THE ROLE OF SMALL AND MEDIUM SCALE BUSINESS AS MEANS OF ECONOMIC DEVELOPMENT

ABSTRACT

The work is an academic exercise which attempts to study the problems and prospects of small and medium scale enterprises in Nigeria. The researcher by undertaking this survey was able to unearth the contributions of small and medium scale business in changing a depressed economy. Research questions were formulated from which the major findings were obtained and recommendations were made. One of the findings is employment generation which is a major contribution of small and medium scale enterprises to any nation’s economy. It is therefore recommended that for small and medium scale enterprises to play its role in contributing to growth and development of the Nigeria economy, government should reform the educational systems to be more functional, relevant and need-oriented and driven. There is also the need to restructure and strengthen policy in favor of a rapid growth and development of small and medium enterprises so as to serve as the hub of industrial transformation.

CHAPTER ONE

INTRODUCTION

1 .1 BACKGROUND OF THE STUDY

Experience has shown that industrial development in any country, provides the brightest hope for generating sustenance growth employment, saving and investment and indeed economic development. Nigeria, like any other developing country with relatively low per-capital income, looks unto industrialization and structural transformation, which are imperative in the quest for the development. One of the most critical development issues in Nigeria revolves around the need to design andimplement policies and strategies for an effective, competitive and diversified industrial system. This is particularly important when one considers the country’s endowment. Olatoke (2005)

Giant business establishment make headlines in our news media, people therefore think less of small and medium scale businesses but a clear examination will show that small scale business venture are also extremely important in our societal development. Most of today business giant started from humble beginning, from dreams and dedication of perhaps one person while backbone of our economic system hang on those business e.g. (Oil and steel companies etc), but the small scale industries constitutes the muscle that enable such business giant above is obvious however; that the small medium scale businesses cannot compete directly with big business. Experiences show that the small-businessman is mostly successful when he fulfills a need that cannot be or is not currently being supplied by these big business competitors.”This act to provide something better and different, gives Nigeria’s small business vitality”. (Ihekwoaba, 2007)

The federal government of Nigeria in realization of the importance of small and medium scale industries to the development of the economy. In her first National development plan (1962 – 1968) the federal government introduces import substitution industries. In her second National Development plan in early 80s the main strategies of the industrial policy were foreign exchange policies and trade regulations investment incentives and special incentives to provide credit and technical assistance to small scale industries. (Udi&Omorokpe, 2006)

Under the structural adjustment programmes (SAP) framework, having recognized futile expenditure with increased revenue from petroleum, 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 the attainment of the goal of economic self-reliance. (Ihekwoaba, 2007)

Small and Medium Enterprises (SMEs) as defined by the National Council of Industries refer to business enterprises whose total costs excluding land is not more than two hundred million naira (N200, 000,000.00) only. A lot has been said and written about SMEs the world over. It has also formed the subject of discussions in so many seminars and workshops both locally and internationally. In the same token, governments at various levels (local, state and Federal levels) have in one way or the other focused on the Small and Medium Enterprises. While some governments had formulated policies aimed at facilitating and empowering the growth and development and performance of the SMEs, others had focused on assisting the 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) etc are not only keenly interested in making SMEs robust and. vibrant in developing countries but have also heavily invested in them. Locally, the several Non-Governmental Organizations such as Fate foundation, Support and Training Entrepreneurship Programme (STEP), the Nigerian Investment Promotion Commission (NIPC), the Association of Nigerian Development Finance Institutions (ANDFI), as well as individual Development Finance Institutions (DFIs) have been promoting the growth of SMEs in Nigeria through advocacy and capacity-building initiatives, and have continued to canvass for better support structures for operators in the SME subsector. All the massive attention and support given to SMEs relate to the widely acclaimed fact that SMEs are job and wealth creators. (Olatoke, 2007)

In justifying the introduction of SMIEIS, the then Governor of the Central Bank of Nigeria, Sanusi (2003) said “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 thedevelopment of indigenous technology, rapid industrialization, generation of employment for our teeming youths and the pivot for sustainable economic development in Nigeria”. Small and Medium Enterprises (SMEs) occupy a place of pride in virtually every country or state. Because of their (SMEs) significant roles in the development and growth of various economies, they (SMEs) have aptly been referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country.” SMEs represent a veritable vehicle for the achievement of national economic objectives of employment generation and poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology. Other intrinsic benefits of vibrant SMEs include access to the infrastructural facilities occasioned by the existence 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 needed by the SMEs, stemming from rural urban migration, enhancement of standard of living of the employees of the SMEs and their dependents as well as those who are directly or indirectly associated with them. (Ihekwoaba, 2007)

