The Relationship Between Business Environment and Export Performance

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Market globalisation and competition have created vast opportunities for companies to expand their domestic businesses by tapping into foreign markets which offer larger audience and consumer base for their products and services. Companies with high entrepreneurial orientation will most likely pursue these open-market opportunities in order to capture a larger share of the international market by exporting their products and services into other economies. However, despite the attraction and viability of the export market in the international front, there are many factors which can determine the success or failure of export ventures. The positive outcome of export ventures depends largely on the resilience and preparedness of the venturing companies, the stability of the companies' financial and managerial capacities, and most importantly the marketing strategies the companies employ to penetrate the new foreign markets. Firms which are highly adaptable to internal and external factors which surround the business environment in the new markets are more likely to benefit from such ventures.

There have been countless studies in the international marketing context which explore and investigate the relationship between export marketing strategies and their influence on export marketing performance (for example, Cooper et al 1985; Bilkey 1982; Christensen et al 1987). Nonetheless, due to problems associated with methodology and concept, the outcomes of these studies are fragmented and the relationship issue remain unclear (Cavusgil and Zou 1994; Aaby and Slater 1989; Madsen 1987).

Despite all these empirical work, very little is known about export orientation and export performance of SMEs in developing countries. A majority of existing studies only focus on finding out the underlying factors affecting export orientation of SMEs which influence export performance in Western and European nations. Most of these studies, however, investigated and highlighted specific dimensions, particularly the influence of export marketing strategies on export performance (for example, Phillips et. al 1983; Robinson and Fornell 1986; Bilkey 1982; Rosson and Ford 1982). Some studies only look at firm behaviour and its impact on export orientation in the international market (Miller 1983).

By definition, small and medium-sized enterprises (SMEs) are classified by the number of employees or annual turnover of the services or manufacturing companies. However, the classification varies according to countries or regions.

Small and medium-sized enterprises (SMEs) have long been recognised as a catalyst to economic growth in any nation. More than 95% of small enterprises belong to the SME sector in many newly industrialised countries, which also provide employment opportunities for a majority of the population. Owing to this fact, companies classified as SMEs normally enjoy numerous programmes, schemes and government assistance, mainly in the areas of finance, infrastructure and advisory services.

Besides creating employment opportunities for locals, SMEs also help in the transfer of technological advancement, development of skills among employees, generation of direct exports and attraction of foreign direct investments. Many governments around the globe have formulated policies to encourage and provide funds to support the growth of SMEs in their countries. Therefore, one known strategy which is effective in accelerating economic development is the promotion of SMEs' growth (Kazem and Van der Heijden, 2006; Hallberg, 2000).

For the purpose of this paper, we will look at Nigeria in particular and study the export orientation of its SMEs, and the internal and external factors which affect its export potential. In Nigeria, its National Council of Industries define SME as a company having not more than 300 workers with total cost of operation of not more than N200 million (excluding land cost). The study will specifically cover the Nigerian leather industry, purportedly the industry with tremendous potential in generating high export earnings and creating employment opportunities throughout the country.

The Federal Republic of Nigeria (Nigeria) is a sub-Sahara African country, categorized as one of the developing countries in the world. Located in West Africa, Nigeria comprises 36 states with Abuja as its capital. Nigeria has the largest population (158.2 million, UN 2010) among countries in Africa with Hausa, Igbo and Yoruba making up the three largest and most influential ethnic groups. A majority of its population are black Muslims and Christians. Its largest city is Lagos, which is also its Central Business District.

Being a member of Commonwealth, Nigeria is also listed as one of the "Next Eleven" economies. It is ranked 31st in GDP (USD 459.4 billion, 2009 estimates) and known as one of the fastest growing economy in the world with a growth projection of 8.3% in 2009 by the International Monetary Fund. [1] 

For a developing country like Nigeria, export earnings from non-oil industries is significant contributor to the country's Gross National Product. By actively participating in the export market, companies can widen its trade opportunities and expand its productivity gains. Changes in trade globalisation have presented domestic companies with vast opportunities and potential to venture into foreign markets. Even the World Bank agreed that promoting export orientation among manufacturing industries is significant for the growth of sub-Sahara Africa (World Bank, 2000). Nigeria exports mainly petroleum and petroleum products (95%). The balance 5% comprise other non-oil exports such as cocoa and rubber. Being world's 12th largest oil producer and eighth largest exporter, Nigeria's petroleum contributed largely to its economy, accounting for 40% of its GDP and contributing 80% to the country's revenue. (Wikipedia)

With its well-developed infrastructure, financial, transport, legal and communication sectors as well as rich supply of natural resources (e.g natural gas, coal, tin, bauxite, etc.), World Bank already indicated that Nigeria has reached middle income status. The Nigerian Stock Exchange is the second largest in Africa. Nigeria is actively trading with the United States, being its largest trading partner in sub-Saharan Africa and also the country's 50th largest export market. (Economy of Nigeria, Wikipedia)

When Nigeria was under military rule, economic growth was somewhat stunted. However, restoration of democracy and ensuing economic reforms successfully led Nigeria back on track, becoming the largest economy in West Africa and the second largest in Africa after South Africa.

