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In almost all economies, small businesses are essential for continous growth.A huge failure rate, has a destructive outcome on any economy. This is the status quo in Nigeria, notwithstanding numerous claims by the government, of inaugurated programms to aid entreprenuers.Different surveys assembled from small businesses in Nigeria, find the primary constraint to success , to consist of; feeble infrastructural support, absence of capital, corruption, and poor record keeping. Regrettably many of the solutions are captive to the political environment as well as the educational progress (Opara, John, Wynn& Pamela, 2007). "Common sense suggests and academic studies concur that an ameliorative business environment enables entrepreneurial activity and boosts enterprise and performance". (Mary Agboli and chikwendu Christian ukaegbu, 2000).
At the time Dunlop commenced the production of tyres at its premises in Lagos Nigeria, in 1963, the vision of its founding fathers was to make it a tyre manufacturer of tribute in Africa. And it achieved this,producing the first tubeless tyre in Nigeria. Consiquently,it won awards both locally and internationally. However Its activities were stifled, due to the unconducive business environment in Nigeria.
For the purpose of this essay, we will adopt the concept of a business environment as noted by (Bird, 1989), to be the events, circumstances, situations, settings, and niches, which surround entrepreneurial activity in Nigeria. In the same vein (Gnyawali& Fogel, 1994) see the business environment as the "overall economic, socio-cultural and political factors that influence people's willingness to undertake entrepreneurial activities. It also refers to the availability of assistance and support services that facilitate" start up processes (Gwyawali & Fogel, 1994). A good business will encourage foreign investors and breed an enabling environment for the society to develop as a whole and relatively reduce poverty.
This essay aims to demonstrate the effect that the Nigerian infrastructural environment has on the success rate of businesses. The second section begins by explaining the concept of the business environment, factors responsible for the untimely death of businesses, comparison between Nigeria and India, what the government is doing to reduce the volatility rate.
2. The Nigerian Business Environment
The Nigerian business environment as used in this essay comprise of small, medium and large enterprises but emphasis will be placed on small businesses as they represent the engine of growth and economic development of any economy (Ogunsiji and Ladanu, 2010). The definition of SMEs in Nigeria, differ from one agency to another due to the different variables used that range from number of employees to capital and turnover. Fig 1 below shows definition of SMEs as defined in the National Policy of MSMEs, (2007).
Types of Enterprises
Asset Base (Excluding Land and Buildings)
Less than 10 Persons
Less than N5 Million
10 - 49 Persons
Less than N50 Million
50 - 199 Persons
N50m - Less than N500 Million
Source: Nigerian National Policy on MSMEs 2007
Nigeria is a country of about 140 million people located in the West African sub-region. The country is a collection of a number of ethnic groups with over 250 languages. The majority tribes are the Yorubas in the South West, the Igbos in the South East and the Hausa-Fulanis in the North which accounts for about 50% of the total population(Adegbite 1986)By the 2006 population figures they account for about two thirds (NPC,2006).
This potentially signifies a huge market and expectedly a vibrant business environment. It is a country with enormous human, material and natural resources with an internal market that cannot be rivalled in the African continent and also owns the most highly trained work force in the continent (Bala, 2003). Indeed there are very few countries in Africa with the huge economic potentials it enjoys.
Olusegun Obasanjo (President of Nigeria, 1999-2007), against the background of identified obstacles to investment and economic growth of the nation, resulting from over dependence on oil, articulated some guiding policies to revitalize the Nigerian economy and promote foreign direct investment. (Porter, 2010) argues that countries in the Investment-driven stage have efficiency in producing standard products and services as the source of their competitive advantage.
Government's plan at this stage of the country's development to invest in efficient infrastructure, have a business-friendly government with strong investment incentives and better access to capital for improved productivity was in consonance with Porters theory. Specifically, it was to address three rehabilitation of Socio-Economic Infrastructure such as:
a. Electricity. This was up graded from 2000MW to 4,500MW with plans to get to 10,000MW by 2005 which is yet to be attained. A World Bank survey showed that firms suffer from an extraordinary burden imposed by erratic, low quality electricity in Nigeria (world bank.org.)
b. Telecommunication. Prior to the licensing of mobile telecoms operator Nigeria had only 363,284 fixed wireless installed capacity with 120,771 subscribers. The licensing of mobile operators in 2002 has made the telecommunication industry Nigeria one of the fast growing in the world.
c. Railways, airports and Roads. The railways were to be rehabilitated using the standard gauge while new roads networks were to be built and the international Airports improved (Bala, 2003).
