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PROJECT TOPIC AND MATERIAL ON IMPACT OF SMALL AND MEDIUM SCALE ENTERPRISE ON ECONOMIC DEVELOPMENT IN NIGERIA
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- Name: IMPACT OF SMALL AND MEDIUM SCALE ENTERPRISE ON ECONOMIC DEVELOPMENT IN NIGERIA
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This research work is on the impact of small and medium scale enterprises on economic growth in Nigeria. The main objective of this study is to empirically examine the impact of small and medium scale enterprises on economic growth in Nigeria. This research work made use of secondary data which were obtained from the Central bank of Nigeria Statistical Bulletin (2016). The data were collected for a period of thirty one years (1986-2016). The Ordinary Least Square Regression Technique was employed in the analysis of the data. It was found that small and medium scale enterprises has significant impact on economic growth in Nigeria also commercial bank loan has significant impact on SME. It is recommended that, The Nigerian government should organize a national enterprise forum, which would focus on the contributions of SMEs in national development objective.Commercial banks should be strongly encouraged to assist small and medium scale enterprises by providing cheap sources of finance and making their requirements for soft loan to be easier and more reasonable.
1.1 Background of the Study
The small and medium scale enterprises (SMEs) have been generally acknowledged as the bedrock of the industrial development of any country. Apart from the numerous goods and services, they provide a veritable means of large scale employment as they are usually labour intensive. (Yerima,2010). In developing countries, Nigeria have since the 1980‟s shown increased interest in the financing and promoting of Small and Medium scale Enterprises from three main reasons. According to Owuallah, (2014), these reasons are:
- Transformation of traditional or indigenous industry
- Increase in job creation.
- Redistribution of wealth and income.
They also provide training grounds, for entrepreneur even as they generally rely more on the use of local materials. Osaba, (2008) says that, the distribution of goods has continued to be the only viable and reliable option for development, growth and survival of any economy. The work explores the role and contribution, constraints and prospects of the SMEs as they contribute to the growth and development of the Nigerian economy. The pursuit of economic development has been a major goal of many developing nations of the world.Developing countries are confronted with several problems such as high rate of poverty and unemployment which have continued to hinder the attainment of socio-economic development. For any nation to attain development, industrialization; gainful and meaningful employment are important indices used as a measurement of economic development. This is often depicted by income per capital, equitable distribution of income, the welfare and quality of life enjoyed by the citizens of that nation. Small and Medium Scale Enterprise (SME) has proved to be a major tool adopted by the developed nations to attain socio- economic development. In recent time, small scale industrial sector is considered to be the backbone of modern day economy. Historical facts show that prior to the late 19th century, cottage industries, mostly small and medium scale businessescontrolled the economy of Europe. The Industrial Revolution changed the status quo and introduced massproduction (Thomas, 2011). The twin oil shocks during the 1970s undermined the mass production model, whichtriggered the unexpected reappraisal of the role and importance of small and medium sized enterprises in theglobal economy (Wendrell, 2003). In Nigeria, the introduction of SME can be traced back to the year 1945 whenthe essential paper No. 24 of 1945 on “A Ten year plan of development and welfare of Nigeria 1946 waspresented”. Small and Medium scale Enterprise was considered an all time necessity at the beginning; which hasgained prominence today and is expected to increase its importance in the future (Basil, 2015).
The contributions which small and medium scale enterprises make to the economic growth process have been well documented (Mambula, 2012). Small and medium scale enterprises (SMEs) generate more direct job per naira of investment than do larger enterprises. They serve as a training ground for developing technical and entrepreneurial skills and by virtue of their greater use of indigenous technological capabilities, they promote local inter-sectoral linkages and contribute to the dynamism and competitiveness of the economy. Prior to the 1970s, the small and medium scale enterprises (SMEs) belonged to the past but this view has since changed because the contributions of SMEs to industrial and economic growth of countries have been recognized internationally (Nnanna, 2001). Since Nigeria’s independence in 1960, Nigeria’s national development plans (1962-1985, 1986-1990, 1991-2000, 2001-2010) had laid emphasis on the strategies of government led industrialization through the development of local manufacturing industries. This was in recognition of the important role the small and medium scale enterprises play in industrial strategic plans of the government and the overall growth of the economy.
