THE ROLE OF SMALL AND MEDIUM SCALE ENTERPRISES FOR ECONOMIC GROWTH

Abstract

This study is on the role of small and medium scale enterprises on economic growth in Nigeria. Four objectives were raised which included; To identify the policies put in place by the Nigerian government in order to promote growth of SMEs in Nigeria, to ascertain the impact of SMEs on economic growth of Nigeria, to investigate the impact of SMEs on poverty reduction in Nigeria, to ascertain the relationship between the impact of SMEs and the economic growth of Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff from selected SMEs was selected randomly. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up managers, human resource managers, secretaries and accountants were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies.

CHAPTER ONE

INTRODUCTION

• Background of the study

The creation, growth, advancement as well as development of Small and Medium Scale Enterprises (SMEs) have provided evidence essential to the growth and development of many countries; particularly the developed and some developing nations like United States of America, China and India. In such countries, SMEs consist of over 98 per cent of the entire businesses and play a part in more than 65 per cent of employment opportunities (Deen, 2003). Globally, SMEs contribute over 50 per cent to the Gross Domestic Product (GDP) in developed countries. SMEs have remarkable effect on the economies of some European, American and Asian nations that successfully adopted and adapted it. In the U.S.A, SMEs formed over 50 per cent of the non-farm private GDP as well as generated 75 per cent new jobs in the economy. By the end of 2008, it was estimated that the US economy has an estimated population of 300 million, which was sustained by about 6 million businesses. Among these businesses, 27% employ less than 20 persons, 22% employ less than 50 persons while about 18% employ less than 100 persons (World Bank, 2001). In addition, SMEs also constitute 95 per cent of registered businesses in the world; particularly in the European Union, SMEs constituted 99.8 per cent of all businesses as well as employing around 76 million people which represents around 67.4 per cent of total employment in 2010 (Canetti, 2003). Consequently it became obvious that SMEs have been mainly recognized as the spine of the economy as well as play an important role to create employment opportunities, improve value of human resources, develop a philosophy of entrepreneurship, supports large scale industries as well as set-up new business opportunities (Boniface, 2006). The advantages of SMEs to any country are definitely obvious. These include contribution to the economy in terms of: output of goods and services increment; generation of jobs at moderately low cost of capital, particularly in the rapid growing service sector; offer a medium for lessening disparities in income; develop a collection of skilled and semi-skilled workforce as a foundation for imminent industrial expansion (Iromaka 2006). Others include enhancing forward and backward linkages between economically, socially and geographically different segments of the economy; offer opportunities for enhancing and adapting suitable foreign and indigenous technical methods; provide an outstanding breeding ground for entrepreneurial and managerial ability, the significant shortage of which is frequently an immense restriction to economic growth and development. The question now is why has Nigeria SMEs not been able to attain to a substantial extent all or a few of the above listed advantages. This paper is guided by the following objectives: to ascertain if there is a significant association among the funding of SMEs and their contribution to Nigeria’s economic growth and development; to appraise the influence as well as contributions of SMEs to Nigeria’s economic growth and development; to find out factors other than funding hindering the growth and development of SMEs in Nigeria as well as suggest likely policy measures, programmes and incentives on the part of the Federal Government of Nigeria, entrepreneurs as well as the general public on the pressing need to support, advance, develop and maintain the growth of SMEs in Nigeria. These objectives if well articulated will assist in driving SMEs as a veritable means through which economic growth and industrialization can be facilitated and maintained in Nigeria. According to a World Bank discussion paper in 2001, SMEs have gone through a great level of tests, difficulties, challenges, failures and subsequent collapse, because of inadequacy in infrastructures, whereas most of them are not capable to transform to large scale business enterprises which is the underlying principle behind the growth and development of SMEs (Transitional Industries). Regardless of the large number of SMEs all over the nation, their involvement in economic growth and development has not produced a major effect. This could be as a result of the difficulties they encounter. The difficulties confronting SMEs in many less developed nations are enormous. The most perturbing amongst these difficulties is provision of funds (Financial Availability). Most modern as well old-fashion SMEs mode of operations are not profitable prospects for deposit money banks (commercial banks), as they will like to reduce their risk portfolio. In Nigeria, the circumstance is not unusual, until in recent times in 2003, when the Banker’s Committee got involved with a scheme titled the “Small and Medium Scale Industries Equity Investment Scheme (SMIEIS). The scheme was not successful and inevitably failed like majority of government credit schemes that were not properly planned, organized and implemented. The basis of this research is to significantly assess as well as deal with the poor, substandard, unacceptable and unsatisfactory performance of SMEs in Nigeria over the years (1970-2010) and to prove the fact that funding is a major restraint to SMEs contribution to economic growth and development in Nigeria.

At this level, perspectives are directed towards government support and involvement in exploiting countries social benefits from greater completion and entrepreneurship.

