Small and Medium Business Enterprises and Economic Growth of Nigeria

1.1 Introduction

Small and Medium Enterprises (SMEs) play a pivotal role in the economic growth and development of Nigeria. As a key component of the economy, SMEs contribute significantly to employment generation, income generation, and poverty reduction across various sectors. The impact of SMEs on economic growth in Nigeria has been widely studied and documented, highlighting their role in fostering innovation, enhancing productivity, and promoting economic diversification. According to the Nigerian Bureau of Statistics (NBS), SMEs account for over 50% of Nigeria's GDP and employ millions of people, making them a crucial driver of economic activity and development. Despite their importance, SMEs face numerous challenges such as inadequate access to finance, infrastructural deficits, and regulatory constraints, which hinder their full potential contribution to economic growth.

This chapter will address the background information that motivated this study, the challenges that prompted it, its aim, and its objectives as a preface to subsequent sections of the study. Additional factors include the study's significance, scope, limitations, research questions and hypotheses, and the definition of technical terms.

1.2 Background of Study

The impact of Small and Medium Enterprises (SMEs) on economic growth in Nigeria dates back to the country's post-independence era. Following Nigeria's independence in 1960, the government recognized the importance of SMEs in driving industrialization, job creation, and poverty reduction. Policies were subsequently formulated to support SME development, focusing on sectors such as manufacturing, agriculture, and services. During the 1970s and 1980s, Nigeria experienced an oil boom, which led to a neglect of non-oil sectors, including SMEs. However, economic diversification efforts gained momentum in subsequent decades, with renewed emphasis on SMEs as engines of economic growth. Initiatives such as the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), established in 2003, underscored the government's commitment to enhancing SME competitiveness and sustainability. Despite these efforts, SMEs in Nigeria continue to face challenges such as inadequate infrastructure, limited access to finance, and policy inconsistencies. These challenges have constrained their growth potential and overall contribution to economic development.

The role of Small and Medium Enterprises (SMEs) in fostering economic growth in Nigeria has garnered significant attention from researchers and policymakers alike. SMEs constitute a substantial segment of the Nigerian economy, contributing to employment, income generation, and industrial development. The sector encompasses a wide range of businesses, from micro-enterprises to larger SMEs, each playing a unique role in driving economic activity.

According to the Nigerian Investment Promotion Commission (NIPC), SMEs account for approximately 96% of businesses in Nigeria, employing over 80% of the workforce in the non-agricultural sector. This sector's dynamism and resilience make it a critical component of Nigeria's economic landscape, particularly in diversifying revenue sources away from oil dependence. However, despite their significant contributions, SMEs in Nigeria face various challenges, including limited access to finance, inadequate infrastructure, and regulatory hurdles. These constraints often hinder their ability to scale operations, innovate, and contribute more effectively to economic growth.

For the past decades, small business enterprises in Nigeria were characterized as essentially backward and cog in the wheel of the overall development of the Nigeria economy. As a result of this, there has been a prevalent feeling that such businesses could be assisted only for social reasons, not as a promising opportunity for national development. Obviously, too little attention has been paid to the benefits to be derived from helping small enterprises of modernize and grow. This attitude arose partly amongst both the citizens and government and mainly from the very nature of the small business which made it difficult for its impact to be felt in the economy.

Small and Medium Scale Enterprises (SMEs) have been acknowledged the world over as the driver of economic development and growth. This is because these enterprises have great potential for employment generation, economic empowerment, poverty alleviation, improvement of standard of living, substantial local capital formation, achievement of high levels of productivity and capacity, means of achieving equitable and sustainable industrial diversification and dispersal, appreciable contribution to gross domestic product, increase harnessing of local raw materials and technological and export diversification (Ekpo, 2000; Essien, 2006; Butt, Hunjra and Rehman, 2010; Akpakpan, 2012). Not only do they provide employment and income for the bulk of the population, they have been recognized as critical breeding and nurturing ground for domestic entrepreneurial capacities, technical skills, technological innovativeness and managerial competencies for private sector development (Derinola, 2008; Ojo, 2010; Olorunshola; 2014). Generally, therefore, SME’s are the pivot for achieving economic development of any nation. This is because, they create employment opportunities for teeming youths and self reliance for owner managers, contribute to gross domestic product (GDP) through their outputs (production of goods and services), development and inculcating entrepreneurial spirit, as well as better living standard of the populace through poverty alleviation. Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Small and Medium Business Enterprises and Economic Growth of Nigeria.

