Impact of small scale businesses on nigerian economy?

Answer 1

Small & Medium Scale Enterprises and Funding in Nigeria (Posted 25th Aug, 2003)

NIGERIAN ECONOMY DEPENDS ON THE RECOGNITION OF SMEs

Historical facts show that prior to the late 19th century, cottage industries, mostly small and medium scale businesses controlled the economy of Europe. The industrial revolution changed the status quo and introduced mass production. The twin oil shocks during the 1970s undermined the mass production model, which triggered an unexpected reappraisal of the role and importance of small and medium sized enterprises in the global economy. Findings by economists over the years show that small firms and entrepreneurships play a much more important role in economic growth and development.

Importance of SMEs

Many economies, developed and developing have come to realise the value of small businesses. They are seen to be characterised by dynamism, witty innovations, efficiency, and their small size allows for faster decision-making process. Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME's. Developments in small and medium enterprise are a sin quo non for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology.

Giving insight into the SME phenomenon, a paper delivered at a forum by Mallam Mohammed Hayatu Deen, titled "Stakeholders Roles and the Development Benefits in a Virile Small Enterprise Sector", pointed out that small business operations are propelled by the dynamic theory, which makes them efficient and prone to constant change. He gave a comparative statistic using 9 developed countries on how SMEs create employment, increase job growth, induce change, innovation and competition.

Benefits of the SME

The benefits of SME's to any economy are easily noticeable, they include: contribution to the economy in terms of output of goods and services; creation of jobs at relatively low capital cost, especially in the fast growing service sector; provide a vehicle for reducing income disparities; develop a pool of skilled and semi-skilled workers as a basis for the future industrial expansion; improve forward and backward linkages between economically, socially and geographically diverse sectors of the economy; provide opportunities for developing and adapting appropriate technological approaches; offer an excellent breeding ground for entrepreneurial and managerial talent, the critical shortage of which is often a great handicap to economic development, among others.

Challenges faced by SME s in Nigeria

The challenges facing SME's in many developing countries are monumental. The most worrying among these challenges is funding. Most new small business enterprises are not very attractive prospects for banks, as they want to minimise their risk profile. In Nigeria, the situation is not very different, until recently when the Banker's Committee intervened in 2001 with a scheme themed the Small and Medium Industries Equity Investment Scheme (SMIEIS). The scheme relegated to the background government credit schemes that are not well thought-out and implemented.

The SMIEIS Scheme

The Banker's Committee is a body constituted by representatives of banks in Nigeria. The scheme was approved at their 246th meeting on December 21, 1999. According to them, this was a response to President Obasanjo's concern and policy measures for the promotion of small and medium industries (SMI) as a vehicle for rapid industrialisation, sustainable economic development, poverty alleviation and employment generation. The scheme requires all banks in Nigeria to set aside 10% of their profit before tax (PBT) for equity investment in small and medium scale industries. The scheme commenced on June 19th 2001.

The scheme aims among other things to assist the establishment of new, viable SMI projects, thereby stimulating economic growth, development of local technology, promote indigenous entrepreneurship and generate employment. The funds will be available for projects in the real sector of the economy which include: agro-allied, information technology and telecommunication, manufacturing, educational establishments, services (directly related to production in the real sector or to enhance production), tourism and leisure, solid minerals, construction, and any other activity as may be determined from time to time by the Bankers Committee.

To qualify for the scheme, an enterprise, in addition to being engaged in any of the activities listed above, must have a maximum asset base of N200 million excluding land and working capital; with the number of staff employed by the enterprise not less than 10 and not more than 300. The enterprise must be registered as a limited liability company with the Corporate Affairs Commission and comply with all relevant regulations of the Companies and Allied Matters Act (1990) such as filing of annual returns including audited financial statement. Comply with all applicable tax laws and regulations and render regular returns to the appropriate authorities. Timing of investment exit shall be a minimum of 3 years.

There are 4 categories of stakeholders in the SMIEIS scheme, the Government, Central Bank of Nigeria (CBN), Bankers Committee and the individual banks, each playing a unique role to ensure the success of the scheme. Available data as at February 2003 indicate that 80 banks have set aside N13.07 billion with 28 banks investing around N2.87 billion based on 67 investments in 47 enterprises.

