishment of other appropriate support systems and an enabling environment is critical for the success of SMEs in Nigeria.” Udi and Omorokpe (2006)
1.2 PROBLEM STATEMENT
Small and medium-sized enterprises (SMEs) in Nigeria have not performed admirably, and thus have not played the expected vital and vibrant role in Nigeria’s economic growth and development. The government, citizens, operators, practitioners, and organized private sector groups have all expressed grave concern about the situation.
Year after year, governments at the federal, state, and even local levels have expressed interest in and recognition of the critical role of the SME sub-sector of the economy through budgetary allocations, policies, and pronouncements, and have thus made policies to energise it.
There have also been fiscal incentives, grants, support and aid from bilateral and multilateral agencies, as well as specialized institutions, all aimed at making the SME sub-sector more vibrant. Just as it has been a major concern for everyone to promote the welfare of SMEs, it has also been a major source of concern for everyone that the vital sub-sector has fallen short of expectations.
When compared to what other developing and developed countries have been able to achieve with their SMEs, the situation is more disturbing and concerning. It has been demonstrated that there is a strong correlation between the degree of poverty, hunger, unemployment, economic well-being (standard of living) of a country’s citizens and the vibrancy of the country’s SMEs.
If Nigeria is to achieve significant success in meeting the Millennium Declaration Goals by 2015, one of the sure ways would be to aggressively pursue the development of its SMEs.
Some of the Millennium Declaration Goals, such as halving the proportion of people living in extreme poverty, suffering from hunger, and lacking access to safe water, halving maternal and infant mortality by three-quarters and two-thirds, respectively,
and enrolling all children in primary school by 2015, may be a mirage unless our SMEs’ fortunes improve sooner rather than later. Given Nigeria’s increasing poverty and the need to meet the Millennium Development Goals, the time has come to intervene surgically in the situation of our SMEs.
The main problems of SMEs, which are not insurmountable, are as follows: a lack of entrepreneurial skills, poor management practices, limited access to money and capital markets, low equity participation from promoters due to insufficient personal savings due to their level of poverty and a low return on investment, insufficient equity capital, poor infrastructural facilities, a high rate of enterprise mortality, a shortage of skilled labor, and a multiplicity of regulatory agencies.
Without a doubt, the problems and challenges that SMEs face are enormous, but it is interesting to note that some SMEs are able to overcome them. This provides hope and should serve as a foundation for optimism that there is a way out.
There must be some survival strategies that many SME promoters are unaware of. This study also aims to investigate and dissect some of the key business survival strategies that have proven effective for a few thriving SMEs. The benefits of this could be enormous, as other SMEs facing extinction, as well as new and proposed new ones, could borrow.
1.3 OBJECTIVE OF THE STUDY
The overall goal of this research is to identify ways and means of establishing and maintaining the vibrancy of Nigerian SMEs so that they can play the expected vital roles as the engine of growth in our economic development efforts.
The following are the goals of this study in order to accomplish this:
(1) To identify the major issues, challenges, and constraints that have hampered SMEs.
(2) To investigate the roles, functions, and significance of SMEs in the Nigerian economy.
(3) To ascertain the government’s role in assisting Nigerian SMEs.
(4) To make appropriate recommendations for resolving the problems, challenges, and constraints that SMEs face in carrying out their roles.
1.4 QUESTIONS FOR RESEARCH
The research questions are as follows:
(1) What are the major issues, challenges, and constraints confronting Nigerian SMEs?
(2) What are the roles, functions, and importance of small and medium-sized enterprises (SMEs) in the Nigerian economy?
(3) What roles should the government play in assisting Nigerian SMEs?
(4) What are the recommended solutions to Nigerian SMEs’ problems, challenges, and constraints?
1.5 HYPOTHESIS OF RESEARCH
For this study, the following research hypotheses were developed:
Ho: There is no significant relationship between the growth of the Nigerian economy and SMEs.
Ho2: SMEs play no significant role in the growth of the Nigerian economy when compared to other sectors.
1.6 THE STUDY’S SIGNIFICANCE
Everyone has been agitated about what to do to alleviate Nigeria’s crippling poverty, high level of ignorance, and embarrassingly high level of unemployment. Given the important and beneficial role and contributions that SMEs make in other developed and developing economies.
This study is important for potential, prospective, and existing SMEs. The study will teach them (business owners) how to manage their businesses, how to raise funds, and what principles and practices to employ in order to maximize profits and reduce costs.
Individuals who are unemployed will benefit from this study as well, because they will be able to easily source funds and establish business enterprises rather than looking for white collar jobs.
1.7 THE STUDY’S OBJECTIVE
The study’s scope includes the entire staff of Telnet (NIG) Ltd and Bitcoms system (NIG) Ltd (small and medium scale enterprises) in Lagos’ Eti-Osa local government area.
1.8 TERM DEFINITIONS
i. Micro Enterprise: A firm whose total cost, including working capital but excluding land costs, is less than ten million naira (N10,000,000) and/or with a labor force of no more than thirty (30) full-time workers and/or a turnover of no more than two million naira (N2,000,000).
ii. Small Enterprise: An enterprise with a total cost, including working capital, of between ten million naira (N10,000,000) and one hundred million naira (N100,000,000), and/or a workforce of between eleven (11) and seventy (70) full-time employees, and/or a yearly turnover of not more than ten million naira (N10,000,000).
iii. Medium Enterprise: A company with a total cost, including working capital, of more than one hundred million naira (N100,000,000) but less than three hundred million naira (N300,000,000), and/or a staff strength of between seventy-one (71) and two hundred (200) full-time workers, and/or an annual turnover of not more than twenty million naira (N20,000,000).
iv. Large Enterprise: Any enterprise with a total cost of more than three hundred million naira (N300,000,000) including working capital but excluding land costs and/or a labor force of more than two hundred (200) workers and/or an annual turnover of more than twenty million naira.
Only (N20,000,000) is available. Other abbreviations, terms, and notations used in this research include, but are not limited to:
(v) NASME: Nigerian Association of Small and Medium Enterprises, a federation of all SMEs.
(vi) MAN: Manufacturers Association of Nigeria is the official association of Nigerian manufacturers.
(vii) NACCIMA: Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture is a confederation of Nigerian Chambers of Commerce.
viii. NASSI: Nigerian Association of Small Scale Industries is a federation of all Nigerian Small Scale Enterprises.
DFIs (Development Finance Institutions) Institutions are businesses that provide project and development financing, such as the Bank of Industry (BOI)
x. SMEs: Small and Medium Enterprises are businesses that meet the criteria outlined above.
xi. SMEDAN: Nigerian Small and Medium Enterprises Development Agency
xii BOI: Bank of Industry, which makes medium-to-long-term loans to businesses.
xiii. CBN: Central Bank of Nigeria, Nigeria’s apex bank in charge of supervising other banks.
NACRDB stands for Nigerian Agricultural Cooperative and Rural Development Bank.
NECESSITIES: National Economic Empowerment and Development Strategy
xvi. State Economic Empowerment and Development Strategy (SEEDS)
NDE stands for National Directorate of Employment.
CMD stands for Centre for Management Development.
NAPEP stands for National Poverty Eradication Programme.
MSME stands for Micro, Small, and Medium Enterprises.
xxi. Non-governmental Organization (NGO) xxii. LCCI stands for Lagos Chamber of Commerce and Industry.
xxiii. xxiv. NACC: Nigerian American Chamber of Commerce SRS stands for Simple Random Sampling.
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