Full Project - THE ROLE OF SMALL AND MEDIUM SIZED ENTERPRISES FOR ECONOMIC GROWTH

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Full Project – THE ROLE OF SMALL AND MEDIUM SIZED ENTERPRISES FOR ECONOMIC GROWTH

Click here to Get this Complete Project Chapter 1-5

ABSTRACT

This study, the role of small and medium sized enterprises for economic growth, was undertaken to find out how SME sub-sector in Nigeria has performed and its impact on the economic growth of the country.

Small and Medium Scale Enterprises (SMEs) is accepted globally as a tool for empowering the citizenry and economic growth. It has been associated with the rapid economic growth of countries in Asia and North America. In Nigeria efforts have been made by successive governments to reduce poverty and accelerate economic growth by increasing foreign direct investment, diversifying the economy, enacting policy frameworks which favour small business ownership and sometimes initiating employment and entrepreneurship programmes.

Specifically this study tends to figure out: how profitable SME business is; whether infrastructural development could be attributed to the presence of SMEs; if significant number of people are employed within the SME sector; whether the SME market has attracted banks and financial institutions with increase in loans and incentives; whether there is increase in information Technology related businesses due to presence of SMEs and if there is need for the government to encourage and develop more opportunities for SMEs.

A total of 200 SMEs were randomly selected from Matori, a city in Lagos state Nigeria. A questionnaire was constructed and distributed to the selected SMEs. The responses were collated and analyzed using Statistical Package for Social Sciences (SPSS) analytical tool.

The study reveals that while SME businesses are profitable problems of policy inconsistency and poor infrastructural development continuously undermine the potentials of the market. Though the presence of SMEs has attracted infrastructural development, such developments in most cases are community effort or privately driven which limits the amount of developments achieved. For example their efforts could be limited to patching and maintaining existing bad road networks but not expanding or creating new road networks.

The study also revealed that financial institutions like banks are attracted to areas where SMEs are established but getting funds through these institutions via loans has not been easy due to high interest rates and harsh conditions like types of collateral to present.

It was also established that SMEs are good employers of labor but not without required support and facilities. SMEs will not engage more people to work for them when their businesses do not thrive. For their businesses to thrive they need government to encourage them and develop more opportunities such opportunities could be in terms of providing infrastructures like stable power supply and good transport networks (rails and roads), easy access to finance (low interest rates), stable government policies, reducing multiple taxations, ensuring availability and access to modern technology and raw materials locally etc.

The result of the study confirms existing theories in the field which support the belief that SMEs remains a tool for economic growth in Nigeria.

There are enormous potentials and opportunities for SMEs in Nigeria to mature and play the crucial role of economy growth, poverty reduction, employment and wealth creation. This will entail having the government provide required supports and addressing identified problems. While the SMEs also need to change their attitudes relating to entrepreneurship development, government needs to involve the SMEs in policy formulation and execution for maximum effect. There is also need to introduce entrepreneurial studies in our Universities in Nigeria in addition to emphasizing practical and technological studies at all levels of our educational system.

ACKNOWLEDGEMENT

My unqualified gratitude goes to God Almighty, The Merciful and The Provider, who lavishly gave me the endurance, resilience, foresight and thoughtfulness to undertake this project and to complete it to satisfaction

I wish to specially thank Prof. Klaus Solberg Söilen for giving me this opportunity to prove myself and also for all his vital feedbacks and supports

I will also like to appreciate my beloved wife, Adaobi Jacinta for showing me support and understanding throughout the period of my undertaking this research work.

Lastly I wish to acknowledge the contributions of Engr. Emeka Onuzuruike, my fellow distance learning MBA student at the Blekinge Institute of Technology who helped me proof read and objectively critique this work.

Onuorah Patrick

Lagos, Nigeria

December, 2009.

