Small And Medium Scale Enterprises Business Essay

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Small and Medium Scale Enterprises in Nigeria have not performed commendably and hence have not played the expected role in the economic and development of the Nigerian manufacturing sector.

Every year, the various tiers of the Nigerian government (federal, state and local), through budgetary allocations and pronouncements acknowledged the significance of SMEs to the manufacturing sector. These governments have made several policies promoting the growth of SMEs. In 2012, the Presidential budget speech, the President of the Federal Republic of Nigeria reiterated the crucial role of the SMEs to the economy. Several fiscal policies have been publicized for promoting growth of SMEs.

This research work focuses on the SMEs operating in the manufacturing sector of the Nigerian economy in Nigeria from 2000 to 2009. The manufacturing sector should play a significant role in any economy. For any country to experience economy transformations, its Real Sector {Manufacturing sector}, must be the key contributor to its Gross Domestic Product (GDP). However, in Nigeria the reverse is the case, hence the need to undertake a review of this sector of the economy is pertinent as the importance of SMEs cannot be overemphasized. The manufacturing sector in Nigeria contributed an average of 3.5% to the nation's GDP from 2000 to 2009, as shown below:

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Table 1 - Contribution of the Manufacturing sector in Nigeria's GDP

Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Percentage

4.24

4.18

3.79

3.64

3.68

3.79

3.91

4.03

4.14

4.20

Source: National Bureau of Statistics Nigeria, 2011

The Nigerian manufacturing sector has not maximally contributed to the Nigerian economy. Currently, Nigerian SMEs contribute about 10% (Nigeria Vision 20:2020-National Planning Commission, 2010) to the country's GDP. When compared with the GDP of the manufacturing sector, one can safely conclude that SMEs operating in the manufacturing sector contributes about 0.35% (3.5% of 10%) to the GDP. It is evident that SMEs in the manufacturing sector of the Nigerian barely contribute to the GDP of the Nation.

Oluseyi Olutola (n.d) in a seminar paper, titled "Career Crisis and Financial Distress - The way out", identified certain problems associated with the performance of SMEs in Nigeria. These problems include low level of entrepreneurial skill, constrained access to money and capital markets, low equity participation, poor manpower, multiplicity of regulatory agencies and overbearing operating environment. Funding was identified as a major challenge to most stakeholders in the SMEs subsector despite the several palliatives introduced by the government. Despite the fact that some of the issues impeding the growth of the SMEs are as a result of the operating environment (infrastructure, security and government polices), others are self induced (poor corporate governance and managerial and technical skills).

The problems and challenges that SMEs face in Nigeria are enormous. Previous researchers agree that there are tremendous opportunities for SMEs as growth engines and stimulants of economic development. Olise (1997), describe the future of SMEs in Nigeria as one which is exceedingly bright because of the abundant resource, large populace and market for the products and services.

OVERVIEW OF SMALL & MEDIUM- SCALE ENTERPRISES IN NIGERIA

Definition

The definition of Small & Medium-scale Enterprises (SMEs) defers from country to country. These differences in definition arise from the fact that most organisations in different countries are at different levels of economic development.

Afonja (1999) stated that the three (3) variables are used to define the concept of SMEs. These are: number of employees; total revenue; and assets base. For example in the United Kingdom (UK) an SME is a company or organisation 500 employees and either an annual turnover of £100million or a balance sheet size of £86million (hmrc, n.d).

The main factors determining whether a company is an SME for the European Union (EU) is the number of employees and turnover or balance sheet size (europa, n.d).

Table 2 - The European Union (EU)'s definition of an SME

Company category

Employees

Turnover

or

Balance sheet size

Medium-sized

< 250

≤ € 50 m

≤ € 43 m

Small

< 50

≤ € 10 m

≤ € 10 m

Micro

< 10

≤ € 2 m

≤ € 2 m

In Nigeria, the fluidity in the definition of the concept of SMEs is also prominent. From the above table, it is evident that what Nigeria classified as large-scale companies in the 1960's may as well now qualify as SMEs Olise (1997). Most of the definitions given by different governments and their agencies in the past are no longer applicable, due to time, various government policies and the persistent fall in the value of the Nigerian Naira. The classification of businesses into small, medium and large is still highly subjective. Nevertheless, SMEs are now defined along a broad continuum of the number of employees; balance sheet size and asset base.