In addition to the socio-economic infrastructure is the stance of government to stamp out corruption by the creation of EFCC and ICPC. Funding was also provided for the training of officers and men of security agencies while more personnel were recruited into the Police force for the security of life and property. Long term fund for investment was also on the Government's priority list. Furthermore, it tried to promote industrial and technological development through various incentives (Okejiri, 2000).
In spite of its oil-dominated economy, Nigeria has been the subject of considerable instability and has suffered from extremely poor governance.
Availability of resources and infrastructures seem to be a key predictor of the regularity of new business start-ups, many investors are unwilling to invest or have the tendency to withhold support until firms have been successfully established. (Pennings, 1982).Even where funds are available the costs at which they are available are very high, and consequently limit the growth of the nation's economy adversely affecting every sector. The term infrastructures bring to mind facilities such as roads, airports, telecommunications, and transportation. Lack of these basic amenities pose a big problem and consequently repel investors. The challenge is not that infrastructures are not erected, but that the ones that are, never live up to standard, or are mismanaged, and eventually collapse, leaving the economy worse than it was initially. A good example is the failure of the incubators in Nigeria.
Business incubator programmes are often initiated by private companies or municipal entities and public institutions .Its primary objective is to expand the business to a stage where it can stand alone thus increasing its chances of success and growth.
The business incubators that existed in Nigeria were expected to perform a number functions, accelerating growth of small and medium enterprises, as well as stimulating the speed of socio- economic development in general. The industrial incubator was expected to support indigenous entrepreneurship by providing entrepreneurs with an exceptional base of operation in fully built up factory buildings with supporting infrastructures. However, after a few years, the incubators in Nigeria were assessed, it was discovered that most of them failed because, tenant firms refused to leave the premises even after their term had expired. The main reason claimed by tenants for their failure to move out was the inability of government to offer an affordable substitute site, also was the fact that the incubators were characterized by weak management, being run more or less by department of the supervising ministry with all the attendant red tape and bureaucratic ineptitude (Oyeyemi and Adegbite, 2000).
3. Comparison between the Investment Climates Nigeria and India
The decision to compare both countries stems from the fact that both are developing countries and are both heavily populated.
3.1 Power supply
The term business environment is defined by Eifert as the nexus of policies, institutions physical infrastructure, human resources and geographic features that influence the efficiency with which different firms and industries operate (Eifert et al 2005).
Dissimilarities in investment climate form the sources of national and regional gaps in productivity (Lall and Mengistae, 2005) This is in consonance with Dollar et al (2004) who reported the same discoveries of international gaps in manufacturing efficiency based on World Bank's Investment climate Surveys (Lall and Mengistae, 2005).
Like Nigeria, power outages take place in India. But whereas it occurs every two days India it happens more often in Nigeria and sporadically thereby not giving room for adequate planning. This is opposed to once in two weeks in China and once in one week in Brazil. In both India and Nigeria power outages lead to loss of sales by constraining interruptions, i. e. idle capacity on businesses and consequently wastes of raw materials (Lall and Mengistae, 2005).
The problem of inadequate power in India is one of regulatory policy and ownership in the energy sector in addition to under-investment in transmission and distribution. On the other hand, inadequate power supply in Nigeria is a result of corruption, selfishness and sabotage emanating from generator importers.
3.2 Financing businesses
The significant determining factors of an economy's ability to construct wealth, increase job opportunities and competitiveness are innovation and entrepreneurship argues (Hochberg et al, 2010). Entrepreneurs therefore have need of constant stream of funds to start their businesses and also for the day-to-day running of same. It is for this reason that the Nigeria government set up the Small and Medium Industry Equity Investment Scheme (SMIEIS) in addition to a partnership with commercial banks whereby government provides funding and bank provides counterpart funding.In spite of this provision, retained profits is mostly used by companies as costs associated with alternative sources are extremely high (Okoyeuzu, 2010) where they are available. The financing behaviour of Nigerian firms is a matter of constrained operational and financial market structure and not necessarily a matter of choice. While in the case of India, government makes all efforts to meet the financial requirements of entrepreneurs by providing financial schemes and various funding options. India's financial system consists of banks financial institutions, non-financial companies and venture capital companies. The most important source of institutional credit in India are banks, thus giving India a sound financial arrangement capable of providing a strong base for setting up of business units in the country (Bus.gov 2010) .
Venture capital fund is very vibrant in India (Bus.gov 2010) with firms that are involved are visible to the entrepreneurs and are considered as credible source of funding being very well known (Hochberg et al 2010). They finance SMEs with limited sources of funding but possessing huge potential for large profits.
