CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The role of Small and Medium Enterprises
(SMEs) in the national economy cannot be underestimated as they play important
role in the global economy (Taiwo, Ayodeji & Yusuf, 2015). SMEs are key
players in the economy and the wider eco-system of firms. Enabling them to
adopt and thrive in a more open environment and participate more actively in
the digital transformation for essential boosting of economic growth and
delivering a more inclusive globalisation (Organisation for Economic
Co-operation and Development, 2017). However, in the developed economy
particularly the OECD countries, SMEs are the predominant form of enterprise,
accounting for approximately 99% of all firms. They provide the main source of
employment, accounting for about 70% of jobs on average, and are major
contributors to value creation, generating between 50% and 60% of value added
on average (OECD, 2016). In emerging economies, SMEs contribute up to 45% of
total employment and 33% of GDP. SMEs contribute more than half of employment
and GDP in most countries irrespective of income levels when taking the
contribution of businesses into account (International Finance Corporation
2010).
Furthermore, according to Ruchkina,
Melnichuk, Frumina and Mentel, (2017), SMEs constitute an important part in
economic development of any given country and contribute considerably to
regional economic development by creating new jobs, providing investment
opportunities and forming the economic capital and potential required for
sustainable economic growth. 2 In developing economy such as Nigeria, SMEs are
widely acknowledged as the key engine of economic development (Small and Medium
Development Agency of Nigeria, 2013). Because of this realization, a central
issue dominating policy debates around the world and Africa has been to induce
economic growth through the growth of SMEs. Most people in developing countries
must support themselves and their families (Ball, Geringer, Minor& McNett
2010). Thus, understanding economic growth is essential to understand the
economic challenges facing a country and how resources should be managed to
maintain sustainable development at regional, national and international levels
(Wiik, 2017). The contribution of the SMEs sector to the Nigerian economy is
essential for the accomplishment of the broader development objectives such as
poverty relief, spreading of employment opportunities and increasing indigenous
ownership of resources in the economy (Chidoko, Makuyana, Matungamire&
Bemani 2011). Furthermore, SMEs facilitates the growth and development of human
and capital resources towards general economic development and the rural sector
in particular (Chinweuba & Sunday, 2015). Small and Medium Scale
Enterprises (SMEs) contribute about half of Nigerian GDP and accounts for over
25 per cent of employment in the country (Small and Medium Development Agency
of Nigeria, 2013). There are 17 million SMEs in Nigeria, employing 60 million
persons and contributes about 48 per cent to the nation’s Gross Domestic
Product in nominal terms (Small and Medium Development Agency of Nigeria,
2013). This sector is responsible for most of the advances in new products and
process and provides most of the employment opportunities, as a central
indicator of the overall operation of an economic system (Enterprise Baseline
Survey 2012).
There are various definitions as to what
constitutes SMEs. Small and Medium Development Agency of Nigeria (SMEDAN)
definition adopts a classification based on dual standards, employment and
assets (excluding land and buildings). Small Enterprises are those enterprises
whose total assets (excluding land and building) are above Five Million Naira
but not exceeding Fifty Million Naira with a total workforce of above ten, but
not exceeding forty-nine employees. Medium Enterprises are those enterprises
with total assets (excluding land and building) are above Fifty Million Naira,
but not exceeding Five Hundred Million Naira with a total work force of between
50 and 199 employees. For this study, SMEDAN definition of SMEs was adopted.
SMEs is regarded as enterprises whose total assets (excluding land and
building) are above Five Million Naira, but not exceeding Five Hundred Million
Naira, with a total work force of between 10 and 199 employees. However, SMEs
play a significant role to the growth and development of a country. Baloyi
(2010) opined that despite the existence of SMEs, their performance has become
a thing of concern as SMEs in the country still continue to weaken (not all
SMEs are experiencing growth).Douglas, Micah and Tom (2014) opined that 90% of
the business startups do not operate beyond the third anniversary due to lack
of environmental factors. More so, there are other SMEs that have stagnated at
the survivalist stage which may be due to poor performance (Bidzakin, 2009).