Alternative Sources of Funding

For small businesses shopping for funding can be quite a Herculean experience. But, recent development like the SMIEIS and some other funding sources are now open. One of such is the independent fund manager called the SME Manager Limited (SML), which is an investment advisory company established by African Capital Alliance (ACA) to promote SME sector-led investments in Nigeria by making equity investments in Nigerian SMEs. Also, available are: the Bank of Industry, the New Partnership for African Development (NEPAD) initiative and the African Growth and Opportunity Act, AGOA, of the United States.

Way Forward and Conclusion

Much is expected from the government to provide basic social and infrastructural facilities to assist small businesses. Nigeria s economic terrain is very constraining with the focus being concentrated on the big firms which are constantly down-sizing. Business people that fall in the SME category have frequently accused the banks of providing funding to only their cronies and favoured companies. But the banks have denied such allegations saying that many of the SMEs cannot meet up with banks requirements.

With services sector having 73.1% investments in number and 64.6% of value and Lagos-based investments accruing 86.6% of total number and 87.7% of value, the banks are advised to spread their funds wider. Also, the CBN should monitor closely some of the defaulting participating banks in the SMIEIS scheme. On the part of government, policies that promote inward induced investment should be encouraged far and above

This article may be outdated following the current development in Nigeria used as context. Though useful, am still working on the supplementaary current roles of SMS in Nigeria Economy.

Thanks.

Answer 2

In Ghana, the small scale industries help to create employment for the greater population that is semi-skilled. People from the blue-collar industry are able to find a common market for their goods because of the small scale industry.

Answer 3

The advantage of small scale business to Nigeria economy is that it actually produces more as it reaches all the way to the consumers. This is also a major source of income form most people even in rural areas.

Answer 4

Here is one case study.. which will answer your question...

A number of large-scale factories (with more than 1,000 employees) in Japan have shut down since the second oil crisis, and this can be attributed to technological innovation. The need to save energy and resources has had an effect in the areas of labour, materials usage, and energy consumption. A fierce competition to continually come up with a new product has emerged and has led to notably shortened life spans of goods. These developments have resulted in a decrease in the number of large-scale factories. High consumption levels have transformed the mass-production system into a system producing high-quality goods in small quantities to meet market needs and to diversify risks. Under these circumstances, the traditional Japanese employment pattern has been eroded, some of the effects of which have been mentioned in the preceding section on female labour.

The size and importance of the role of medium- and small-scale industry in the whole of the Japanese manufacturing industry is not widely known in the third world. Neither is it known that there is a structure linking these industries with the more internationally famous Japanese enterprises in business and technology.

The definition of medium- and small-scale industry has differed according to the period, varying in maximum complement from 10 to 20 to 100 employees. Today, government classification designates enterprises with less than 300 employees and capital of less than Y100 million as medium- to small-scale.45

According to statistics, factories with fewer than 20 employees account for 87.3 per cent of the total number in Japan, employ 20.1 per cent of all workers, and contribute 12.6 per cent of the total national output.

Factories with more than 500 employees, on the other hand, comprise only 0.3 per cent (1.807 total of all factories in Japan; they employ 20.5 per cent of the nation's workers (2,246,000) and account for 38.3 per cent of total output. While in Japan factories with fewer than 100 workers make up 98.0 per cent of the total and employ 58.0 per cent of all workers, in the United States, the respective figures are 87.7 per cent and 25.4 per cent, and in West Germany the corresponding proportions are 72.6 per cent and 18.7 per cent. The percentages for factories in Japan employing more than 1,000 workers are 0.1 per cent and 13.4 per cent, in the United States 0.6 per cent and 27.5 percent, and in West Germany 2.2 per cent and 38.0 percent.46

Aside from the statistical significance of these comparisons, it is clear that even in highly industrialized countries, medium- and small-scale factories have a role, and that, depending on the type of technology and industry, an enlargement of scale may be unwise or impossible.

Japanese medium- and small-scale enterprises were forced to renew their equipment in search of high efficiency as they faced a serious shortage of labour during and after the rapid economic growth of the 1960s. The two oil crises forced them to confront increased costs in both labour and materials. The changes and intensification in competition forced them to renovate their operations. Some of Japan's famous enterprises that maintained a small scale as an ideal size for the development of new products also underwent this process of adjustment.

