The Socio-Political Impact of SMEs in Lagos State

A PhD. Thesis on

THE SOCIO-POLITICAL IMPACT OF SMEs IN LAGOS STATE

November, 2018

 TABLE OF CONTENTS

ABSTRACT

Governments around the globe encourage entrepreneurial development as the major route to economic growth. In Nigeria, the words “beyond oil” have been used by political leaders, policymakers and scholars to emphasize the need for a diversified and more competitive economy. On this premise, the impact of Small and Medium-scale Enterprises (SMEs) on Nigeria’s socio-political structures is evident in milestones achieved by the Lagos State government through huge investments on infrastructure, industrialization and human capital development. A sample population of 150 respondents was selected from traders, artisans, factory workers and SME operators in the nation’s business hub. Using descriptive statistics, normality test of hypotheses and multiple regression models, this study examines the current situation and performance of SMEs in Lagos, Nigeria. Research method is quantitative in nature and collated data (primary and secondary) is evaluated using a mix of percentages, pie charts, tables and mean scores.  Findings show that Nigerian SMEs face managerial incompetency, inadequate infrastructure and poor financing as the major challenges. Other results highlight the relationship between SME development and entrepreneurs’ age, marital status, gender, education, access to finance, political participation and standard of living. The study, however, concludes that revitalizing the SME sector through an integrated approach will boost Nigeria’s economic recovery and diversification strategies.

CHAPTER ONE

INTRODUCTION

Nigeria is among the major Oil Producing and Export Countries (OPEC). It’s a shame, however, that Africa’s most populous country is still one of the world’s poorest countries with less-productive activities in the SME sector even though SMEs, where maximally utilized, have been recognized as a reliable tool for economic development because they infuse innovation, dynamism, productivity, sustainability and relevance in world economies (Olufowobi., 2018). Governmental support for entrepreneurs in small and medium-scale businesses generates employment, creates equitable wealth, strengthens industrial linkages through production of primary goods, inspires loyalty to the government, increases citizens’ participation in governance, and broadens people’s understanding of global business trends. In Nigeria, SMEs offer nearly 70% of industrial employment and, according to Enelamah (2018), provides employment to about 80% of Nigeria’s total workforce.

Shailesh et al (2013) described entrepreneurship as a “dynamic process” through which businesspersons create, sustain and continuously improve earnings. Considering the agriculture-friendly, capital-saving and labour-intensive nature of SMEs, the Federal Government of Nigeria (FG) considers SMEs as a key to economic growth despite the sector’s unimpressive overall performance in recent years (Acha., 2009). To improve lives in line with President Muhammadu Buhari’s Vision2020 agenda, the Lagos State government has encouraged advocacy on the importance of SMEs and shown commitment by formulating policies projected for quality delivery in the industrial and manufacturing sub-sectors. These strategic measures have attracted foreign investors and enhanced capacity utilization needed for industrialization (Cook & Nixson., 2000).

This study therefore delves into the socio-political performance and potentials of SMEs in Lagos State, with focus on proffering effective solutions to the identified problems.

1.1 BACKGROUND OF THE STUDY

Established in 2003, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) aimed at restructuring the Micro, Small and Medium Enterprises (MSMEs) sector for sustainable growth. Purposes for its formation include the attainment of national economic development objectives (Ayyagari et al., 2003) in line with previous economic transformation policies such as the Structural Adjustment Programme (SAP) of 1985. Nigeria has since jiggled between capital-intensive projects that support large-scale industrialization and others such as SMEs, which are labour-intensive but more responsive in identifying and harnessing domestic linkages for quick, sustainable growth, self-reliant growth, and progression of non-oil exports (Lalkaka., 1997).

Figure 1: Economic Development Policies in Nigeria

Source: SMEDAN (2010)

In its monetary policy statement released in 1998, the Central Bank of Nigeria (CBN) described SMEs in general commerce as businesses with less than 300 employees, including total assets below ₦500,000 and/or annual revenue not above ₦100 million (Oyelaran-Oyeyinka., 2006). Business activities in the sector include: poultry farming, trading, food production and supplies, laundry services, food beverage production, fashion designing, restaurant services, creche/kindergarten education, including professional services such as law, accountancy etc (Fabayo., 1989). Developmental efforts from the World Bank and three tiers of government (Federal, State and Local governments), National Economic Reconstruction Fund (NERFUND), Nigeria Export & Import Bank (NEXIM), Peoples Bank of Nigeria (PBN), Bank of Industry (BOI) and community/microfinance banks, through budgetary allocations to SME Loan Schemes, have provided financial assistance to business owners who previously depended on private funds or cash received from informal sources (Arriyo., 1999).

However, the failure of these formal credit schemes in addressing problems of SMEs in Nigeria indicates managerial incompetence, weak capital base and entrepreneurs’ low credit rating which makes the argument on poor performance a vicious circle (Ayyagari et al., 2003). Transforming the SME sector demands change and innovation strategies which aid policymakers in identifying internal and external factors in the economic, cultural and socio-political structures that either stimulate or impede growth. Secondly, entrepreneurs need governmental support on personal development, financial empowerment and the provision of a conducive business environment.

This study therefore aims at identifying the underlying factors hampering growth of SMEs in Nigeria and how strategic business ideas can relaunch the sector as a catalyst for economic growth.

1.2 STATEMENT OF THE PROBLEM

Dearth of accurate, verifiable information on the number of SMEs and employees working in the sector is responsible for an alleged distortion of facts on job creation, production of raw materials, export earnings, development indicators, and inherent potentials of SMEs. According to a 2010 survey conducted by the National Bureau of Statistics (NBS) and SMEDAN, there are about 32.5 million employees in nearly 17.3 million SMEs and significant improvements have been documented in the federal government’s efforts to stabilize the economy through effective macroeconomic policies, reduction of importation barriers, streamlining the taxation system and institutionalizing transparency in the nation’s customs system (Enelamah., 2018).

