Environmental Factors Affecting SMEs in Nigeria

The Nigerian economy has since the late 1980s been faced with challenges of reintegration into the global economy as a result of corrupt policy maker and self-centred leaders. Some researcher have suggested that for Nigeria to be among the best economies i.e. To achieve the objective of economic growth through competitiveness, employment generation and income redistribution, small businesses have to be actively promoted. According to Saunsi (2003), he stated that SMEs has played and will continue to play significant roles in the growth, development and industrialization of many economies of the world.

Data from Federal Office of Statistics reveal that about 97 per cent of the entire enterprises in the country are SMEs and they employ an average of 50 percent of the working population as well as contributing up to 50 per cent to the countries industrial output. It was suggested that SMEs in Nigeria are the catalysts of economic growth and development, as well as the backbone of the nation (Ariyo 1999; Ihua 2005). However, SMEs in Nigeria have performed below expectation due to a combination of internal and external factors.

With the migration of Nigerian to neighbouring country Ghana where economic issues are less of concern as instigated researchers, economist and other stakeholders to ask question on the viability of small businesses in Nigeria. Dutton and Jackson (1987) state that the assumption underlying most organisational theory, research and practice is that the short-term effectiveness and long term survival of organisations are determined by the actions they take in response to their external environment. Put differently, Business as an open system in the society interacts with it environment, which must be favourable to the business for achievement of set objectives. The entrepreneur must plan, take decisions and execute them within the limits imposed by the environment. In other words, the environment is a strong determinant of the success or failure of an organization. Perhaps this was what motivated Chinonye (2004) to stress that the environment constitutes one of the factors that determines the choice between salaried employment and starting one’s own business.

As a sign of seriousness on the part of government to promote the small and medium enterprise (SME) activities, the past administration led by Olusegun Obasanjo made several efforts directed to, developing and promoting the performance of this sector introduce program and establish institutions. These include the National Economic Empowerment and Development Strategy (NEEDS) with an agenda for SMEs included the National Poverty Eradication Program (NAPEP), the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) an institution charged with the responsibility of providing support and promotion of SMEs to reach a greater variety of enterprises, particularly those located in rural areas. In addition, the creation of microfinance banks to aid easy accessibility of funds needed by various SMEs.

SMEs play a significant role in the business system of both developed and developing economies. This research seeks to look into external factors that pose challenges to SME entrepreneurs in terms of running their businesses to ensure viability. With the recent economic downturn, this has created serious challenges to SMEs to sustain their survival. With the closure of some businesses, this has further increased in level of unemployment, and unfavourable economic policies in Nigeria, SME faces uncertain future. Due to the size of country, this research will be focusing on Lagos state been the commercial nerve centre of Nigeria.

The essence of this research work is to analyse environmental factors affecting small and medium scale enterprises in Nigeria, taking Lagos state as our case study. His business environment, which may be economic, includes the general state of the economy, political which includes having a fair knowledge of the political situation and the extent to which it might affect the business, technological which involves the total knowledge we have about the way we do things, and social which includes population, birth rate, life style etc.

STATEMENT OF THE PROBLEM

Small businesses in Nigeria are operating in a rapidly changing environment with different issues impacting on their long term survival. Thus the questions these project hopes to answer are:

• What are the external factors (environment) affecting the survival of small businesses.
• How can small business protect themselves from the effect of rapidly changing and unstable external factors environment?

OBJECTIVES OF THE STUDY

Against the background given above, this paper intends to:

• Identify the reasons for the formation of small business.
• Determine the external factors affecting the survival of small businesses.
• Make suggestions to small business on strategies to survive given unstable external environment and the government on how to create a conducive environment for small business.

METHODOLOGY

To achieve the set objectives for this study, a qualitative research methodology will be employed. Primary data will be used. It will be sourced through administering of questionnaires. A questionnaire will be developed for data collection purposes. The questionnaire will consist of questions pertaining to various external factors affecting the survival of small businesses. While secondary source, which include textbooks, Journals, articles and other relevant materials on the SMEs will also be used.

Literature review

This chapter deals on the relevant literatures in some selected areas. It is believed that this review will aid in explaining the core terms in the selected topic and the research aims with significant literature in the field. The chapter begins by looking into an overview of the varying definitions and concept of small business enterprises, characteristics, and also discusses some of the issues involved in the problems facing small business enterprises. It will further discuss the different motives of setting up business, and use PEST anaylsis model to explain the external environment. ……… a look at the strategies that could be use by the government in supporting small business enterprises and concluded on the economic growth and development theory.