CERTIFICATION

Table of Contents

TOC \o “1-3” \h \z \u

1.Introduction PAGEREF _Toc250967105 \h 81.1Context and Motivation PAGEREF _Toc250967106 \h 91.2Research Focus PAGEREF _Toc250967107 \h 91.3Scope of Thesis PAGEREF _Toc250967108 \h 101.4Outline of the thesis PAGEREF _Toc250967109 \h 112.Literature review PAGEREF _Toc250967110 \h 122.1An overview of Small and Medium Scale Enterprises PAGEREF _Toc250967111 \h 122.2Background to the Subject Matter PAGEREF _Toc250967112 \h 142.3Small Businesses in Africa. PAGEREF _Toc250967113 \h 172.4Characteristics of SMEs in Nigeria PAGEREF _Toc250967114 \h 182.5Information communication technology(ICT) and small business PAGEREF _Toc250967115 \h 192.6Funding of Small Business PAGEREF _Toc250967116 \h 203.Methodology and Research Findings PAGEREF _Toc250967117 \h 273.1Description of Study Area PAGEREF _Toc250967118 \h 273.2Research method and approach used PAGEREF _Toc250967119 \h 273.3Statistical tool used PAGEREF _Toc250967120 \h 283.4Limitations of The study PAGEREF _Toc250967121 \h 284.Presentation and Analysis of Data PAGEREF _Toc250967122 \h 294.1Summary of Findings: PAGEREF _Toc250967123 \h 365.RECOMMENDATIONS AND CONCLUSIONS PAGEREF _Toc250967124 \h 375.1Recommendations PAGEREF _Toc250967125 \h 395.2Conclusion PAGEREF _Toc250967126 \h 415.3Future Research Suggestions PAGEREF _Toc250967127 \h 426.References PAGEREF _Toc250967128 \h 437.APPENDIX A: SURVEY QUESTIONNAIRE PAGEREF _Toc250967129 \h 47

LIST OF TABLES

Table 1: The Indian working group on science and technology for Small- and medium-scale enterprises, 2007-2011 —————————————————————————-pg 8

Table 2: Summary of hypothesis —————————————————————-pg 35

LIST OF FIGURES

Figure 1: Types of Small Businesses in Matori ———————————————-pg 30

Figure 2: Profitability of business ————————————————————–pg 31

Figure 3: Estimated annual income in Naira ————————————————–pg 32

Figure 4: Infrastructure associated with SME development on Matori community —-pg 33Figure 5: Usage of computer and/or internet facilities —————————————pg 34

Figure 6: Did computer centers come to the area as a result of SMEs presence? ——-pg 34Figure 7: Reasons why respondents encourage government support for SMEs ———pg 35IntroductionIn the words of Levitsky (1996) and Zecchini (1997) small enterprise development is portrayed as one of the most successful economic development trajectories in the post- communist economies of central and Eastern Europe. According to Milford (2000), while quoting from World bank (2000), “enormous store has been placed on its presumed capacity to address extreme poverty, create desperately needed jobs, halt the ongoing de-industrialization process and curtail any further ethnic unrest associated with bleak economic prospects and social collapse”.

Nigeria seeks to be counted among the world’s 20 largest economies by 2020 and this to many is not practical. The goal of this research work is to determine using primary and secondary data, the role of small and medium scale enterprises (SMEs) so far in the economic growth of Nigeria. This would enable one to make deductions and suggestions on how to make use of SMEs at the local scale to engender economic development.

What constitute a small and medium scale enterprise varies especially from country to country. For example, according to the newly enacted Indian Micro, Small and Medium Enterprises Development Act 2006, enterprises are classified into Micro, Small and Medium according to the following criteria:

Type of enterprise Engaged in manufacture or

production of goods Engaged in providing or rendering of services

Investment in plant and

machinery Investment in equipment

Micro enterprise Does not exceed 25 Lakh rupees Does not exceed 10 Lakhrupees

Small enterprise More than 25 Lakh rupees, but

does not exceed 5 Crore rupees More than 10 Lakh rupees, but does not exceed 2 Crore rupees

Medium enterprise More than 5 Crore rupees but

does not exceed 10 Crore rupees More than 2 Crore rupees but does not exceed 5 Crore rupees

Table 1: The Indian working group on science and technology for Small- and medium-scale enterprises, 2007-2011

In Taiwan, enterprises in the manufacturing, construction and mining and quarrying sectors that have paid-in capital of less than NT$80 million or fewer than 200 regular employees are classed as SMEs. For other industries, those enterprises that had annual operating revenue of less than NT$100 million in the previous year or that have fewer than 50 regular employees are classed as SMEs (White paper on SMEs in Taiwan, 2008).

In the United States of America, enterprises in the manufacturing sectors with fewer than 500 regular employees or wholesaling and retailing sectors with fewer than 100 regular employees and an average annual operating revenue of less than US$6 million are classified as SMEs. For the services and construction sector, they may have an average annual income of less than US$6 million and less than US$28.5 million respectively to be classified as SMEs (White paper on SMEs in Taiwan, 2007). In the United Kingdom the classification is based on staff strength. They classify businesses with less than 250 regular employees as SMEs (UK: Department of Trade and Industry)

Context and MotivationOver the years, having worked for different successful companies in Nigeria which are considered small players in the industry, I have developed a keen interest in understanding how these small businesses actually affect our economy. The growth of SMEs have been said to combine the strategies of poverty alleviation and industrialization into a unique package that is beneficial not only to entrepreneurs but to the country at large.