4 CASE STUDY OF DUNLOP PLC NIGERIA
With approximately 140 brands of tyres now introduced into the country, most of which are scraps, the country is simply aiding to improve other economies at the expense of theirs. But the problem of inadequate electricity supply made Dunlop at full capacity spend an average of N190 million monthly on power generation alone. This includes a 150 million on the maintenance of generators, as well as 40 million naira paid to the Power Holding Company of Nigeria (PHCN) for the public power supply that it consumed (Adegboyega, 2010). Unfortunately 47 years after, Dunlop could no longer cope with the situation and its operations came to an end in 2009; becoming a victim of Nigeria's declining infrastructure. The cause of Dunlop's decline is complex and interrelated. Dunlop's focus on systematic promotion and confining competition became core rigidity, the path dependency and the subsequent inactivity inhibited Dunlop from developing world class production competences essential to compete in the global environment.
5. Causes of volatility of Nigerian Businesses
Nigeria is a multi-cultural society with an increasing population. Unfortunately, most of Nigerian leaders are inspired by ethnic and sectional loyalties and lack the intelligence that is needed to build a feasible plan for the continuous growth and development of an abundant, multicultural country (Iyoha, 2010) that has the capacity to guarantee business survival and growth. Consequently, the under listed among others have contributed to the untimely death of businesses in Nigeria. The causes of business volatility unfortunately, are a vicious cycle as represented in fig. 2 below.
Figure 2 Some of the causes of business volatility.
Transparency, Rule of Law, Checks and Balances, have become foreign concepts in the nation. This has fostered a continuous economic decline and the decay of basic infrastructures. The most obvious of all is the fact that Africa's leading oil producing nation, cannot boast of an active oil refinery, and we are constantly haunted by fuel shortage. (Lewis, Robinson, & Rubin, 1998). For a country that is highly reliant on transportation, for the movement of raw materials from one location to another, it is detrimental to the economic system.
5.2 Infrastructure- Power supply, roads and telecommunication
Businesses in Nigeria are faced with high operating costs arising from inadequate or poor infrastructural facilities. A World Bank Study found that several firms acquired radio devices for communications. Furthermore, the study found that "92% of Nigerian manufacturers own their own electricity generators"(Fisman and Khana 2004). The inefficiency in electricity supply lead to severe losses and the eventual failure of businesses.
Public telecommunication is unreliable, roads are in poor state of disrepair and electricity is short supply. These basic infrastructures (Cukierman, Hercowitz, &Leiderman, 1992) shows are germane for proper development of businesses and to be provided by government.
5.3 Managerial incapability.
Managerial incapability manifest in form of lack of basic skills and clear vision, failing to plan and lack of or improper book and record keeping among others have contributed in no small measure to the failure of businesses in Nigeria.
5.4 Inadequate finance and High transaction cost
Research shows that the creation of investment companies, provision of low interest loans and the availability of credit guarantee schemes for small business financing contribute to the establishment of new businesses (Hawkins, 1993). But most bankers particularly commercial ones often hesitate to finance start-up firms due to the high cost involved in processing and supervision of the loans. This
6. What is Nigerian Government doing to reduce the volatility rate of businesses?
In the last section we discussed the factors that lead to volatility of businesses in Nigeria. In this section, we will take a critical look at what the Nigerian government is doing to make the business environment in the country less volatile. Several policy thrusts were planned by past administrations since the 70s aimed at improving the business sub sector in Nigeria (Yusuf and Schindehutte, 2000).
The democratic government of the Obasanjo administration shifted more to the private sector by restructuring the economy in order to make it private-sector led, market oriented and technology driven. This the government did by establishing various organisations and agencies while reorganising and restructuring the existing organisations concerned with the development and promotion of business activities in the country.
Recognising the indispensible role of small businesses as the engine of growth of any economy and Nigeria as a fast developing economy with open doors to multi-national corporations, government encouraged public-private participation (Okpara et al, 2007). In addition, it established the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), part of whose mandate is to promote and provide access to industrial infrastructures such as layouts, incubators and industrial parks and also to work in conjunction with other institutions in both public and private sectors to create a good investment environment for businesses in general and Micro Small and Medium Enterprises (MSMEs) in particular (SMEDAN, 2003). By2006 the organisation had developed clusters across the geo-political zones in the country.