Similar to SMEs in other countries, Nigerian SMEs also receive certain initiatives from its Federal Government in its quest to develop the sector. The government has taken various steps to introduce monetary, industrial and fiscal policy measures to develop the SMEs. One such initiative is the establishment of the Industrial Development Centers (IDCs) which provides extension services such as project appraisals, managerial assistance, production planning and control, training and others. However, despite all the various government initiatives, the SME sector failed to take off due to poor administration and inadequate funding and management skills. (Chemonics International Inc. 2002).

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Problem Statement

The current international market is presented with ample opportunities for domestic companies to reap the benefits in foreign markets. Trade globalisation and competition have spurred companies to venture out of their home countries and establish their businesses in foreign markets which offer large potential gains from export earnings. But in order to be successful in the international market, companies have to face many challenges. Companies which make it big in the international arena usually display high resilience to competition, rapid market adaptations to foreign market conditions and are highly responsive to market demands.

Nigeria, being the second largest economy in sub-Sahara Africa after South Africa, has great potential to increase its export earnings. However, for many years since 1970s, its government only focused on oil production and petroleum exports due to the increasing price of petroleum related products. Non-oil exports have long been neglected despite their potential for higher export earnings for the country's Gross National Product (GNP). Many companies, especially the Nigerian SMEs, failed to maximise their potential gains due to lack of support, incentives and initiatives from the government and related agencies.

Although many studies have been undertaken by experts to investigate the impact of export orientation of SMEs on export performance, these studies focussed more on Western and European nations. Most of these studies examined specific dimensions, for example the influence of export marketing strategies on export performance (Phillips et. al 1983; Robinson and Fornell 1986; Bilkey 1982; Rosson and Ford 1982). Miller (1983) only focussed on the impact of firm behaviour on export orientation.

So far, existing studies on Nigerian SMEs' export performance deal with marketing strategies, market adaptation and factors influencing export market activities (Cavusgil and Zou 1994; Omotayo 2009; Ibeh 2004).

This study will examine the relationship between business environment (internal and external factors) and export performance among SMEs in Nigeria. By revealing and verifying the underlying factors which can contribute to higher export performance, Nigerian SMEs planning to broaden their horizon in the export can make informed decisions and devise workable strategies to tackle the issues at hand. Firms can successfully respond to the business environment and adapt well to changing market conditions. At the same time, the Nigerian government can focus on rebuilding the non-oil sectors by providing incentives, advisory assistance and the much needed infrastructure as a platform for SMEs to reengineer the growth of the country's economy and realize their full potential as exporters.

Purpose of the Study

The purpose of this paper is to investigate and explore the relationship between business environment (internal and external factors) and export performance among SMEs in Nigeria.

Objectives

Specifically, the objectives of the study are:

To ascertain the relationship between internal factors (firm, product and managerial characteristics) and export performance among SMEs in Nigeria.

To examine the relationship between external factors (industry and export market characteristics, policy) and export performance among SMEs in Nigeria.

To achieve the above objectives, hypotheses have been proposed to guide the direction of this study.

Research Questions

It is stated earlier that the research purpose is to examine the relationship between business environment (both internal and external factors) and export performance among SMEs in Nigeria. The study is guided by the following research questions:

To what extent do firm characteristics influence the export performance?

To what extent do product characteristics influence the export performance?

To what extent do managerial characteristics influence the export performance?

To what extent do industry characteristics influence the export performance?

To what extent do export market characteristics influence the export performance?

To what extent does policy influence the export performance?

Hypotheses

Given the preceding discussion, the following hypotheses are posed:

Null hypothesis

The research questions presented in the preview section of this thesis are the basis for the following null hypotheses:

Null Hypothesis One

There is no statistically significant relationship between firm characteristics and export performance.

Null Hypothesis Two

There is no statistically significant relationship between product characteristics and export performance.

Null Hypothesis Three

There is no statistically significant relationship between managerial characteristics and export performance.

Null Hypothesis Four

There is no statistically significant relationship between industry characteristics and export performance.

Null Hypothesis Five

There is no statistically significant relationship between export market characteristics and export performance.

Null Hypothesis Six

There is no statistically significant relationship between policy and export performance.

Research Hypotheses

The review of the literature presented earlier in the proposal suggests that there is a relationship between firms' export entrepreneurship and export performance. This study will examine the following directional research hypotheses:

Alternative Hypothesis One

There is a statistically significant relationship between firm characteristics and export performance.

Alternative Hypothesis Two

There is a statistically significant relationship between product characteristics and export performance.

Alternative Hypothesis Three

There is a statistically significant relationship between managerial characteristics and export performance.

Alternative Hypothesis Four

There is a statistically significant relationship between industry characteristics and export performance.

Alternative Hypothesis Five

There is a statistically significant relationship between export market characteristics and export performance.

Alternative Hypothesis Six

There is a statistically significant relationship between policy and export performance.