Nonetheless, lack of reliable data management systems are not the only challenges to SME growth in Nigeria. Oyelaran-Oyeyinka (2006) notes that SMEs in countries like Korea, Vietnam, India and Singapore, which are comparatively at the same level of development with Nigeria, have made better progress since the 1960s. This study therefore identified these as the major problems:

• Lack of commitment from FG in institutionalizing a solid SME sector.
• Poor infrastructure base.
• Poor credit environment.
• Inadequate technical/financial support.
• Low-level investments from individuals, corporate bodies and foreign creditors due to Nigeria’s unstable economic and political environments.

1.3 PURPOSE OF THE STUDY

This paper aims at evaluating the socio-political impact, problems and prospects of SMEs in Nigeria using Lagos State as a case study. The objectives are:

1. To identify the problems militating against SMEs’ performance as a catalyst to Nigeria’s economic growth and sustainable development objectives.
2. To thoroughly examine sources of the identified problems.
3. To analyse the current situation of SMEs in Nigeria.
4. To ascertain the socio-political impact and prospects of SMEs in Lagos State.
5. To proffer solutions through change and innovative models.

1.4 SIGNIFICANCE OF THE STUDY

Results of this analysis will be useful for the long-elusive transformation of the SME sector by:

• Presenting the Lagos State government with a clear understanding of how SMEs can be maximized as a socio-political change agent.
• Providing managers and policymakers with the most effective leadership and business management strategies needed to properly identify the strengths, weaknesses, opportunities and threats in the SME sector, for optimal development and functioning of human capital and material resources.
• Providing entrepreneurs with easy access to working capital and investment funds.
• Adding competitiveness to the sector and thereby attracting global investors.
• Increasing local production of goods and services for exports, with less reliance on imported products.
• Presenting an intellectual basis for further research on SMEs in Lagos State and 36 states of the federation.

1.5 RESEARCH QUESTIONS

SMEs have formidable potentials for exports, employment and economic growth, especially in Nigeria, where there are significant, unexploited opportunities spread across entertainment and leisure, agro-processing, fashion, biotechnology, telecom etc. Although the development of SMEs requires improved financial assistance, Benhabib and Spiegel (1994) noted that the problem is not in providing physical cash but in human capital investments. This is true, although domestic development of entrepreneurs with adequate technical know-how is costlier than what any country can spend to attract Foreign Direct Investment (FDI).

Based on these facts, the research question is: “How can innovative policies be recommended to the Lagos State government to solve SME challenges and maximize opportunities in local and global markets?”

Additionally, the sub-questions are as follows:

1. How has Nigerian SMEs performed in recent years and what are the potentials?
2. What are the socio-political impacts of SMEs in Lagos State?
3. How can strategic policy change enhance the performance and potentials of entrepreneurs in Lagos State?

1.6 SCOPE OF THE STUDY

The research investigates SME challenges and prospects using valid, verifiable and unbiased contributions from a total of 120 SME owners carefully selected from all Local Government Areas in Lagos State. The respondents were chosen based on the fact that:

1. They have a minimum of 5 years’ experience in the SME sector.
2. They own or manage a registered small and medium-scale enterprise.

1.7 RESEARCH METHODOLOGY

This study will focus on the overall performance of SMEs in Nigeria, including a comparative analysis with India, but narrowed down to Lagos State, where, through a mix of qualitative and quantitative methods, the researcher collates useful primary data from 150 survey participants who are resident in Lagos State. Other information collected from secondary sources include materials from public libraries, journals, academic books, print media and the Internet, which are expected to add relevance to the cache of knowledge required by the researcher to successfully complete this task.

1.8 HYPOTHESES

H01: There is a relationship between SMEs and poverty reduction in Lagos State.

H02: There is a relationship between SMES and politics in Lagos State.

H03: There is a relationship between SMEs and the standard of living in Lagos.

1.9 LIMITATIONS

Research processes are often challenged by human limitations such as ethics, moral, culture, tradition, language and socio-political barriers. Also, lack of reliable, comprehensive and easily assessible data records in Nigeria presents one of the major challenges to this study.

1.10 CONCLUSION

According to a 2017 survey conducted by the Economist Intelligence Unit (EUI), over 90% of businesses in Nigeria are categorized as SMEs which, with increased financial support and sustainable productivity, have the potentials for champion economic diversification strategies for industrialization and sectoral development. Unfortunately, an unstructured taxation system drains the nation of productive time. For example, approximately 956 hours are spent on filling tax returns in Lagos, compared to Africa’s overall average of 310. Findings from EIU also show that only 2% of adults had access to loans from MFIs. Further, 50% of Nigerians live without access to national grid electricity supplied by Enugu Electricity Distribution Company (EEDC). Although about 82% of residents access the internet through mobile phones on daily basis, mobile business transactions are slow and mostly impossible due to poor network coverages, especially in rural communities. These pitiable conditions are worsened by the incessant cases of terrorism in the North-East and militancy in the South-South (Green., 2017).

On this backdrop, SMEs in Nigeria experience low survival rate. Adeniji (2015) points out that most business outfits collapse within five years of existence whereas many others struggle to last between six and ten years. Only less than 10% of SMEs survive the highly-competitive market due to infrastructural inadequacies such as inaccessible roads and dysfunctional or inexistent water supply systems, including poor knowledge market trends, lack of differentiated products, ineffective business strategies and inexperience (Dӑnӑcicӑ., 2011).

For Nigerian SMEs to attain global competitiveness, there is need for collaborations, commitment and increased investments from the government, entrepreneurs, investors (local and foreign) and all stakeholders.