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Nigeria is yet to enact any Law governing its SMEs. The National Council of Industries in an attempt to create a distinctive feature between SMEs and other businesses, defined SMEs as any enterprise with a maximum asset base of N1.5billion (6million GBP), (excluding land and working capital), without limit to the number of employees. (Small and Medium Enterprises Equity Investment Scheme, 2007). This is subject to review by the Bankers' Committee from time to time.

Advantages of an SME to the economy

SMEs, by their nature are advantageous to the economy Okongwu (2001). These advantages include:

Increased employee productivity and better employment opportunities. Given their size, most SMEs do not have a clear division of responsibilities, as employees are supervised by the SME owner, employees often engaged and fully utilized when compared to large organizations.

Development of specialized product niches. SMEs due to their size, as often able to create new products and services, when compared to the large companies.

The size and closeness to consumers is a benefit to the SME operators as they gain superior understanding of the consumer needs and adapt/create the necessary changes in the market.

Bespoke products and services - when compared to large organizations, SMEs have a greater flexibility in offering / designing specialized services and products respectively for its consumers.

Current State of SMEs in Nigeria

The SMEs constitute over 80% of all business enterprises in Nigeria, providing a range of various economic activities (Nigeria Vision 20:2020-National Planning Commission, 2010). Like the manufacturing sector, the SMEs also have enormous challenges. Some of these include funding, poor infrastructure and lack of required technical skill to run a business. Currently, the few surviving SMEs in the manufacturing sector compete for funds in commercial banks at high interest rates averaging 18 to 22%. These challenges coupled with the government frequent change in policies, reduces the profitability of the SMEs in this sector and inevitability stiffen their growth.

Table 3 - Comparative analysis of the contributions of SME's in selected countries.

Sample Country

Employment

Export Earnings

Contributions to GDP

United Kingdom

53%

27%

52%

United State America

52%

30%

50%

India

79%

38%

40%

Hong Kong

78%

37%

51%

Japan

70%

40%

51%

Nigeria

75%

2%

10%

Source: Nigeria Vision 20:2020-National Planning Commission, 2010

SIGNIFICANCE OF THE STUDY

Given the vital and productive part played by SMEs in other economies, it becomes compelling for the SMEs subsector in Nigeria to be revamped and overhauled towards playing its expected roles.

The Nigerian manufacturing industry faces a myriad of problems ranging from infrastructural, cost of financing, government policy shifts, etc. Below is a summary of the indicative impact of these on the industry:

Exit of many manufacturers. The Nigerian Manufacturers Association (MAN) stated that 820 of its members have ceased business in the last 8 years (Chief Jamodu, K., 2009. The Nigerian Manufacturing Sector, The Guardian, 24 July, 2009 p.10). This includes SMEs as well as multinational companies such as Nigeria's erstwhile foremost tyre manufacturers (Michelin & Dunlop). Michelin closed down its manufacturing plant.

The textile sector is down to a few operators from the nearly 200 textile manufacturers operating in Nigeria in the 1980s.

Other than the cement sector, there was no new prime manufacturing plant in Nigeria for many years as prospective investors are discouraged from investing because of the enormity of the problems facing the industry and would rather export goods into Nigeria.

Consequently, this research intends to identify the key challenges SMEs in the manufacturing sector faced between the years 2000 and 2009 and its relevance as at the date of this research. The research will also attempt to make appropriate recommendations for addressing these challenges.

Research questions

This research will investigate the key challenges impeding the growth of SMEs in the manufacturing sector. Other queries relating to the research question is:

Are the problems more focused in established SMEs or start-ups companies?