In recognition of the enormous potential roles of SMEs, some of which have been outlined above, various special measures and programmes have been designed and policies enunciated and executed by government to encourage their (SMEs) development and hence make them more vibrant in Nigeria. (Udi &Omorokpe, 2006)

The highlights of these measures include:

i. Fiscal incentives and protective fiscal policies

ii. Specialized financial institutions and funding schemes for the SMEs

iii. Favourable tariff structure

iv. The SMIEIS funding scheme

v. Selective exemption and preferential treatment in excise duties

vi. Establishment of Export Processing Zones

vii. Selective reservation of items for exclusive manufacture in the SME subsector

Government’s full weight and support for NEPAD and AGOA activities and operations has however been worrisome that despite the Incentives, policies, programmes and support aimed at revamping the SMEs, they have performed rather below expectation in Nigeria. Different people, organizations, and operators have advanced various reasons as to why SMEs have not been able to live up to their billing. While an average operator would always hinge his failure on lack of access to finance, some others think otherwise arguing that inappropriate management skills, difficulty in accessing global market, lack of entrepreneurial skills and know how, poor infrastructure etc are largely responsible. The Association of Nigerian Development Finance Institutions (ANDFI) in 2004 issued this statement in relation to why SMEs perform poorly in Nigeria: “Finance is usually considered as the major constraints of SMEs. While this may be true, empirical evidences have shown that finance contributes only about 25 percent to the success of SMEs. Thus, the creation of other appropriate support system and enabling environment are indispensable for the success of SMEs in Nigeria”. (Udi & Omorokpe, 2006)

1.2 STATEMENT OF PROBLEM

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. This situation has been of great concern to the government, citizenry, operators, practitioners and the organized private sector groups. Year in year out, the governments at federal, state and even local levels through budgetary allocations, policies and pronouncements have signified interest and acknowledgement of the crucial role of the SME sub-sector of the economy and hence made policies for energizing the same. There have also been fiscal incentives, grants, bilateral and multilateral agencies support and aids as well as specialized institutions all geared towards making the SME sub-sector vibrant. Just as it has been a great concern to all and sundry to promote the welfare of SMEs, it has also been a great cause of concern to all, the fact that the vital sub-sector has fallen short of expectation. The situation is more disturbing and worrying when compared with what other developing and developed countries have been able to achieve with their SMEs. It has been shown that there is a high correlation between the degree of poverty hunger, unemployment, economic well being (standard of living) of the citizens of countries and the degree of vibrancy of the respective country’s SMEs. If Nigeria were to achieve an appreciable success towards attaining the Millennium Declaration Goals for 2015, one of the sure ways would be to vigorously pursue the development of its SMEs. Some of the key Millennium Declaration Goals like halving the proportion of people living in extreme poverty, suffering from hunger, without access to safe water, reducing maternal and infant mortality by three-quarts and two thirds respectively and enrolment of all children in primary school by 2015 may indeed be a mirage unless there is a turnaround of our SMEs’ fortunes sooner than later. The time is now to do something surgical to the situation of our SMEs given the aggravating level of poverty in Nigeria and the need to meet up with the Millennium Declaration Goals.

The main problems of SMEs, which are however not insurmountable: low of entrepreneurial skills, poor management practices, constrained access to money and capital markets, low equity participation from the promoters because of insufficient personal savings due to their level of poverty and low return on investment, inadequate equity capital, poor infrastructural facilities, high rate of enterprise mortality, shortages of skilled manpower, multiplicity of regulatory agencies and overbearing operating environment, societal and attitudinal problems, integrity and transparency problems, restricted market access, lack of skills in international trade; bureaucracy, lack of access to information given that it is costly, time consuming and complicated at times. The problems and challenges that SMEs contend with are enormous no doubt but it is curious to know that some SMEs are able to overcome them. This gives hope and should provide a basis for optimism that there is a way out. There must be some survival strategies, which are not known to many SME promoters. This research is also intended to explore and unravel some of the key business survival strategies, which have worked for a few thriving SMEs. The benefits of this could be tremendous in that other SMEs facing threats of extermination as well as new and proposed new ones could also borrow

1.3 PURPOSE OF THE STUDY

The overall objective of this research is to identify ways and means, which will establish and sustain the vibrancy of Nigerian SMEs so it can play the expected vital roles as the engine of growth in our economic development efforts.