In recent times, significant attention has been focused on small and medium scale enterprises in developing countries because of their potential for diversification and expansion of industrial production, as well as the role they play in the attainment of the objectives of development. According to Navidi and Schmitz (1994) these roles are (a) small scale enterprises utilize large labour surplus that exist in developing economies; (b) they yield quick returns; given their capital requirements, they facilitate the exploitation, mobilization and utilization of local capital resources. Thus, in any economy where capital and institutional savings as well as management and technical skills are inadequate, the contribution of these small firms cannot be over emphasized.

It is necessary at the beginning to state what essentially constitutes small and medium scale enterprises. Often, there is no single criterion for classifying a business unit as a small, medium or large enterprise. These terms small, medium and large are relative and they differ from industry to industry and from country to country. There is no unique universally accepted definition of these terms. It is important to note that definitions change over time and depends to a large extent the country’s level of development.

STRUCTURE AND CHARACTERISTICS OF THE NIGERIAN SMEs

In Nigeria, there are different definitions of SMEs according to Osuagwu (2001) the national council on industry classifies small and medium scale enterprise in Nigeria with regards to employed labour force and capital investment. Various scholars, institutions, entrepreneurs etc. have given different definitions. Griffin and Ebert (1996), sees small and medium scale enterprise as a business owned and managed independently and does not dominate its relevant market segment of interest. The centre for industrial research and development (CIRD) at the Obafemi Awolowo University, defines small and medium scale enterprise as those enterprises with total assets not exceeding two hundred and fifty thousand Naira (N250,000) and employing full time workers not exceeding fifty (50) people.

The central bank of Nigeria (CBN) defined SMES as a business having a turnover not exceeding 500,000 Naira. In addition, the CAMA of Nigeria of 1990 defines a small business as one with annual turnover of not more than two million naira and a net value of not more than one million naira. However the definition of SMES varies from industry to industry and country to country. There are no generally accepted definitions of SMEs.

It has being argued extensively that Small and Medium Enterprises (SMEs) are important because it does contribute meaningfully to economic development, in form of output expansion, employment generation, income redistribution, promotion of indigenous entrepreneurship and production of primary goods to strengthen industrial linkages.

The small and medium scale sector is responsible for about 70 per cent of the total industrial employment in Nigeria and between 10-15 per cent of the total manufacturing output. The agricultural sector which comprises mainly of SMEs has promoted indigenous technology and increased utilization of local raw materials. They are the strongest promise we have for industrial growth (CBN). SMES play a vital role in both rural and urban economies of Nigeria and they abound in all sectors of the economy. According to Adegbite (1997), in a study conducted by the international finance cooperation estimated 125,000 in 1983. The number has been estimated to above 200,000 in 1997 however this figure excludes numerous unregistered businesses that are classified as the informal sector of the economy; there are indicators that SMES account for about 70% of industrial employment and 10% to 15% of manufacturing output (CBN 2000). It is said that less than 5 per cent of SMEs survive beyond their first year of existence. source

Over the year government has pursued policies that would provide favourable conditions for small business including trade liberalization and some incentives therefore making the environment friendly to entrepreneurs. Some International agencies and world organizations have invested and have been promoting the growth of SMEs in Nigeria through funding and capacity-building initiatives/program, and have continued to advocate for better support structures for operators in the small and medium scale sector. Onugu (2005)

Some of the scheme embarked upon by government includes; the introduction of fiscal incentive .i.e. granting small business tax holiday for the first six years of it operation. Also the Central Bank of Nigeria set credit guidelines/rules requiring commercial bank to set aside certain percentage of their funds as loan to small businesses. Several developmental financial institutions and programs were also established to aid small businesses, this include the Nigerian Bank of Commerce and Industry (NCBI), the Nigerian Industrial Development Bank (NIDB), and the World Bank SME I and SME II initiatives. There were also export incentives from the Nigerian Export-Import Bank (NEXIM) to encourage export loan facilities to small businesses as well as export duty exemptions administered by the Nigeria Export Promotion Council (NEPC). Other small business incentive program includes various training (personnel), repair and maintenance of machines, and extension services. Both local and state government have in place various support programs for Small-business Okpara (2007). With various programs and initiatives in place, the effect is yet to be felt by operator of SMEs. Put differently the failure rate of businesses continues to increase and the effectiveness of the programs remains unclear. With the increase in the failure rate of SMEs the future of this sector looks bleak.