Definition of Terms

The operative definitions are shown in the following table:

Table 1: Research Operative Definition

Terms Operative Definitions

Firm characteristics Company attributes such as number of employees, sales volume, position in industry, experience, commitment, etc.

Product characteristics Product traits such as type, strength of patent, price, design, features, etc.

Managerial characteristics Among the determinants include management commitment, perception on competition, attitude towards export barriers and international orientation

Industry characteristics refers to technology orientation and price competition of industry

Export market characteristics refers to demand potential, product or brand familiarity, competitive intensity, marketing infrastructure, cultural similarity and legal barriers in export market

Policy relates to government and business policies in Nigeria

Export performance Success or failure of companies which market their domestically-produced goods and services in foreign markets. Can be measured in terms of sales, profits, market share, etc.

Significance of the Study

Export performance

Nigeria's current main exports are petroleum and petroleum products. When oil-related exports contribute huge earnings to the GDP in the 70s and 80s with rising oil production and increasing prices in the world market, non-oil exports remain weak due to neglect and lack of attention given by the government to these sectors. Agricultural exports, which provided significant earnings to the country in the 60s, need to be revived through government initiatives and policies to assist manufacturers. Even though there are existing government initiatives such as financial assistance and advisory services extended to Nigerian exporters in the non-oil sectors, the SMEs do not maximize their full potential because of other pressing issues.

This study will provide some useful insights into the internal and external factors which have impacted the export performance of Nigerian SMEs. By understanding the business environment and the steps and measures that need to be taken, the Nigerian government can work hand in hand with the SMEs to further develop the export potential of non-oil sectors.

The academicians and researchers

So far, not much research has been conducted to increase our understanding on this subject. By studying the topic and increasing our knowledge on factors which can contribute to enhanced export performance, Nigerian SMEs will be more encouraged to participate in the export market. Thus, this research will be a significant contributor to the export orientation of SMEs in Nigeria.

Extension of a theoretical model

Scope of the Study

This research will cover Nigerian SMEs which are involved in the leather goods industry. It seeks to determine the relationship between internal and external factors in the business environment and the export performance of leather manufacturing SMEs.

Nigeria's leather industry is mainly located in the north-western part of country (Kano, Sokoto, Borno, Zamfara to name a few). The industry holds great potential for high export earnings and employment growth opportunities. Due to readily abundant resources, the country could strengthen its share of the global leather goods market. For example, the skin of its Red Sokoto goat commands a premium in the international market, especially from Italy. A large domestic animal population is already available, apart from local tanning and leather production resources.

Leather Industry

The world trade in leather and its related products is estimated at $70 billion (Chemonics International Inc. 2002) with countries such as the United States, China, India, Spain and Brazil dominating the global scene. Since the demand for leather products has steadily risen over the years due to an increasing level of disposable income in both developed and developing nations, countries with are aware of the economic potential of leather processing have made efforts to develop the industry.

The Central Bank of Nigeria rated the leather industry as the second foreign exchange earner due to great international demand for leather from developed countries. Each year the leather industry exports USD500 million worth of leather (more than 600 million square feet). About 80% of goat and sheep skin and 20% of cow hide are exported internationally. The balance is for domestic consumption. The industry has strong potential to go even further, even as major alternative to its oil products, given ample support from the Nigerian government in terms of workable industrial policies and provide the much needed infrastructure.

In Kano alone, there are more than 25 tanneries. The major tanneries had gone through a hike in production due to the acquisition of modern technology which improves the manufacturing process. The leather industry also provides employment to about 40% of the country's population. (Chemonics International Inc. 2002)

In order to compete with other major players in the global arena, Nigeria need to develop its leather industry further with the production of quality finished leather goods such as shoes, bags, belts and other accessories. The government also needs to encourage the establishment of factories that would provide a ready market to utilise leather as raw material for the production of bags, shoes, belts and the like. (Onwualu, Director -General of Raw Materials Research and Development Council). A proper branding mechanism need to be put in place to introduce top quality leather products from Nigeria in the world market. But at the same time, a lot more has to be done to enhance the infrastructure to support the growth of the leather industry such as improvement in power supply.

Alhaji Lawan Sule Garo, chairman of the Nigeria Tanners Council (NTC) agreed that there is a need for the Nigerian government to encourage both local and foreign investors to establish manufacturing facilities that would use locally processed leather for the  production of high quality goods. However, investors are often discouraged to fund the industry given the high interest rates of 20%-25% imposed by local banks on loans to manufacturers.

Limitation of Studies

Study sample

The small sample of 50 leather manufacturers from the northern part of Nigeria may not represent the actual population of SMEs which totals to about 1,500 across the country (Onugu 2005). The generalisation made from studying this sample may not reflect the actual issues faced by SMEs in other non-oil sectors.

Questionnaire design

The outcome of this research is based solely on responses to a structured questionnaire with which a 5-point Likert scale is used to evaluate the responses. Some of the limitations with Likert scale - one respondent may interpret the scale differently from others, respondents may not be completely honest and base the answers on their feelings for the researcher or subject matter or some respondents may take the easy way out and answer in the average (mid-point). These may lead to inaccurate measures of responses.

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