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CONTRIBUTION OF SMALL AND MEDIUM SCALE ENTERPRISES TO ECONOMIC DEVELOPMENT OF NIGERIA

ABSTRACT

The contribution of Small and Medium Scale Enterprises (SMEs) has been recognized as main sustenance of the economy because of their capacity in enhancing the economy output and enhance human welfare. On this basis, this paper assesses the contribution of small and medium scale enterprises to the economic development of Nigeria. Multiple regression analysis was employed to determine the significant contribution of SMEs to the economic development of Nigeria. The R-squared value (coefficient of determination) indicates that SMEs contribute up to 98.2 percent to the economic growth and development of Nigeria. The result of the regression analysis reveals that capital investment, Labor force, and investment in SMEs have a significant effect on economic growth and development. Hence it was concluded that long run relationship exist between performance of SMEs and economic development. The relationship between these variables were also tested using pearson correlation which also reveals same finding. Based on the findings of this study, it is recommended that Government should provide more capital funding to the young ones who present viable business ideas in order to reduce the rate of unemployment in Nigeria. Also the government should also provide enabling environment in terms of constant power supply to encourage SMEs in Nigeria. The Central Bank of Nigeria (CBN) and other financial institutions should embark on extensive sensitization of entrepreneurs on the operations of the banks and high interests which deter people with genuine business ideas should be reduced to a bearable level so as to make borrowing cheaper.

CHAPTER ONE

1.1     Introduction

The pursuit of economic development has been a major goal of many developing nations of the world. Developing countries are confronted with several problems such as high rate of poverty and unemployment which have continued to hinder the attainment of socio-economic development. For any nation to attain development, industrialization, gainful and meaningful employment are important indices used as a measurement of economic development. This is often depicted by income per capital, equitable distribution of income, the welfare and quality of life enjoyed by the citizen of that nation. Small and Medium Scale Enterprise (SME) has proved to be a major tool adopted by the developed nations to attain socio- economic development. In recent time, small scale industrial sector is considered to be the backbone of modern day economy. Historical facts show that prior to the late 19th century, cottage industries, and mostly small and medium scale businesses controlled the economy of Europe. The Industrial Revolution changed the status quo and introduced mass production (Thomas, 2001). The twin oil shocks during the 1970s undermined the mass production model, which triggered the unexpected reappraisal of the role and importance of small and medium sized enterprises in the global economy (Wendrell, 2003). In Nigeria, the introduction of SME can be traced back to the year 1945 when the essential paper No. 24 of 1945 on “A Ten year plan of development and welfare of Nigeria 1946 was presented”. Small and Medium scale Enterprise was considered an all-time necessity at the beginning; which has gained prominence today and is expected to increase its importance in the future (Basil, 2005). In a developing country like Nigeria, the importance of SMEs in the process of social economic development cannot be overlooked. The importance of SMEs in the development of the country has been summarized in Nigeria third national development plan 1975-1980 as the generation of employment opportunities, stimulation of indigenous entrepreneurship, facilitation of effective mobilization of local resources including capital and skill as well as reduction in regional disparities (Rahanaty, 2009).

Moreover, in a country like Nigeria with an adverse Balance of payment situation, the growing contribution of the SMEs in Nigeria’s export portfolio goes a long way in generating foreign exchange and smoothening out the adverse balanced of payment situation. This is important to the economy in that large percentage of their production inputs are sourced locally thus, reducing the pressure on the limited foreign exchange earnings and helping to eliminate some of the deficit in the balance of payment. According to Ikherehon (2002), SMEs constitute the very basis of the national economy in terms of development of local technology, stimulation of indigenous entrepreneurship, mobilization and utilization of domestic savings, employment creation, structural balancing of large and small industry sectors in both rural and urban areas, supply of high quality intermediate products thereby strengthening the international competitiveness of manufacturer’s goods, stimulate technological development and innovations, provide the capacity to expand export possibility and substitute import effectively. Discovery has also shown that the expected role contribution by the large scale enterprise to the economy in terms of improvement in the GDP, employment generation, increasing local value added, technological development among others are been resolved by SMEs (Nwoye, 2010).