In Nigeria, there has been no concentrated effort to encourage and support new businesses”. Others have argued that the gloom of SMEs in Nigeria is the lack of long-term loans since most loans in the Nigerian market are short-term while what SMEs require to grow and become really successful is long-term capital. The absence of venture capital financing in Nigeria has also intensifies the situation as venture capital provides long-term capital, which allows a small business to grow, as is the case in Ghana and some developed economies.

Other problems, which frustrate SMEs in Nigeria and make some of them to either die within their first two years of existence or perform below standard even after surviving the early years. The key ones include inadequate infrastructural facilities (road water electricity etc.), insecurity of lives and property, inconsistent monetary, fiscal and industrial policies, limited access to markets, multiple taxation and levies, lack of modern technology for processing and preserving products, policy reversals, capacity limitations, data inadequacies, harsh operating environment, fragile ownership base, fragile capital base.

While some of the challenges that SMEs face are induced by the operating environment (government policies, globalisation effects, financial institutions, local government policies, attitude to work etc.), other challenges are driven by the inherent characteristics of the SMEs themselves.

To understand the topic further I will be considering the various reasons for starting up a business. Stoke (2009) found that reasons for starting a business as accounted for the failure of some business. For instance during the dot.com boom so many business sprang up because some many entrepreneur saw it as a way to get rich quickly therefore going into the business without adequate preparation and this saw many of them going out of business.

THE MOTIVATION FOR SETTING UP A BUSINESS

With the increase in new small business only a tiny minority have being recorded to have experience substantial growth or grow to a large enterprise. Many cease to exist only few years usually 1-2 years into trading this may be as a result of fading of heroic visions or inappropriate “home-work”, some of whom quickly return to other types of employment or sadly unemployed. The decision to start a business is always a courageous one regardless of the type or business or circumstances surrounding the decision. There are many reasons for starting up a business, Stokes (2010) identified this reasons under the term pull and push influences. An individual can either be pushed into self-employment because there was no other alternative or one can be pulled into self-employment to pursue a business opportunity.

According to Grilo et la (2006) pull factors refer to the expectation of being better off as an entrepreneur (i.e., attracted to self-employment with the expectation that it will provide greater (im)material benefits), and that push factors is the conflict between one’s current and one’s desired occupational status (i.e., associated with some level of dissatisfaction). Push and pull effects are comparable to necessity-based entrepreneurship and opportunity-based entrepreneurship, respectively. Opportunity entrepreneurs are influenced by pull factors to start a business, while necessity entrepreneurs are affected by push factors.

PULL FACTORS

Desire for independence: this when one desire to be boss of oneself and not wanting to be pushed or under someone. This reason is believed to be common among female entrepreneur.

Desire to be exploit opportunity: the identification of a gap or opportunity in the market through experience or observation is a common reason for starting a new business. The desire to explore this opportunity is a positive motive and can be done through applying specialist knowledge or developing a new product, or through hiring the appropriate technology.

Turning a hobby or previous work experience into business: according to research may founders establish businesses in the area in which they have prior knowledge or experience, example of Bill Gate and other great entrepreneurs.

Financial incentives: the probability of having access to large fund and earn large salary.

PUSH FACTORS

Redundancy: this is considered a push factor lately with the advent of the recession which started with the housing crisis in 2008 where there has being a lot of redundancies across the world. Men and women are faced with no job and on income and this have made people set up their own business using the generous handshake accompanied with redundancies in some cases.

Unemployment: job insecurity and unemployment varies in significance by region, and by prevailing economic climate. According to scott el al (1986) a study of 25 per cent business founders in the late 1970s were pushed, while later research showed a figure of 50 per cent when unemployment nationally are much higher.(Stoke et al 2010).

Disagreement with previous employer: uncomfortable relationships at work has influence people to start their own small business

According to survey it has shown that small business owner that are pulled rather than pushed have higher chances of succeeding. Put differently, a positive motivation (pull factor) to start a business will in the long run have a positive effect on the performance of the business, on the other hand those who are self-employed based on the push factors are less likely to be successful because they are being pushed due to circumstances they find themselves in starting a business as a last resort, most time they are not ready for the challenges associated with small business.

NATURE AND ROLE OF THE BUSINESS ENVIRONMENT

According to Gautam (2005) Environment refers to all internal and external factors that influence the functioning of a business. A business runs in an open system as many other open systems. A business uses various resources as inputs from and supplies outputs to the environment. Business environment is set of all affecting factors to the business. Thus, it creates threats to a business and at the same time brings new opportunities as well. Businessmen should be able of avoiding the threats and exploiting the every opportunity.

To further explore the factors that influence the small businesses: I will be taking a cue from the previous researches where various researchers who have identified numerous factor affecting small business. Stoke (2010) identified some factors which he termed “a matter of life and death of small firms” in his book. These factors can be generally divided two factors external and internal factors.