Despite the expected role of SMEs to economic growth, the contributions of SMEs to the Nigerian economy appear to be insignificant. While SMEs employed about 70 percent of industrial labour force, it only accounted for 10 – 15 percent of total industrial output with a capacity utilization of slightly above 30 percent, which is a reflection of low productivity of SMEs.
SMEs are broadly defined as businesses with turnover of less than N100MM per annum and/ or less than 300 employees. Studies by the IFC show that approximately 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe. SMEs represent about 90% of the manufacturing/industrial sector in terms of number of enterprises, they contribute approx. 1% of GDP compared to 40% in Asian countries and 50% in the US or Europe. In Nigeria, SMEs are distributed by clusters within regions. The 2012 Enterprise Baseline Survey revealed that there are 17million SMEs in Nigeria, employing 32.41 million persons and makes a contribution of about 46.54 percent to the nation’s Gross Domestic Product in nominal terms.
Characteristics of SMEs in Nigeria
A major characteristic of Nigeria’s SMEs relates to ownership structure or base, which largely revolves around a key man or family. Hence, a preponderance of the SMEs is either sole proprietorships or partnerships. Even where the registration status is thus that of a limited liability company, the true ownership structure is that of a one-man, family or partnership business. Other common features of Nigeria’s SMEs include the following among others.
- Labour–intensive production processes
- Concentration of management on the key man
- Limited access to long term funds
- High cost of funds as a result of high interest rates and bank charges
- High mortality rate especially within their first two years
- Over-dependence on imported raw materials and spare parts
- Poor inter and intra-sectoral linkages – hence they hardly enjoyeconomies of scale benefits
- Poor managerial skills due to their inability to pay for skilled labour
- Poor product quality output
- Absence of Research and Development
- Little or no training and development for their staff
- Low entrepreneurial skills, inadequate educational or technical background
- Lack of adequate financial record keeping
- Poor Capital structure, i.e. low capitalisation
- Poor management of financial resources and inability to distinguishbetween personal and business finance
- High production costs due to inadequate infrastructure and wastages.
- Use of rather outdated and inefficient technology especially as it relates toprocessing, preservation and storage.
- Lack of access to international market
- Lack of succession plan
Challenges of the SMEs
Most SMEs die within their first five years of existence. Another smallerpercentage goes into extinction between the sixth and tenth year thus onlyabout five to ten percent of young companies survive, thrive and grow tomaturity.
Many factors have been identified as to the possible causes or contributingfactors to the premature death of SMEs. Key among this include insufficient capital, inadequate market research, over-concentration on one or twomarkets for finished products, lack of succession plan, inexperience, lack of proper records or lack of any records at all,inability to separate business and family or personal finances, lack of businessstrategy, inability to distinguish between revenue and profit, inability to procurethe right plant and machinery, inability to engage or employ the right caliber staff, cut-throat competition, lack of official patronage of locallyproduced goods and services, dumping of foreign goods and overconcentrationof decision making on one (key) person, usually the owner. Otherchallenges which SMEs face in Nigeria include irregular power supply and otherinfrastructural inadequacies (water, roads etc) unfavorable fiscal policies,multiple taxes, levies and rates, fuel crises or shortages, policy inconsistencies,reversals and shocks, uneasy access to funding, poor policy implementation,restricted market access, raw materials sourcing problems, competition withcheaper imported products, problems of inter-sectoral linkages given that mostlarge scale firms source some of their raw material outside instead of subcontracting to SMEs, insecurity of people and property, fragile ownership base,lack of requisite skill and experience, thin management, unfavorable monetarypolicies, lack of entrepreneurial spirit, poor capital structuring as well as poormanagement of financial, human and other resources.
Their characteristics and the attendant challenges notwithstanding, it is the consensus that SMEs, which globally are regarded as the strategic andessential fulcrum for any nation’s economic development and growth, haveperformed rather poorly in Nigeria. The reason for this all-important sector’sdismal performance have been varied and convoluted depending on who iscommenting or whose view is being sought in various governments’ budget, with the imperativeness of SMEs as the bulwark foremployment generation, poverty reduction and technological developmentbeing highlighted. While many attribute the relatively poor performance ofSMEs in Nigeria when compared with the significant roles which SMEs haveplayed in developed economies such as the United Kingdom, Germany and theUnited States and even developing countries of the world like India to theChallenges outlined above, some others hinge the reasons on the fair share of neglect on the sector by the government.
