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CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

In recent time, interest in the linkages between Small and Medium Scale Enterprise (SMEs) and economic performance of countries has attracted the attention of researchers and policy makers and spawned volume of studies on this research area (see Kadiri, 2012; Taiwo, Ayodeji & Yusuf, 2012; Thurik & Wennekers, 2004; Vijayakumar, 2011). This is not surprising considering the role of SMEs in promoting economic growth and development through various channels including job creation, income redistribution, poverty reduction and maintaining a healthy economy (Beck, Demirguc-kunt & Levine, 2005). The small and medium scale enterprises sub sector of the economy holds the key to the nation’s quest for economic growth and development. Today, regardless of the level of growth and development the world over, countries continue to embark on viable policies and programs that would create and pave way for the sustainable development of their economies through SMEs development. Numerous studies have shown that small and medium scale enterprises act as a catalyst for growth and development of a national economy (Anthony & Arthur, 2008; Chinweuba & Sunday, 2015 & Vijayakumar, 2013). In recent decades, Nigeria has made it one of the nation’s prime objectives to expand its industrial base through creation, sustenance and growth of small and medium scale enterprises for attainment of economic growth. This has remained the focus of various administrations in Nigeria particularly during the present democratic dispensation. Moreover, a major obstacle limiting the development of SMEs in Nigeria is the death of infrastructural facilities and financial sources for the sub sector. In most cases, the operators often find financing options particularly banks inaccessible. This phenomenon has pushed many operators to explore other alternative funding sources with high interest rate and other implications. In response to that, government came with various financial windows for the SMEs through the Central Bank of Nigeria. This include Micro, Small and Medium Scale Development Fund (MSMSDF), microfinance banks, direct loans from state governments among many other financial windows. Over a short period, it has yielded significant improvement in their activities (Jibir, 2015). On the other hand, the decay of infrastructural facilities especially power has negatively affected the performance, growth and development of SMEs in Nigeria over the years. However, there are efforts by both states and central government to provide a supporting power supply for industrial development. This development in SMEs activities has spawned volume of empirical studies trying to ascertain the nexus between their activities and general performance of the economy. Studies such as Aremu and Adeyemi (2011); Cravo, Gourly and Becker (2009); Kaigama, Talib, and Ashari (2016); Nagaya (2017) and Taiwo, Ayode and Yusuf (2012) among many others have looked into the relationship between SMEs and economic growth and came up with different and conflicting results which call for further investigation. Besides that, it is observed that majority of the studies applied primary data in the case of Nigeria. There are very few studies that used time series data. Thus, the present study plans to undertake the anatomy of the relationship between SMEs activities and economic growth using dataset for Nigeria. The study goes beyond the existing studies in two ways: firstly, it has applied more recent time series data and secondly, it considers wide specification and robust econometric techniques. On the basis of that, it provides fresh insight to the existing literature on the relationship between SMEs and economic growth.

For sustainable economy, SMEs have been stressed as capable of helping in bringing about positive economic turn around and complementing the effort of the existing medium and large scales industries (Osuagwu,2001). The recognition of the importance of the roles of the SMEs as catalyst and engine of growth has prompted the increased attention and specific education on the method and approach to build and sustain a truly viable private sector dominated by small and medium scale enterprise (SMEs). Such economic contributions are obvious in the mobilization of idle financial resources, the conservation of foreign exchange, utilization of local raw materials, specialist suppliers to large companies, adding varieties and choice for the consumers, checking the monopolistic tendency power, providing a source or innovation, breeding ground for new industries and above all employment creation. In Nigeria the Small and Medium Scale Enterprises (SMEs) have been neglected for so long with the brunt of past policy bias in favour of their large-scale industries counterparts. The government consciousness needs to be jolted to the reality before us giving the pivotal role of the subsector, which can make an economy gain the required versatility and resilience, particularly in view of the abject poverty that has characterized the land.