ECONOMIC DATA USAGE AND THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA

ABSTRACT

The study examined the relationship between economic data usage and the performance of SMEs in Nigeria. More precisely, the study sought to assess the influence of selected macroeconomic indicators such as exchange rate, inflation rate, inflation rate, employment rate, gross fixed capital formation, domestic credit to private sector and economic growth rate on SMEs performance in Nigeria between 2001 and 2015. The study adopted the Ordinary Least Square technique via the multivariate regression analysis to estimate the model. Findings from the study revealed that exchange rate, employment rate, gross fixed capital formation and economic growth rate positively but insignificantly contributed to the performance of SMEs in Nigeria. It was found that domestic credit to private sector positively and significantly contributed to the performance of SMEs and inflation rate and interest rate hampers on SMEs performance in Nigeria. To this end, the study advises that government and monetary authorities should formulate fiscal and monetary policies that will be friendly to the business environment.

CHAPTER ONE

INTRODUCTION

Small and medium-sized enterprises (SMEs) are businesses whose size of workforce is below certain limits set by global or national trading arm of a country. The abbreviation “SME” is used in the parlance of reputable international institutions such as European Union (EU), International Monetary Fund (IMF), United Nations (UN), Economic Community of West African States (ECOWAS), African Development Bank (AfDB), United Nations Conference on Trade and Development (UNCTAD), World Trade Organization (WTO) amongst others. Small and Medium scale enterprises has proliferated more than large and multinational firms and, consequently, employ much more people (Wikipedia Encyclopedia).

The Central Bank of Nigeria describes small and medium enterprises in Nigeria based on some factors such as size of asset and size of workforce. According to the CBN, a small and medium enterprise is the one with an asset size of less or equal to 5 million naira and possess a workforce size of at most 100 (CBN, 2009). Small and medium scale enterprises contribute tremendously to the growth of economies, especially in developing countries. They are thus engine and catalyst of sustainable and inclusive growth. SMEs are drivers of innovation and competition in key sectors of the economy, serves as source of employment creation, promotes technological and industrial advancement, strengthens the use of local resources and technologies, propels the level of capacity utilization  etc. (Fabayo, 2009; Adisa, etal, 2014). Furthermore, they are labour intensive, capital saving and capable of creating plenteous new jobs to the teeming population of the country. The operations and activities of SMEs are fundamental to the citizenry’s level of living standards and accelerate the pace of economic growth process of the nation. Even, Fabayo (2009) adduces that large scale industries need SMEs to thrive. Thus, SMEs are agent of positive change, reduces absolute and relative poverty, creates jobs prospects and adds to national productivity.

Since the adoption of the economic reform programme in 1986, there has been a has been an awareness of the need for a decisive shift from grandiose, capital intensive and large scale industrial projects based on import substitution to small scale industries with immense potentials for developing domestic linkages for sustainable industrial development. Apart from SMEs potential for self-reliant industrialization using local raw materials, they are in a better position to boost employment, guarantee even distribution of industrial development and facilitate the growth of non-oil exports. Fissaeha (1991), states that SMEs employ 22% of the adult population in developing countries while Fabayo (1989) observed that small firms are major source of employment opportunities for a wide cross-section of the workforce: the young, old part-time workers and the cyclically unemployed. Kombo, et al (2011), submitted that “SMEs have contributed greatly to the growth of Kenyan economy, accounting for 12-14% of GDP, through creating employment opportunities, training entrepreneurs, generating income and providing a source of livelihood for the majority of low income households in the country”.

Hence, promotion of such enterprises in developing economies like Nigeria will bring about great distribution of income and wealth, economic self-dependence, entrepreneurial development and a host of other positive economic uplifting factors (Aremu 2004).  SMEs are veritable engines for attainment of national objective in terms of employment generation at low investment cost, development of entrepreneurial capabilities and indigenous technology. They reduce the flow of people from rural to urban areas and can easily be established with minimal skill. They also contribute substantially to the country’s gross domestic product, export earnings and development of employment opportunities.

Despite the bright prospects of SMEs as highlighted above, SMEs in Nigeria have been bedeviled with series of challenges such as inadequate financing, excessive taxation, technical and managerial deficiencies, lack of sound business management, harsh economic environment and lack of functional infrastructures.  Thus, they have been unable to contribute significantly to growth process of the Nigerian economy. Successive governments have implemented various development plans, programs and strategies to enhance the effective functioning of SMEs in Nigeria, but none have succeeded in achieving its targeted objectives of improving SMEs.