From around 1975, the upgrading of facilities by small and medium enterprises brought about a new phase. The attainment of a high technological level has given the exports of these enterprises a competitiveness in international markets. The use of ICs in the production process has minimized differences in manufacturing capability and in the quality of products among manufacturers, so that the original equipment manufacturer (OEM) system has spread rapidly to enterprises of all sizes, small, medium, and large. Whether this represents a new stage of internal structure in the national network of technology is uncertain, but we may say it is a new phase, inasmuch as in the manufacturing industry, there have always been two opposing types, one seeking stability, the other continuous growth.47

The need in Japan for small and medium enterprises and their significance in society will not likely change. A good example of the trend is the fact that factories with fewer than 300 workers account for 99.5 per cent of the factories in Tokyo and employ 74 per cent of all factory workers there. Also of note is that small, medium' and large factories are located strategically, in accordance with the vital technological and business relationships they share.

In terms of development, what this process represents is the dissemination and development of modern urban industrial technology. In effect, the process is one in which those who have mastered the technology of a production process (or kind of job) at a specific level have separated it from the mainstream and become independent entrepreneurs (i.e. from process subdivision to process separation).

Providing an entrepreneur has a clientele, it is his technological ability that assures his independence. However, if the separation is made merely in the form of a change in the place of production as simply an extension of the subdivision of the production process, the new establishment represents in fact an affiliate of the parent company, much like a subcontractor within the plant. Furthermore, in some cases, depending on the type of industry and general business conditions, it will become necessary to master the technology of the entire production process to make the separation. In establishing independence, technology is transferred from the head shop, much as skills and knowledge are handed down from a master craftsman to his apprentice or, in the Japanese custom of norenwake (giving the name of one's shop to a former employee), one merchant helps another set up a business. This is easier to do with technology that needs little start-up investment (most such technology usually requires higher skills).

If the amount of initial investment is large, it becomes necessary to depend on borrowed capital, especially commercial financing. When this happens and materials and machines are leased, customarily the business starts as a processor and operates under a processing-fee system. As long as production is divided into separate small production processes, the processing fees remain low. Under these circumstances, the differences of skills, that is, the technologies of small independent enterprises, determine the differences in efficiency of production and of the use of raw materials. Many owners of small- and medium-scale enterprises are self-made men who accumulated technology and forged ahead on the road to self-reliance.

In addition to the classification of industry in terms of scale, it can be classified according to modern vs. traditional. Applying this classification, what one discovers is that most small-scale enterprises are in traditional industries and engaged in the production of consumer goods and services. While factory production uses modern technology, native industry depends on traditional technology, machines, and tools. In terms of scale, the range is from several workers to several hundred, and yet, according to one study, even in the 1930s, traditional industry output occupied a quarter of the gross industrial production.

According to statistics since the middle of the past century, 80 per cent of gross national expenditure has been for personal consumption and most of it for the consumption of traditional goods (foods, clothing, textiles, china ware, and other general merchandise). The position of small-scale industry in the national economy has been highest after agriculture.

As stated in regard to textile technology, yarn was manufactured at modern factories, while fabrics were woven in the traditional manner and places of production and sold through the historical wholesale system. Thus, the two were not in an exclusive relationship, but in a mutually supplementary, interdependent relationship, which aided the development of both. After World War II, the modernization of traditional technology changed this situation, and the scale of enterprise began to reflect the specialization in technology, though not without exception.

What is important is the formation of an interlinkage between traditional and new technologies by which traditional technology is finally modernized. It is the transition from a stage in which technology determines management to one in which management decides the orientation and level of the technology.

For this reason, the process of technological improvement is characterized by integration of management ability and the potential of the technology. The smaller the enterprise, the more it depends on management's technological ability.

It is noteworthy that, as early as 1900, before Japanese technology became self-reliant, the products of small industries made up a high percentage of Japan's exports. Raw silk accounted for 22.3 per cent, woven silk 9.3 per cent, green tea 4.0 per cent, matches 2.9 per cent, and silk handkerchiefs 2.2 per cent; thus, manufacturers using traditional technology accounted for more than 40 per cent of total exports. The last stage in match production (i.e. packing) depended on people working at home and was so labor-intensive that even young children were used among the urban poor, especially in the large cities, notably Tokyo and Osaka.

Answer 5

the contribution of small scale industry to the nigeria economy gives room for employment of labour and improvement in the standard of living of her citizens.

Answer 6

The impact of small scale business in Nigeria is quite significant. It has created jobs for most people and empowered them financially which has helped grow the economy.

Answer 7

Small scale industries have a big impact. They provide more personalized services in the area, more jobs, and more money to the economy.

Answer 8

not a question