Therefore SME can be seen as a tool for both national development and personal growth. As a person who would love to become an entrepreneur in future, I believe that the knowledge gained from this research would not only help me better understand the status of SMEs in Nigeria but would also equip me in strategizing when I intend to start up.

Research Focus

This research intends to validate the link between the monetary value of SME output and economic growth in the Nigeria context. The statistical definition of SMEs varies by country, and is usually based on the number of employees, capital, or the value of assets and sales volume (Kanamori et al., 2006). According to Schaper (2000), SMEs account for over 95% of private sector firms in most industrialized economies. The importance of SMEs in driving economic growth is again emphasized in the case of communist East and Central European countries that allowed limited forms of officially-sanctioned SME development as a way of ameliorating poor economic performance and lifting living standards (Patterson, 1993). According to Rowen et al., (1998) the rapidity of industrial development success achieved in the last thirty years in East Asian economies have been staggering and this is attributed to SMEs.

This may be the same in developing countries of Africa, such as Nigeria but the degree of impact on economic growth needs to be properly documented and investigated using local case studies. This study seeks to gather data from all relevant sources on the extent to which SMEs have affects the Nigerian economy. The core will be investigating the impact of SME in Nigeria’s economic growth. The research outcome may either validate it as a viable economic tool in the Nigerian circumstance or nullify the belief that it drives the country’s economic growth. Information gathered from primary sources will answer questions on the size of typical SMEs, ownership patterns, approximated value of assets as well as level of assimilation of information technology.

In Nigeria, Lagos is considered the commercial nerve centre because of its strategic location, peculiar demographics and contribution to the national GDP. A number of SME villages have been established in the state to serve as both models for subsequent SMEs and actual drivers of the economy. One of such is the Matori SME village and the adjourning Ladipo spare parts market in Oshodi Local government area of the state. The Matori SME village has been in existence for over 20 years, supporting a number of successful businesses which are also important in generating employment opportunities for the teeming workforce of Matori. Using the age of this market which was set up to promote SMEs, the choice was made to use it as a location for the present study.

Scope of ThesisThis thesis would investigate the answers for the following questions.

Has the presence of Matori SME village brought economic growth and infrastructural development to Matori community?

Is doing business at SME level profitable in Matori community?

Are SMEs significant employers of labor in this community?

Is the Profitability of SME business in this community independent of the nature of goods and services on sale?

Has the profitability of small businesses in Matori led to increased presence of banks and financial institutions and subsequent increase in SME loans and incentives by the Banks?

Is the presence of Matori SME village directly linked with increased number of IT based business in the Matori community?

Is there need for the government to encourage and develop more opportunities for SME level business elsewhere in Lagos State?

Do my findings support the existing theory in the field?

Outline of the thesisThis thesis is sectioned into five chapters as shown in Figure 1 below. Chapter one introduces to us the trends in Nigerian economy since independence. Chapter two provides extensive literature on small business from global to the Nigerian economy, their form of organization and current status. Chapter three contains details of the study location, research methodology and findings. Chapter four contains my recommendations and concluding remarks.

Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Methodology and Research Findings FFindings

Chapter 4: Recommendations & Conclusions

References

Figure SEQ Figure \* ARABIC 1: Outline of the ThesisLiterature reviewAn overview of Small and Medium Scale EnterprisesNigeria remains a country with very high potential but an equally high inertia to develop. The country is blessed with abundant supply of enormous human, agricultural, petroleum, gas, and large untapped solid mineral resources (Obadan, 2003). Since her independence from British rule in 1960, the country has gone through decades of political instability and this has brought with it a climate of social tension and an unpredictable market for business. The successive forceful takeover of government by the use of military coup and the indigenization policy of the late 70’s has put off investors who hitherto saw the country as a large and growing market. Due to the nature of these governments, there is perceived corruption, policy instability, poor infrastructural development and lack of accountability of public funds. For these reasons, the World Bank described Nigeria as a paradox (World Bank, 1996). This is also true for most Sub-Saharan African countries as industrial production has declined or stagnated over the past decades (Lall, 1992).