Performance is the ability of an organization to achieve objectives such as
high profit, quality product; large market share, good financial outcomes and
survival at pre-determined time using relevant strategy for action. Thus,
performance can also be employed to consider how an organization is performing
in terms of market share, volume of products, customer’s demand, loyalty and
investment.(Obiwuru, Okwu, Akpa and Nwankwere, 2011). Business enterprise
performance according to Oghojafor, Olamitunji, and Sulaimon (2011) is how a
manager effectively and efficiently utilizes the organisation’s resources so as
to achieve the organisational goals and satisfy the stakeholders. However,
Neringa and Justina 4 (2014) performance of enterprise as service quality that
denotes the discrepancy among customer’s anticipations and opinions about
quality of services provided. Furthermore, enterprise performance means how the
growth potential exhibited by the SMEs contributed substantially to job
creation, thereby improving the economic status of the business enterprise as
opine by (Adesanya, 2014). Performance does not take place in a vacuum but,
within certain environment which has challenges and opportunities (Walter,
Clynes, Tang, Marmostein, Mellor, & Berger, 2008). Environmental forces
create challenges and opportunities for the organization (Pearce &
Robinson, 2007). Nevertheless, managers/owners must respond and adjust to
alterations in their surroundings so as to be able to recognize the challenges
and opportunity that lies ahead of them in their business environment in order
to perform efficiently. Business environment is marked by different dynamic
features such as global competition, information technology, quality service
revolution and corporate social responsibility which compel managers to rethink
and reshape their approach to various operational responsibilities. Due to this
paradigm switch, new firms are emerging that are more responsive to their
external environment (Luthans, 2007). Furthermore, Ibidunni and Ogundele (2013)
classified the nature of the business environment as stable, dynamic and
unstable and this habitually assists a business enterprise in selecting
suitable strategies. Pearce and Robinson (2011), an enterprise external
environment was first recognized by open systems theorists who observed that
organizations operate not as self-contained isolated units but in continuous
and inevitable interaction with the large system surrounding them and within
which they exist.
1.2 Statement of the Problem
Several of the existing literatures such
as Samad (2007), Saleh and Ndubisi (2006), Teoh and Chong (2008) identified
various problems facing SMEs in a globalized environment such as, difficulty in
facing recession, low productivity, lack of managerial capabilities, lack of
financing, environmental factors, difficulty in accessing management among
others. These problems cause the small and medium enterprises not to perform
effectively. Environmental downturn has been a constant challenge facing SMEs
since the year 2007 (Harvie, 2004). The world economy experienced several
unfavourable environments, which lead to low performance of SMEs. Most nations
are currently showing a diminishing environmental growth and increasing cost of
production, which results to collapse of these business firms (Harvie, 2004).
However, SMEs suffers from a number of challenges leading to poor business
operation. According to World Economic Forum (2017) survey, SMEs rank 127 out
of 138 countries in Global Competitiveness Index and 169 out of 190 countries
in doing Business Index (World Bank, 2017). The avoidance of a future crisis
could, therefore, depend upon developing a favourable environment that will
make these SMEs compete in both domestic and external markets (Harvie, 2004).
However, due to the differences in
economic condition, socio-cultural and technological advancement of the global
economies, it may lead to differences in the findings. Therefore, there is need
to look at the environmental factors that impact SMEs performance in developing
countries such as Nigeria (Li & Liu, 2014). Stagnated growth of SMEs in
Nigeria as a developing country is an issue of great concern (Omolomo, Odunayo
and Tobora, 2014). This is because its persistence may serve as a stumbling
block to any effort by the government to eradicate poverty and unemployment
because of its impact on income distribution and employment generation.
However, agreeing with the report by Small and Medium Enterprise Development
Agency of Nigeria SMEDAN (2013), 95% of SMEs in Nigeria still operate as
micro businesses and only around five per cent of start-up companies survive
and develop to maturity SMEDAN (2008). Thus, Omolomo, Odunayo and Tobora (2014)
indicated that irrespective of country, more than 50% of SMEs collapse within
their first five years and about 25% go bankrupt or fold up in Nigeria due to
poor management and unfavourable environment which result in poor performance
and eventually total collapse.
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