The internal factor: revolves around the characteristics and behaviour of the entrepreneur. The external factors: are largely beyond the control of the entrepreneur.

This environment is classified as follows;

• Economic
• Technological
• Socio – cultural
• Political/Legal

Researchers (such as Stokes, 2010) are of the opinion that, the combination of less controllable (external factors) together with controllable (internal factors) arising from personal attributes, management competencies and behaviour of entrepreneur are some off which influence the start up or survival of small businesses.

Over the years researchers identified internal factors as the major cause of failure of small business in developing countries. Kazooba (2006) revealed that poor recordkeeping and lack of basic business management experience and skill was the major contributor. He further identified inadequate managerial skills, inexperience in the field of business, lack of planning, lack of technical knowledge and lack of market research. (Okpara, 2007). Also many literatures have supported this notion. However, according to Barclays bank business bulletin (2000), they were of the opinion that the high failure of small business is as a result of the economic cycle or the external environment of a given country. They accounted in 2000 which was a year with relative economic prosperity there was high rate of small business survival. Hall (1995) established that a business has a higher chance to survive given a good business environment. Adelaja (2006) identified multiple taxes, new law, trade polies, demographic changes, changing government policies are some of operating challenges managers are faced with. For the purpose of this study I will be focusing on the external factors.

There has being only little interest on the relationship of macroeconomic conditions on the performance and survival of SMEs. Gordon (1988) recognises that macroeconomic conditions can affect the survival of any business. He was of the opinion that tight monetary policy and an increase in interest rate can sharply change the cost of borrowing for businesses and hence destabilize the sector. In the work of wadhwani (1986) he investigated that changes in the level of inflation can affect the volatility of cash flow and reduces the firm’s ability to pay interests on its debts in the case of high inflation, thus threatening the viability of many business. Liedholm and mead (1998) concluded that a general economic fluctuation is directly related to the business survival/performance. Gonzalez (2002) examines the effect of economic control on firm growth, and finds that the economic development and efficient financial system are positively correlated with firm growth. He also looks at the relationship between firm growth and such factors as bank control, corporate law, bankruptcy law, accounting standards and fair market competition, and concludes that a highly effective legal environment not only can protect investors’ interests and help growing firms raise equity capital from the market, but also can influence the financial market development, which, in turn, facilitate firm growth.

The studies on SMEs in developing countries have identified various factors that are related to SME survival and growth. Legal system, institutions and financing are the most claimed factors that have impacts upon the survival and growth of firms. Thorsten et al. (2002) in a survey study of 54 countries, find that firm growth is determined by legal institutions, corruption and financing, and small firms are affected most. Faultless legal system facilitates firm growth, while corruption and lack of finance adversely affects firm survival and growth. (Liu and Pang 2003) Their study suggests that countries, especially the developing countries where these problems are more prevalent, need to improve their financing environment and reform legal system as well as take proper measures to reduce corruptions to minimum to create an environment suitable for small businesses. Liedholm and Mead (1998) examine eight African countries and confirm that firm age and firm size are some of the important variables in analysing the enterprise survival. Their work further show macroeconomic factors such as location, composition of activities, labour force and national income make up other important determinants of firm survival and growth.

From the various reviews various factors have accounted for the low survival of small businesses in developing countries, either factor cannot neglected by entrepreneur as the understand and good knowledge of two will require the survival of a business. Given the uncontrollable nature of external factor managers and entrepreneurs can best anticipate given the various indicators so as to change the internal factors to fit the business environment or guide the way in which the business is operated.

The SLEPT analysis model

The SLEPT analysis model is similar to the PEST analysis but other factors deem relevant were included to help in this study. This analysis is useful in understanding the market growth or decline also the position, potential and direction of a business. SPLET is an acronym for Social, Legal, Economic, Political, Technological factors which are factors that directly or indirectly influence the operations of a business in a given environment. The SLEPT analysis helps to understand the environment in which a business operates and helps in developing a survival/growth strategy fit for the environment. The SLEPT analysis is similar to the SWOT and porter five forces model as they are often used in reviewing and planning strategy or position, direction of a business and marketing position. However, SLEPT analysis essentially considers external factors, while the SWOT analysis is based on partly internal and external factors.

Every Business is generally affected by the economic, social, legal, technological and political factors. These factors collectively form the business environment. Business environment includes those forces, factors and institutions that are beyond the control of individual business organisations and management but affect the business enterprise. While some factors affect businesses directly others have indirect effect. The various factors of SLEPT model will be examined.