According to Mambula (1997), since its independence, the Nigerian government has been spending an immense amount of money obtained from external funding institutions for entrepreneurial and small business development programs, which have generally yielded poor results. Unfortunately these funds hardly reach the desired business because they may be lost to bureaucratic bottle necks and end up in accounts of public office holders.

Despite these setbacks, the role of small business owned by middle class Nigerians, set up by individual savings, gifts and loans and sometimes sustained by profit cannot be ignored. According to Asmelash (2002) countries that have made economic breakthroughs in the last two decades demonstrate beyond doubt that the development of entrepreneurship has been the sine qua non of economic growth and development. According to Asmelah (2002), the significant role SMEs play in development is acknowledged world over. He cited the work of Schell, (1996) who noted that in developed countries such as the USA, where big corporations are dominant, SMEs still play enormous role in the country’s economy. Also, according to the report of the Indian working group on science and technology for Small- and medium-scale enterprises, SMEs occupy an important and strategic place in economic growth and equitable development in all countries. Constituting as high as 90% of enterprises in most countries worldwide, SMEs are the driving force behind a large number of innovations and contribute to the growth of the national economy through employment creation, investments and exports. Owing to the success of the Asian tigers, interest is running high globally particularly in developing countries that are in the rat race to meet up and reduce the economic and development gap. Chinese and foreign experts estimate that SMEs are now responsible for about 60% of China’s industrial output and employ about 75% of the workforce in China’s cities and towns (Schell, 1996). These SMEs creates jobs for workers who have been laid off from state-owned enterprises due to the steady transition from communism to a market based economy.

According to Cook and Nisxon (2000), interest in the role of small and medium-sized enterprises (SMEs) in the development process continues to be in the forefront of policy debates in developing countries. Owing to the relevance of SME’s, in 2006 the government of Taiwan launched a $61 million “branding” initiative, which is aimed to push the economy from being production-based to knowledge-based. According to the report in EE Times Asia in August 2006, the so-called “Branding Taiwan Plan” is a seven-year program designed to help promising small-to-medium enterprises (SMEs) in developing their own brand, according to the Taiwanese government. This was initiated with the full consciousness of the ability of SMEs to drive the economy particularly in the medium term. Small businesses employ 72,000,000 people (Asmelash, 2002).More than 90 per cent of the industries in Indonesia, Philippines, Thailand, Hong Kong, Japan, Korea, India and Sri Lanka are small enterprises (Fadahunsi and Daodu 1997).

A 2004 survey conducted by the Manufacturers Association of Nigeria (MAN) revealed that only about ten percent (10%) of industries run by its members are fully operational. Essentially, this means that 90 percent of the industries are either ailing or have closed down. Given the fact that manufacturing industries are well-known catalysts for real growth and development of any nation, this reality clearly portends a great danger for the Nigerian economy. The acting director-general of the association, Mr. Jide Mike, who disclosed this fact, attributed the cause of this sorry state to such factors as poor infrastructure, multiple taxes imposed on manufacturers in Lagos state by all tiers of government and the difficulty in accessing finance. He noted, “The debris of dilapidated manufacturing concerns across the country is the outcome of years of harsh operating conditions”. Mr. Jide Mike also remarked, “In addition to policy somersault, funding remains a challenge to all stakeholders in the manufacturing sector, the several palliatives, including the Small and Medium Industries Equity Investment Scheme (SMIEIS) and other sector-specific incentives notwithstanding”. He added, “In summary, 30 percent of industries in Nigeria have closed down. About 60 percent are ailing companies and only 10 percent operate at sustainable level”. The acting director-general of MAN emphasized that low capacity utilization has undermined the competitiveness of manufacturing industries, whose fortunes have been worsened by the impact of globalization. He recalled that at Nigeria’s independence in 1960, the manufacturing sector’s contribution to national Gross Domestic Product (GDP) was 3.8 percent and that despite the discovery of oil, manufacturing contributed as much as 9.9 percent to the GDP from 1975to 1981 when capacity building was above 70 percent. Mr. Jide Mike however regretted that the story is different today as the manufacturing sector is back at the independence level as it contributed a mere 4.7 percent to GDP in 2003while industrial capacity utilization dropped to a paltry 48.8 percent in 2003.The above is indeed not encouraging as it is representative of the fate of the manufacturing sub-sector of the SMEs. It is said that the large manufacturing companies are even better off given that those of them, which have international affiliation do get succor and support from their parent companies or technical partners overseas.

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