Small and medium scale enterprises play important roles in the economic growth and development of any economy (Ariyo, 2005). They may look small or inconsequential but are actually the foundation of any economically stable nation. The potential benefits of SMEs to any economy include contribution to the economy in terms of output of goods and services; creation of jobs at relatively low capital cost; provision of a vehicle for reducing income disparities; development of a pool of skilled and semi-skilled workers as a basis for future industrial expansion, among others.  According to the World Business Council for Sustainable Development (WBCSD, 2004) in Organization for Economic Cooperation and Development (OECD) economies, Small, Medium Enterprises and Micro enterprises account for over 95% of firms, 60-70% of employment, 55% of GDP and generate the lion share of new jobs. In developing countries, more than 90% of all firms outside the agricultural sector are SMEs and microenterprises, generating a significant portion of Gross Domestic Product (GDP). Morocco is cited as an example; with 93% of industrial firms as SMEs and account for 38% of production, 33% of investment, 30% of exports and 46% of employment.

 According to NCI (2003), a small-scale industry is an enterprise with total cost (including working capital but excluding cost of land) above N1.5 million but not exceeding N50 million, with a labor size of between 11 and 100 workers, while the medium-scale industry has a total cost (including working capital but excluding cost of land) above N50 million but not exceeding N200 million, with a labor size of between 101 and 300 workers. On the other hand, the revised operational guidelines of SMEEIS (2005) defines a small and medium enterprises as an enterprise with a maximum assets base of five hundred million naira (N500m) (excluding land and working capital), and with no lower or upper limit of staff. The contradictions in the definition of SMEs as given by NCI and SMEEIS point to the different interpretations of what SMEs really are to different schemes. Hence, their approaches to the funding of SMEs are affected. Economic development generally refers to the sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area. Economic development can also be referred to as the quantitative and qualitative changes in the economy. The actions can involve development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy and other initiatives (Satope & Akanbi, 2014).

Economic development differs from economic growth. Growth on a general term could be confined to increase in output (per unit of input) while development implies increase in output together with a change in technical and institutional arrangement involved in production. Growth can take place without development but, a nation cannot achieve economic development without having achieved economic growth. Thus, economic growth is a subset of economic development as economic development is not purely an economic phenomenon. According to Tejvan (2011), in economics, Economic growth is an increase in real GDP which means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. In the long run, economic growth is determined by factors which influence the growth of Long Run Aggregate Supply (LRAS) (the PPF of the economy). If there is no increase in LRAS, then a rise in Aggregate Demand will just be inflationary (Tejvan, 2011).

Development has to do with and improving human welfare which essentially involve increasing the amount of goods and service available to people. The more the output produced the more the wealth and benefit. Development is therefore basically about increasing the volume of business turnover, i.e. the volume of production for sale (Satope & Akanbi, 2014). In various countries, the past few decades have witnessed a revival of interest in the development of small and medium scale enterprises (SMEs). The importance of these enterprises in the development and growth of various economies has been acknowledged by various scholars (Ming-Wen, 2010; Afolabi, 2013). SMEs have aptly been referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country” (Anthony and Arthur, 2008).They represent a veritable avenue for the attainment of national macroeconomic objectives such as employment generation, increased growth and poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology (Adebiyi, 2004).The Small and medium scale enterprises improve regional and sectorial economic balance through industrial dispersal across sectors and in various locations and generally promote effective resource utilization considered critical to engineering economic development and growth (Mukole, 2010).

1.2     Statement of the Problem

Over the past few years, there has been an impressive increase in the number and volume of Nigerian government programs that seek to encourage the unemployed, the young, welfare recipients and disadvantaged groups of the population to set up their own small business. Government also established several micro lending institutions to give credit and loans to SMEs. Such micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), National Economic Reconstruction Fund (NERFUND), the People’s Bank of Nigeria (PBN), the Community Banks (CB), and the Nigerian Export and Import Bank (NEXIM). It was also envisioned that SMEs in the country would contribute about 34% (gross value of manufacturing to GDP ratio) to the national product and generate 60-70% employment with sustainable yearly growth (Egbabor, 2004).

Issues regarding the impact of small and medium scale enterprises on economic growth and development have received increased empirical attention in the literature (Anthony& Arthur, 2008; Bamidele, 2012; Afolabi, 2013).However, there is scanty work of this type in Nigeria, especially, in the area of evaluating the contribution of SMES on economic development. Most of the earlier studies in this area in Nigeria did not give attention to the properties of time series data used in their studies to evaluate the long run relationship. This, has, however, give little reliability to these studies. Also, Very few studies attempt to find the link between investment in SMEs and economic development. Hence, this study intend to find out the contribution of SMEs on economic development.

1.3 Purpose of the Study

The main purpose of this study is to investigate the contribution of small and medium scale enterprises on the economic development of Nigeria.

The specific objectives are:

1. To find the long run relationship between SMEs and economic development

2. To find out the relationship between investment in SMEs and economic development of Nigeria.

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