THE EXTERNAL BUSINESS ENVIRONMENT

According to………… say the external environment is the pattern of all the external conditions that influences and relates to development. The factors include:

1) TECHNOLOGICAL ENVIRONMENT: These are related to knowledge applied in the production process, innovations, machines and materials used for producing goods and services. Technology is the way things are done, technological change influences the way an organization carries out its operations.

Technology improves customer service and demand. This is especially true of modern communication technology, because online databases enable vast quantities of information to be shared easily and quickly between businesses and their customers. Technology positively impacts the production and distribution of goods and services, therefore improving the speed and efficiency with which goods and services are accessed or delivered to the consumers, also help minimise cost. (Olabisi Ajayi, 2000). Berisha-Namani is opinion that technology is having a significant impact on the operation of SMEs and it is claimed to be essential for the survival and growth of economies in general.

2) SOCIAL ENVIRONMENT: The social environment consists of factors related to human relationships on business. The factors relevant in the social environment includes; demographic characteristics such as population density and distribution, age group etc, family structure such as changes in family structure, attitude of the family etc, social concerns, social attitudes etc.

Thandeka(2008) “Businesses needs to take a pro-active approach and be ahead of these changes, by anticipating rather than hurriedly making alterations to products and processes in a reactive way. Changes in social trends can impact on the demand for a firm’s products and the availability and willingness of individuals to work.”

3) ECONOMIC ENVIRONMENT: These are some of the small business enterprise that originates from the nature and direction of the production, distribution and consumption of goods and services in the area where the business operates. It covers the price level, productivity level; interest rate, employment rate, real income level etc. The amount saved and invested in an economy will have an effect on the spending pattern of such economy.

4) LEGAL/POLITICAL ENVIRONMENT: The political system covers the forms of institutions and the structure in which a nation is governed. The political environment changes in response to new social pressure such as from military to democracy. (Olabisi Ajayi (2000), political/legal environment are those factors which results from legal and governing issues in which the business enterprises may want to operate (Osuagwu, 2001), restrictions are imposed on enterprise through fair trade decisions, tax programme, minimum wage level etc.

Measurement of the model

Given the several closely related identified challenges and problems of the SMEs chooses to subdivide the STEPL model into nine major problem areas such that most identified or expressed challenges noted by various author and researcher would fit into one of the nine headings. And this will serve as the measure to the STEPL model in Nigeria. Apart from ease of analysis, this approach would enhance formulation of direct question which would facilitate quick responses from the respondents.

The nine key business environment problem areas identified from various works include the following:

1. Infrastructure
2. Inconsistent Government Policies & Bureaucracy
3. Multiplicity of Taxes and Levies
4. Unfair Competition and dumping
5. Lack of Access to Modern Technology
6. Unemployment
7. Inflation
8. Exchange rate
9. Interest rate

Suggestion

It should be noted that the external forces cannot be controlled however, business can anticipate situation using various indicators to make informed decisions which might give such a firm competitive advantage over other. This is process called environmental scanning. Environment scanning is the process that seeks information about events and relationships in a small business enterprise outside business environment. The process of environmental scanning considers and attempts to provide answers the some questions below:

What is the current state of affairs of the firm?

What are the most important events affecting the business?

What are the trends that might sharpen the business?

What significant event can occur in the business environment?

For example: for businesses involve in environmental scanning when there is further change in social indicator (e.g there is low birth rate or high population of those ages above 50) such firm might concentrate on the future demand of the old. Futher more in the case of changes in economic indicators such as increase in prices, unstable exchange rate, firms can seek for alternative raw material so as to reduce the effect of high price on supply or hedges

On the part of government in order to turn around the dwindling fortunes of the micro enterprises sector, there is a need for a coherent policy package for promoting micro enterprises through the following measures:

To encourage the creation of industrial estates and clusters of businesses so that MNCs could foster the growth of SMEs. (mutual relationship)

Undertake studies aimed at attracting foreign investors, scanning, and overseas markets.

Strengthen the Bank of Industry and other finance institutions such as Nigeria Exports and Imports Bank (NEXIM) etc., to effectively provide a window of special funding/concessional loans and credit guarantee schemes.

Strengthen the legal and institutional framework for the operation of micro-finance institutions including tax incentives for micro enterprises, and special incentives targeted at investors who would specialize in exporting to foreign markets, and review and implement a codified tax and incentives structure reform that support large businesses to foster growth of micro enterprises in their value and supply chain. Provide targeted tax deductibility incentive for science, technology, research and development spending.

Design, develop and implement a fast-track formal export oriented products.