This research is intended to critically appraise and analyse the operatingenvironment and circumstances of SMEs in Nigeria with a view to actuallyidentifying why they (SMEs) are not playing the vibrant and vital roles in theNigerian economy as they (SMEs) do in other economies such as India whichhas so many similarities with Nigeria in terms of population and otherdemographic variables. This is even more disturbing if one recalls that Nigeriaremains the largest market in the African continent where investmentopportunities are beckoning to be exploited.
1.2 Statement of Problem
Several studies have identified financial constraint as the major obstacle to Small and Medium Scale Enterprises Development in developing countries including Nigeria. For instance, Adelaja (2003) argued that the access to institutional finance has always constituted a pandemic problem for SME development in Nigeria. She recalled that in the past, a number of schemes have been put in place to provide special credit lines/windows for SMEs but this achieved very limited impact.
The primary focus of this study emanates from the fact that small scale enterprises owners do not have sufficient finance to carry on their business due to the low saving culture of the people in this part of the world. The reason for this is not far fetch: low level of income basically.
Adesaolu,Oladoyin and Oladele (2005) deduced that the financial challenges mar the developmental role of Small and Medium Scale Enterprises. But this may not be true especially in the case of Nigeria where the informal sector, which is constituted largely by the Small and Medium Scale Enterprises play a very important role in the development of the nation’s economy.
Many scholars have written widely on entrepreneurship and its potency to generate employment, thus, underscoring the quintessence, significance and relevance of this sub-sector in the development of any given economy. The experiences of developed economies in relation to the roles played by entrepreneurship buttresses the fact that the importance of entrepreneurship cannot be overemphasized especially among the developing countries. In order to highlight its significance in relation to the growth and development of a given economy, entrepreneurship has been variously referred to as a “source of employment generation”. This is because entrepreneurial activities have been found to be capable of making positive impacts on the economy of a nation and the quality of life of the people (Adejumo, 2000). Studies have established its positive relationship with stimulation of economic growth; employment generation; and empowerment of the disadvantaged segment of the population, which includes women and the poor (Oluremi and Gbenga, 2011; Thomas and Mueller, 2000; Reynolds, 1987) and small and medium scale enterprises, is all about entrepreneurship which is a major engine to economic growth. Therefore, this study seeks to evaluate the promotion of Small and Medium Scale Enterprises (SMEs) in Nigeria and their catalytic role in economic growth
1.3 Research Questions
The questions for which answers are sought from this research are as follows:
- To what extent has SMEs impacted on Nigeria’s economic growth performance
- The various problems encountered by SMEs in an effort to obtain loans from commercial banks.
1.4 Objectives of the Study
The aim of this research work is to examine how small and medium scale industries can be a catalyst for the economic growth of Nigeria. The specific objectives are:
- What is the impact of SMEs on Nigeria’s economy
- What are the problems encountered by SMEs while trying to obtain loans from the bank
1.5 Statement of Hypothesis
For the purpose of this study, the researcher developed the following hypothesis.
Ho1: Small and medium scale enterprises has no significant impact on economic growth in Nigeria
Ho2:- Commercial bank credit has no significant impact on SMEs
1.6 Significance of the Study
This researcher would be of valuable benefit to both the financial institution and Small and Medium scale Industries in Nigeria, as well as the countries policy makers who have desire to place Nigeria on a sound economic and industrial footing. When this research is concluded, it would have contributed to the study of knowledge already pilling on the issue of constraints on growth of SMEs, which cannot over look an aspiring nation like Nigeria because it would help to evaluate the operations of this vital segment which has been identified as having high potential in promoting economic growth (Oni and Daniya, 2012). Also this study is going to provide useful information on some of the challenges SMEs face in Nigeria which will be significant to people interested in developing SMEs in Nigeria.
1.7 Scope of the Study
This scope of this study in terms of its contents is restricted to the concept of constraints on growth, financing and promoting SMEs in terms of achieving its organizational goals and objectives. The study encompasses the roles and contributions of small and medium scale industries on the Nigerian economy which amounts to over 17million (Enterprise baseline survey 2012).
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