Abeokuta- - Tie And Dye
Oshogbo - Tie And Dye
Figure 3.Clusters in Nigeria as at 2006
6.1 Curbing Corruption
In addressing the problem of corruption, which was and to some extent still is an impediment to the growth and survival of businesses in Nigeria, the government establish the Economic and Financial Crimes commission (EFCC). The act establishing the commission empowers it to investigate all financial crimes including advance fee fraud, money laundering, counterfeiting, illegal charge transfers, futures market fraud, fraudulent encashment of negotiable instruments computer credit card fraud, contract scam etc. (EFCC Act, 2000). Despite this institution, "a survey of the major apprehension of business executives shows that crime and corruption represent 75% and 71% respectively of the serious obstacles to doing business in Nigeria" (NBS/EFCC report 2009). President Obasanjo during his second term in office vowed to fight corruption declaring that "corruption must be stamped out of the Nigerian society" and continuing he stated that any minister or top government official found to be corrupt will be dismissed and prosecuted (Djebah 2004 in Nwabuzor 2005). Indeed, a cabinet minister was dismissed during his tenure and subsequently prosecuted over bloated identity card contract (Nwabuzor 2005).
6.2 Reducing Power Outages
In spite of billions of naira of investment spending devoted to the state-owned electricity utility company (PHCN) over the past 25 years, it failed to deliver satisfactory and dependable service in Nigeria, this produced an emergency of confidence and the need for exigent reforms in the industry (Iwayemi 1994). The incessant power outages culminating in the use of generators by businesses create huge operations costs and invariable the death of businesses. Government's planned reforms led to the inauguration in 2005 of the Nigerian Electricity regulatory Commission charged with the responsibility of regulating tariffs and monitoring the quality of service offered by PHCN (Okoro and Chikuni, 2007). However (Amobi, 2007) points out that a quick deregulation of the power sector will lead to enormous operation cost and the advantage derivable will be negligible. On the other hand, the study carried out by Adenikinju, (2003) supports the effort of government to "privatise and liberalise the Nigerian electricity market". The power sector in the country is currently undergoing reforms to develop and enlarge the capability of generation and the transmission network. (Gujba et al 2010). Perhaps this effort will decrease business expenditure on generator maintenance and operating cost, thereby improving their profit margins and increasing their lifespan.
6.3 Road Maintenance
Maybe the most pragmatic road provision to date is the creation of directorate for Foods Roads and Rural Infrastructure (DFRRI) in 1986.This was the result of the priority placed by the then Federal government on roads. Subsequently, in 2002 the Federal Road Maintenance Agency (FERMA) was established to cater for the maintenance of Nigerian roads in order to reduce the cost of movement of raw materials. Although, FERMA is Limited to the maintenance of Federal roads it is the first institutional instrument for "concrete national policy platform, best practices and quality control in roads maintenance" (FERMA, 2010). There is the Local Government Roads Maintenance Agency; however, it only exists on paper (Ipingbemi 2008). Projects started were usually abandoned therefore the efforts towards improving the rural roads from where most agricultural products emanate achieved little as (Olarewaju, 1992; Kraxberger. 2003 in Mijinyawa et al 2005).
6.4 Accessing finance and reducing high transaction costs
In the area of financing business government launched institutions such as Small Scale Industry credit Scheme (SSICS), Nigerian Bank of Commerce and Industry (NBCI), National Economic Recovery Fund NERFUND), with the assistance of international financial institutions World Bank Loan Scheme (SMEI & SME II Loan Scheme) to address the problems of high transaction costs and risks by creating subsidized credit programmes and providing loan guarantees (Abereijo and Fayomi, 2005). Various policy efforts have put in place to influence the direction of bank credits through structural policy measures focusing on bank consolidation. This unfortunately has not worked in favour of minority businesses (Ezeoha and Amaeshi, 2010). A senior economist with the World Bank, Ismail Radwan, speaking at the credit awareness conference in Lagos on 31/08/2010, pointed out that "less than 1% of Nigerian businesses have access to bank finance"(Microfinance Africa, Sept 1, 2010). In Nigeria accessing finance from banks can be very difficult due to the high interest rates and equity financing is still at its infancy. Equity financing is yet to be fully accepted as a fiscal concept by both the entrepreneurs and the financial institutions coupled with the market that is still largely poorly developed (Abereijo and Fayomi, 2005).
6.5 Doing Business in Nigeria
Trade in Nigeria a country with about 140 million people, have the capacity to spur industrialisation and contribute tremendously to poverty reduction in Nigeria. Export of textiles to the US made possible by the African Growth and Opportunity Act (AGOA) of the Clinton regime was never really tapped into by Nigeria as a result of the cumbersome nature of export documentation. The country needs a sound and implementable trade policy. A policy formulated showing the problems or gaps and how those policies will solve the problems. In addition there should be the political will to implement with nobody being above the law. Policies properly outlined and that are not swayed by personal interests is bound to further common good and invariably advance the nation (Nigeria Muse, 1st June, 2010).