In order to achieve this, the followings are the purpose of this study:

(1) To identify the major problems, challenges and constraints which have militated against the SMEs.

(2) To examine the roles, functions and importance of SMEs in Nigeria economy.

(3) To determine the role of government in assisting the SMEs in Nigeria.

(4) To suggest appropriate recommendations for solving the problems, challenges and constraints of SMEs from performing it roles.

1.4 RESEARCH QUESTIONS

The followings are the research questions:

(1) What are the major problems, challenges and constraints of SMEs in Nigeria?

(2) What are the roles, functions and importance of SMEs to Nigeria economy?

(3) What are the roles that government should play in assisting the SMEs in Nigeria?

(4) What are the recommendation solutions to the problems, challenges and constraints of SMEs in Nigeria?

1.5 RESEARCH HYPOTHESES

The following research hypotheses were formulated for this study:

Ho: there is no significant relationship between SMEs and the growth of Nigeria economy

Ho2: there is no significant role played by SMEs in the growth of Nigeria economy when compared with other sector.

1.6 SIGNIFICANCE OF THE STUDY

All and Sundry have been seriously agitated as to what to do in order to reduce the crippling poverty, high level of ignorance and the embarrassing high level unemployment rate in Nigeria. Given the vital and salutary role and contributions which SMEs play in other developed and developing economics.

This research is significance to potential, prospective and existing SMEs. The study will be an eye opener to them (owners of businesses) to know how to manage, its business, how to source for fund, principles and practice to employ in maximizing its profits and cost reduction.

The individuals, who are not employed, will also gain from this study, in the sense that they can easily source for funds and establish business enterprises instead of searching for white collar jobs.

1.7 THE SCOPE OF THE STUDY

The scope of this study is the entire staff of Telnet (NIG) Ltd and Bitcoms system (NIG) Ltd (small and medium scale enterprises) in Eti-Osa local government area of Lagos.

1.8 DEFINITIONS OF TERMS

i. Micro Enterprise: A firm, whose total cost including working capital but excluding cost of land is not more than ten million naira (N10,000,000) and/or with a labour size of not more than thirty (30) full-time workers and/or a turnover of less than two million naira (N2,000,000) only.

ii. Small Enterprise: An enterprise whose total cost including working capital but excluding cost of land is between ten million naira (N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce between eleven (11) and seventy (70) full-time staff and/or with a turnover of not more than ten million naira (N10,000,000) in a year.

iii. Medium Enterprise: A company with total cost including working capital but excluding cost of land 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 with an annual turnover of not more than twenty million naira (N20,000,000) only.

iv. Large Enterprise: Any enterprise whose total cost including working capital but excluding cost of land is above three hundred million naira (N300,000,000) and/or a labour force of over two hundred (200) workers and/or an annual turnover of more than twenty million naira

(N20,000,000) only. Other abbreviations, terms and notations used in t his study include but are not limited to the following:

(v) NASME: Nigerian Association of Small and Medium Enterprises, which is an umbrella association of all SMEs

(vi) MAN: Manufacturers Association of Nigeria is the official association of manufacturing companies in Nigeria

(vii) NACCIMA: Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture is an association of various Chambers of Commerce in Nigeria

viii. NASSI: Nigerian Association of Small Scale Industries is the umbrella association of all the Small Scale Enterprises in Nigeria

ix. DFIs: Development Finance Institutions are companies involved in project and development finance such as the Bank of Industry (BOI)

x. SMEs: Small and Medium Enterprises are those firms, which satisfy the definitions given above

xi. SMEDAN: Small and Medium Enterprises Development Agency of Nigeria

xii BOI: Bank of Industry, which provides medium to long-term loans to enterprises

xiii. CBN: Central Bank of Nigeria, the apex bank in Nigeria, which supervises other banks

xiv. NACRDB: Nigerian Agricultural Cooperative and Rural Development Bank

xv. NEEDS: National Economic Empowerment and Development Strategy

xvi. SEEDS: State Economic Empowerment and Development Strategy

xvii. NDE: National Directorate of Employment.

xviii. CMD: Centre for Management Development

xix. NAPEP: National Poverty Eradication Programme

xx. MSME: Micro, Small and Medium Enterprises

xxi. NGO: Non-governmental Organization xxii. LCCI: Lagos Chamber of Commerce and Industry

xxiii. NACC: Nigerian American Chamber of Commerce xxiv. SRS: Simple Random Sampling.