STATEMENT OF PROBLEM

Shehu et al. (2013) posited that small business owners create about 75% of job opportunities in Nigeria. But inspite of this, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) reported that 80% of small and medium scale enterprises wind up after five years of commencing business operations.  According to Aremu and Adeyemi (2011), “most SMEs in Nigeria die within their first five years of existence, a smaller percentage goes into extinction between the sixth and tenth year while only about five to ten percent survive, thrive and grow to maturity.” Several reasons are responsible for the premature death of SMEs, principal among them are: insufficient capital, irregular power supply, infrastructural inadequacies (water, roads and other social amenities etc.),  lack of focus, inadequate market research, over-concentration on one or two markets for finished products, lack of succession plan, inexperience of business management, lack of proper  documentation of records, inability to separate business and family or personal finances, lack of business strategy, inability to distinguish between revenue and profit, inability to procure the right plant and machinery, inability to engage or employ the right caliber of  staff, cut-throat competition. The specific business problem is that some small business owners have limited or no information on key factors that can contribute to business sustainability for longer than and beyond 5 years.

The internal problems of SMEs in Nigeria can be angled in the context of inadequate working capital, stiff competition from larger companies, difficulties in sourcing raw materials, low capacity utilization, lack of management strategies, poor educational background of operators, and huge financial problems while the external problems include: policy inconsistencies, multiple taxation, harsh regulatory requirements and trade groups.” However, some external factors have also been found to be inimical to the progress of SMEs and these include issues related to capital shortage, taxes, regulations, patents and franchising abuses, political instability, volatile macroeconomic conditions, insecurity amongst others.

1.3   OBJECTIVES OF THE STUDY

The main objective of the study is to examine the relationship between economic data usage and the performance of small and medium scale enterprise in Nigeria.

More specifically, the study is targeted to examine the effect of critical economic data such as exchange rate, interest rate, inflation rate, economic growth rate, gross fixed capital formation, employment rate and domestic credit to private sector on the performance of small and medium scale enterprise in Nigeria.

1.4    RESEARCH QUESTIONS

The study attempts to provide satisfactory answers to the following research questions:

What is the relationship between economic data usage and the performance of small and medium scale enterprise in Nigeria?

What are the effects of critical economic data such as exchange rate, interest rate, inflation rate, economic growth rate, gross fixed capital formation, employment rate and domestic credit to private sector on the performance of small and medium scale enterprise in Nigeria?

1.5    RESEARCH HYPOTHESIS

A hypothesis is a proposed or supposed statement made on the basis of limited as a starting point for further investigation. The hypothesis is stated as

H0: Economic data has no significant impact on the performance of SMEs in Nigeria.

H1:  Economic data has significant impact on the performance of SMEs in Nigeria.

1.6     METHOD OF ANALYSIS

Secondary time-series data were used to analyze the empirical aspect of the study. A model was built in which the performance of small and medium enterprise in Nigeria was taken as the dependent variable and economic data such as exchange rate,  interest rate, inflation rate, economic growth rate, gross fixed capital formation, employment rate and domestic credit to private sector were adopted as the independent variables. The ordinary least square was then employed via the multiple regression analysis to empirically estimate the coefficients of parameters estimates of the independent variables. The choice of this technique was informed by the optimal and desirable properties of the OLS such as linearity, minimum variance, minimum mean-square error, unbiasedness, consistency and sufficiency. Also, the technique was adopted because it is vastly used in researches to examine the causal effect of independent variables on dependent variable.

1.7     SIGNIFICANCE OF THE STUDY

This study through its findings pinpoints the contributions as well as constraints confronting the SMEs in Nigeria. This is needed in order to ensure that prospective SMEs avert the failure of premature dissolution as evidenced in majority SMEs. The study also informs entrepreneurs and owners with sound business management ethics and knowledge on how to manage businesses devoid of dissolution and bankruptcy. The study is equally of immense benefits to the government through its agencies such as Ministry of Trade and Investment to formulate effective policies that will ensure smooth functioning of SMEs in Nigeria. Lastly, the study serves as a guide to researchers, students, academics and other stakeholders in their prospective research undertakings in this line of study.

1.8     SCOPE OF THE STUDY

The study examines the relationship between economic data usage and performance of SMEs in Nigeria with strong emphasis between 1985 and 2015. This time frame was picked because of the need to explore the recent trend in economic data and performance of SMEs in Nigeria.

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