Secondly, proponents of SMEs support frequent claim that SMEs are generally more productive than large firms, financial market and other institutions, direct government financial support to SMEs can boost economic growth and development. Some argued that SMEs expansion boosts employment more than large firm growth because SMEs are more labor intensive thereby subsidizing SMEs may represent a poverty alleviation tool, by promoting SMEs, individual countries and the international community at large can make progress towards the main goal of Halfling poverty level by year 2020 i.e. to reduce poverty by half and becoming among 20 largest World Economies (Nigeria Vision 20:20). Entrepreneurial development is therefore important in the Nigerian economy which is characterized by the following heavy dependence on oil, low agricultural production, and high unemployment, low utilization of industrial capacity, high inflation rate, and lack of industrial infrastructural base. These constraints limit the rate of growth of entrepreneurial activities in Nigeria. Hence, this paper seeks to investigate small and medium enterprises as a veritable tool in economic growth. In recent times, the fortune of small and medium scale Industries attracted the attention of government world-wide and thus has been the focus of general interest and research, especially in developing countries due to the importance of small scale and medium scale Industries. Their importance cannot be over emphasized as they constitute a whole virile vehicle for the generation of vast production of outputs and job creation. They also act as catalyst for restructuring and diversifying the productive base of an economy and for the Industrial economy take-off and growth of such an economy. The small and medium scale Industries are seen to hold the key to future expansion of the Industrial sector. In Nigeria, evidence has shown that in 1986, small scale and medium scale Industries accounted for 70% of all firms, employing millions of Nigerians (First Bank of Nigeria report, 1987). By the end of 1979, over 80% of all establishments licensed under the factory act were small and medium scale Industries (Onwuala, 1987). This made the importance of this economic unit to be unelectable. Small and medium scale industries in its widest sense imply the urgent response to the challenges of developing countries, of which Nigeria is not an exception. Small and medium scale Industries should be established with due regards to the importance of available local raw materials in its environs because the challenges facing them are enormous. The importance of small and medium scale Industries to the economic growth of any country, whether developing or developed, have been widely acknowledged and acclaimed. They are considered as stimulants to private ownership and entrepreneurial skills development employment generation, promotion of industrial dispersal and rural urban migration. Clive Carpenter (2001), said that across the world, small businesses are crucial for economic growth, poverty alleviation and wealth creation. According to Uayatudeen (2001), across the world, small businesses have such a crucial role to play in the development of an economy and that cannot be ignored. Most firms and small and medium scale Industries are compared with companies that economists usually study, but economists have concentrated on large scale Industries. The leading textbooks in economics have little discussions on small and medium scale businesses or entrepreneurs. The contributions of small and medium scale Industries on the Nigerian economy are as follows: creation of wealth, poverty eradication and employment generation as encapsulated in the national economic empowerment development strategies (NEEDS) However small and medium scale Industries are bedeviled by numerous challenges which have hampered its development and growth and also its contribution to national development.

• STATEMENT OF THE 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.

• OBJECTIVES OF THE STUDY

The main objective of this study is the impact of small and medium scale enterprises on economic growth in Nigeria 1982-2012.  But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

1. To identify the policies put in place by the Nigerian government in order to promote growth of SMEs in Nigeria.
2. To ascertain the impact of SMEs on economic growth of Nigeria.
3. To investigate the impact of SMEs on poverty reduction in Nigeria.
4. To ascertain the relationship between the impact of SMEs and the economic growth of Nigeria
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:  Small and medium scale enterprises has no significant impact on economic growth in Nigeria.

H₁:  Small and medium scale enterprises has significant impact on economic growth in Nigeria.

H₀²: there is no significant relationship between the impact of SMEs and the economic growth of Nigeria

H₂: there is a significant relationship between the impact of SMEs and the economic growth of Nigeria

1.6SIGNIFICANCE OF THE STUDY

This study is significant because it would help to evaluate the operations of a vital segment of the industrial sector SMEs which have 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.

1.7SCOPE AND LIMITATION OF THE STUDY

The study encompasses the roles and contributions of small and medium scale industries on the Nigeria economy from 1982-2012.  The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 DEFINITION OF TERMS

Economic Growth: Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to obviate the distorting effect of inflation on the price of the goods produced. In economics, “economic growth” or “economic growth theory” typically refers to growth of potential output, i.e., production at “full employment“.

Entrepreneurship: The willingness and ability of an individual to seek out investment opportunities in an environment, and be able to establish and run an enterprise successfully based on the identified opportunities.

SMEs: Small and medium enterprises or small and medium-sized enterprises (SMEs, small and medium-sized businesses, SMEs, and variations of these terms) are companies whose personnel numbers fall below certain limits. The abbreviation “SME” is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). In their paper Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries, Tom Gibson and H. J. van der Vaartindeed suggest a less imperfect formula:

An SME is a formal enterprise with annual turnover, in U.S. dollar terms, of between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates

CATALYST: It is a substance that increases the rate of a chemical reaction. Also according to vocabulary dictionary, it is a person or a substance that causes change

1.8 ORGANIZATION OF THE STUDY            

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.