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According to the Small Business Administration (SBA), a small business is not dominant in its field of operation which mainly owned and operated independently and meet minimum requirement of operation such as annual receipts and the number of workers (Boone and Kurtz 1992, 64). Notably, the business can be considered as small when it is less than $50,000 in annual receipts and the maximum number of employees is 25 persons or less (Peterson, Albaum and Kozmetsky 1986, 65). In fact, most of the small businesses are sole proprietor, partnerships, or a private incorporation.
Nowadays, small businesses are significant to a nation’s economic growth. In addition, small businesses also regarded as the motivation to reduce the poverty, creating more job opportunity and boosting the economic (Okpara et al. 2007). Therefore, many developed and developing countries have instituted and supported the small and medium enterprises development (Okpara et al. 2007). This is mainly because many countries have recognized the significant of small businesses in general economic development.
Nigeria is one of the Sub-Saharan African nations and Nigeria is turning more to the small-medium enterprises (Ogechukwu 2006). In fact, Nigeria’s government has provided some incentives program in order to encourage the foreigners and Nigerians to set up small business enterprises since the 1970s (Okpara et al. 2007).
In 2010, the ranking of ease of doing business for Nigeria is in 13th position out of 46 nations in Sub-Saharan Africa (Doing Business Report, 2010). This gives a clear image to investors that the business environment in Nigeria can still be applied for business operation.
Therefore, this report will analyse the legal-political, economics, socio-cultural and technological environment in Nigeria. As follows, the recommendations will be given to determine whether the business environment in Nigeria is appropriate for small businesses.
2.0 External Environment Analysis
2.1 Legal-Political Environment
The political situation and the legal system in Nigeria play a significant role to a small business. Therefore, managers should understanding well of their environment and strive to operate within it (Ebert and Griffin 2007, 6). Sometimes, it would be the threat or an opportunity to the small businesses.
2.1.1 Political Risk
Nigeria is in the very high category of political risk (AMB Country Risk Report 2009). This is mainly because Nigeria has high potential in political corruption. Nigeria’s Economic and Financial Crimes Commission released an advisory list of a number of politicians who join the corruption including the vice president of Nigeria, Atiku Abubakar (Nigerian leaders ‘stole’ $380bn 2006). Evidently, the political corruption has produced many negative impacts and discouraged the small businesses development. For instance, the small businesses managers need to pay the bribes to the government officials if they want to bid the public-sector projects (Small Businesses Development and Corruption 2006). Moreover, they will not get any necessary license or permit from the government if they refuse to pay the additional payments to officials. Therefore, it would be a threat for small businesses.
2.1.2 Laws and Regulations
Nigeria government has different acts to govern the labor issues. Under the Nigerian Labour Act 1974, an employer must give a written contract of employment to an employee whose engagement within three months (Oserogho 2010). It must specify clearly in the terms of contract. For instance, an employee should work for 6 hours or more per day (Nigeria Labour Act n.d.). Sunday Daily Trust (July 18, 2010) reported that federal government has approved the new minimum wages of N18000 per month for a worker. Since the maximum working hours of employees are lesser and high cost for paying minimum wages for employees, it will affect the small businesses total output and growth. Besides, the increasing of minimum wages also raise burden to a small businesses. Obviously, it will also decrease the revenues of the small businesses. Therefore, it is a threat to set up a small business in Nigeria.
2.1.3 National Tax Policy
A new National Tax Policy has been approved by the Nigeria government at the end of year 2008. In the National Tax Policy, the companies’ income tax has been reduced from 30% to 20% and the personal income tax also has been reduced from 25% to 17.5% (Onuba 2010). Certainly, this would be beneficial to the small businesses in Nigeria. Many individual will utilize sophisticated financial techniques to convert ordinary income to capital gains because low tax rates on capital gains are an important part of personal income tax shelters (Burman 2008). Indeed, they can develop the small businesses to abroad by using the personal income tax that has being reduced by government as their capital for investment. Therefore, it would be an opportunity for small businesses here.
2.2 Economic Environment
Different countries have different types of economic development. Nigeria mainly depended on the petroleum, agriculture and services sector. In fact, Nigeria’s GDP is second only after the South Africa (Executive Summary n.d.).
2.2.1 Economic Growth and Development
Over the past three year, the economic in Nigeria is primarily contributed by the non-oil sector such as agriculture and services sector (Outlook for 2009-10: Economic forecast 2009, 7). Due to the global financial crisis in 2009, Nigeria experiences economy downturn. The real GDP growth in Nigeria has fall to 4.5% in 2009. However, The Economist Intelligence Unit estimated that the real GDP growth in Nigeria will improve from 4.5% in 2009 to 5.3% in year 2010 (Nigeria 2009, 3). Real GDP growth improves indicate economic is growing. Obviously, it will be a chance for small businesses to expand their investment. Besides, revenue of small businesses is predicted to increase steadily since the economic in Nigeria perform well. Therefore, it would be a potential opportunity for small business.
Graph 1: The Real GDP growth in Nigeria from 2004 to 2010
(Source: Real GDP growth)
2.2.2 Resources and Product Markets
In order for small business to function efficient and effective, the resources markets and product markets must be available. Nigeria is a country which is rich in mineral resources such as petroleum, gas, aluminum, gold and others (Izon n.d.). In detail, the mineral industry in Nigeria has contributed a major percentage which is 34.1% to its GDP (Nigeria Economy n.d.). These statistics show that Nigeria has high potentials for the industrial development (NATURAL RESOURCES AND POTENTIALS FOR DEVELOPMENT 2003). Consequently, small businesses are encouraged to involve in mineral industry. This is because small businesses can gain a lucrative profit from mining mineral. Therefore, it would be an opportunity for small businesses.
2.2.3 Exchange Rates
The value of Nigerian Naira has depreciated almost 20% between the late of November and the end of the year (Outlook for 2009-10: Economic forecast 2009, 8). Presently, 1 U.S. Dollar is approximately 150.8 Nigerian Naira (Exchange Rates 2010). This is because the rapid fall in oil prices in Nigeria (Outlook for 2009-10: Economic forecast 2009, 8). A weak naira makes small business to function difficultly. Samson and Daft (2009, 144) claimed that in the lower rate, foreign goods would be more expensive to import. Consequently, the profit of export sales for small business will become lesser because domestic goods look cheaper as the value of naira depreciate. Therefore, it would be a threat for small business.
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