Recently, the Minister for Finance, Olusegun Aganga, said the government met with key operators of businesses to find out what the issues are and the role government can play, because it was concerned about the condition of doing business in the country. Continuing, Aganga stated that "we met with the banks and asked what we need to do in order for them to lend to the real economy. There are a number of things we need to do. One is legislative that we need to change the Land Use Act, Evidence Act and Bankruptcy Act. Second thing is establishment of commercial courts".
6.6 Business and Entrepreneurial Skills
To improve the management capability and entrepreneurial skills of business owners, the government established the Abuja Enterprise Agency (AEA) co-funded by federal Capital Territory Administration, UKs DFID, United Bank for Africa and Diamond Bank. This establishment provides business advisory and information services while promoting ethical practices in the business community in addition to the promotion of the use of technology initiatives to the Federal Capital Territory residence at a token fee.
We have in this essay looked at the investment climate of Nigeria, discussed the causes of business volatility, and then we compared Nigeria with India with reference to access to business finance and infrastructural facilities, finally we analysed some of the actions government has taken or is taking to reduce the volatility of businesses in Nigeria and conclude as follows.
The Political instability in the country that has placed inherent harm on most businesses has not hindered shell's activity as profits in Nigeria seem to be higher than elsewhere. Therefore rather than exit the Nigerian market like Dunlop, Shell is expanding its investment in the country (Frynas, J. 1998). This may not be unconnected with Shell's first mover advantage of the 50s that perhaps has been turned into a core competence.
The development of successful business incubator in Nigeria will foster business survival and growth. The Brazilian business incubator "accounts for 98% of existing companies and employing 60% of the active population while contributing 21% of its GDP (Mendoza, 2009). These incubators are tied to universities and research centres located in close proximity to the facilities. Nigeria's business incubators should be increased and tied to her over 100 Universities scattered across the country. In addition, it is important to provide matured businesses with alternative locations to enable them relocate and give room to subsequent incubators. To be viable, admission should be streamlined so that "genuine entrepreneurs are admitted instead of political appointees and top government functionaries". Consequently no spectacular results have been recorded (Adegbite, 2001)
According to the US president Barak Obama in the report: Nigeria 2010, we must recognise the truth: development depends on good governance (The Oxford Business Group, 2010) and this is one major factor that is missing in the Nigerian economy. The advancement that the United States experiences did not fall upon them like ripe cherries, it took hard work and commitment, one ingredient that Nigerian leaders have a high deficiency of .Although various techniques have been put in place to ensure good governance in the country, drastic measures are still needed to be taken to address the situation. It is more than the people voting and electing government officials, it is impossible for a country to create wealth if the leaders take advantage of the economy to deepen their own pockets and no business will invest in a place where the government skims 20% of the top.
In spite of all the efforts that has been made to make the business climate conducive for businesses to operate; it is obvious that a lot more needs to done. Paraphrasing Oronsanye in eNext of 14th November, 2010 the Nigerian economy is in desperate need of restructurings as there are numerous limitations to local business activities in Nigeria says a recent World Bank report on the ease of doing business in Nigeria.
Nigeria is a growing economy; the entrepreneurial concept has not been fully embraced. Entrepreneurship will not prosper if members of a society view it with suspicion. Government and business development organizations can organise programmes in order to develop societal awareness towards entrepreneurship and make people recognize the importance of being entrepreneurs. Over the years, the overall environment of doing business in Nigeria has become relatively easier (World Bank, 2010).
An entrepreneur, through personal drive and/or novel technical or managerial insights, is able to achieve significant growth for a firm he or she owns or manages for other providers of capital" Nigeria is not recognised for being an innovative or inventive country. For this to change there will have to be investment in Research and Development. Countries like the UK are individualistic in nature, but like Japan Nigeria is a conformist society but to achieve great innovative measures a different approach needs to be taken that involves building individual skills.
In a recent report, Ghanaian authorities set strict conditions for foreign investors to pay about 43 million deposits before starting operations. There is absolutely no reason for companies to prefer Ghana to Nigeria considering the population of Nigeria which is more than five times that of Ghana. But the poor infrastructural facilities are one of the humiliations that should motivate the Nigerian Government to take the issue more seriously. Although business environments do not have to be perfect, they should be good enough on a number of crucial dimensions to stimulate investment and competition sufficient to launch the self-reinforcing process of industrial growth.
Although business environments do not have to be perfect, they should be good enough on a number of crucial dimensions to stimulate investment and competition sufficient to launch the self-reinforcing process of industrial growth.