How can the challenges faced by SMEs in Nigeria be solved / eliminated to enable SMEs act as expected - the backbone of development of the Nigerian economy?

Personal interest

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This research work is personal, being a tax consultant specializing in the Consumer and Industrial Markets Group. I have a personal interest in finding out the myriad of issues affecting the subsector and ways to mitigate these issues. It will be an immense joy to see SMEs act as a catalyst for growth as experienced in India.

Research objective

This research will identify those issues faced by SMEs in the manufacturing sector and attempt to proffer solution to these challenges.

Previous researchers have identified the various problems faced by SMEs. In my opinion, identifying specific issues faced by the manufacturers is very major, if Nigeria is to achieve its vision 20:20:20 goals, on economic growth and development. This is the main essence of this study.

Limitation of study

Similar to any task, this study was constrained by the following factors:

Poor return rate of questionnaires - The major tool of this research is the use of questionnaires. The Researcher noted that some participants were unwilling to complete questionnaires promptly, while others prefer to be anonymous in their responses. This limited number of responses received to about 125 entrepreneurs, when compared to the initial sample size of 150.

Lack of co-operation from the respondents - Given the level of education of most of the respondents, some of the respondents are not educated for this type of research, as they were unwilling to disclose their financial status or admit the reasons why their businesses failed, even when enough assurance was given in respect of confidentially.

Lack of detailed accurate information - There was also the problem of unavailability and inaccurate official records, especially from the regulatory agencies. This made the Researcher rely more on primary data for analysis and conclusions.

Some of these challenges were anticipated, hence the decision to also use oral interviews, to gather information from other respondents.

Finally, time was also a serious constraint on this research, due to level, number and schedule of people to be interviewed, the time given to out this work as detailed as expected is obviously too small, as this research competed with work and balancing family.

STRUCTURE OF THE DISSERTATION

This research will attempt the answer the research question.

Literature review

The SME sector has been acknowledged by governments, economists and development experts as prospective engines of economic growth and a critical success factor for private sector growth and partnership. This is evidenced in the existence of copious literature on SMEs written by various writers and researchers. Documents to be searched and reviewed will include the various books, theories and journal documenting the contemporary efforts towards SMEs development in Nigeria.

Data collection

This research will be based on a combination of both primary and secondary data.

Primary data will be obtained mostly through questionnaires and oral interviews with relevant respondents. The questions stated in the questionnaires will be crafted from the research questions.

Secondary data will be collected from previous work on the subject. This will involve a thorough review of the existing literature which can be found in the form of books, journals and periodicals written by entrepreneurs, academics, journalists, bankers and regulatory agencies. This is particularly essential for collecting accurate figures in the SME space in Nigeria.

Interviews

The interviews questions will also be in align with the research objective. This will elicit information from:

the Regulators on why the various policies formulated by the government, did not achieve the desired results.

the Bankers on why SME operators are always reluctant to partner with the Bank in -spite of the various Schemes set up by the Nigerian Government.

the SME operators, on the most critical problem facing their business and their recommendations to other Stakeholders.

Questionnaire

Questionnaires will be administered to the following stakeholders:

SMEs operators/owners, service providers and professionals in the SMEs sub-sector

This questionnaire will have questions designed to obtain information on the profile of the respondents, what they consider as the major problems of SMEs.

Banks and Regulators

The Banks and Regulators are the operator of most SME Schemes in Nigeria. This questionnaire will be aimed at eliciting from the banks on the reasons why SMEs still are not acting as a catalyst for change in Nigeria, in-spite of the funding provided under the various.

ANALYSIS

The analysis will focus on statistical techniques. Asika (2004) postulated that behavioural sciences can hardly be described quantitatively, and the mode of gathering information on them requires the use of nominal scales. Consequently, the data collected via the questionnaire and interview will be compiled in the form of descriptive statistics and graphic charts. Given that data will be collected from different people with varied background, it is only appropriate to use basic percentages, frequency distributions, bar charts and graphs.