1.3 Statement of Problems

Investigation revealed that the role of Small and Medium Enterprises (SMEs) in fostering economic growth in Nigeria is crucial yet beset by significant challenges. These challenges include:

1. Insufficient Access to Finance: SMEs in Nigeria face difficulties in accessing affordable credit and financing options, hindering their ability to expand operations, invest in technology, and innovate (Ogundele & Olatunji, 2020).
2. Inadequate Infrastructure: Poor infrastructure, including unreliable power supply and inadequate transportation networks, increases operating costs and limits market access for SMEs (Abiola & Arinola, 2018).
3. Regulatory and Policy Constraints: Inconsistent policies, bureaucratic bottlenecks, and regulatory burdens create uncertainties and impede business growth and sustainability (Oluwatobi, Ibidunni, & Ibidunni, 2019).
4. Market Access and Competition: Limited market access, intensified competition, and dominance of larger firms pose challenges for SMEs to compete effectively and scale their businesses (Adeleke, 2017).

Furthermore, Nigeria’s most pressing employment challenge is insufficient labour demand due to inadequate firm creation and growth. Most jobs are created in industries such as retail trade, hospitality and recreational and personal services, which are characterized by very high firm entry but also high exit rates and therefore limited sustained employment growth (MOFPED 2014). Hence, it is against this backdrop that this study aims to examine the Impact of Small and Medium Business Enterprises and Economic Growth of Nigeria.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of Small and Medium Business Enterprises and Economic Growth of Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the impact of government expenditure in promoting small and medium enterprises on economic growth in Nigeria;
2. To examine the impact of Employment generation growth rate and level of Corruption on economic growth in Nigeria;
3. To evaluate the relationship between the SMEs and economic growth in developing countries;
4. To investigate the primary challenges hindering the growth and sustainability of SMEs in Nigeria; and
5. To examine the impact of commercial bank credits and lending rate to small and medium enterprise on economic growth in Nigeria.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Is there any significant relationship between the SMEs and economic growth in developing countries?
• Is there any linkage between the SMEs and economic growth?
• What are the impact of Employment generation growth rate and level of Corruption on economic growth in Nigeria?
• What are the primary challenges hindering the growth and sustainability of SMEs in Nigeria?
• What is the impact of government expenditure in promoting small and medium enterprises on economic growth in Nigeria?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between the growth of Small and Medium Enterprises (SMEs) and economic growth in Nigeria
• H1: There is a significant relationship between the growth of Small and Medium Enterprises (SMEs) and economic growth in Nigeria

Hypothesis Two

• H0: The growth of Small and Medium Enterprises (SMEs) do not significantly contribute to economic growth in Nigeria
• H1: The growth of Small and Medium Enterprises (SMEs) significantly contributes to economic growth in Nigeria

1.7 Significance of Study

The outcome realized from the research findings will be significant to the following stakeholders:

1. Government: Understanding the impact of SMEs helps the government formulate policies and programs that can effectively support SME growth, stimulate economic diversification, create jobs, and enhance overall economic stability.
2. Investors and Financial Institutions: Insights into SMEs' role in economic growth guide investors and financial institutions in identifying profitable investment opportunities, facilitating access to finance, and mitigating risks associated with SME financing.
3. Academic and Research Community: Research on SMEs contributes to academic discourse, enriching knowledge on entrepreneurship, economic development, and policy effectiveness, thereby guiding future studies and informing curriculum development.
4. SME Owners and Entrepreneurs: SME owners benefit from understanding their businesses' economic impact, enabling them to strategize for growth, access resources, and navigate regulatory environments more effectively.
5. International Development Organizations: Insights into SMEs' contributions to economic growth aid international development organizations in designing targeted interventions, capacity-building programs, and policy advice to support SMEs in achieving sustainable development goals.

1.8 Scope of Study

The scope of the research is focused on the impact of small and medium business enterprises and economic growth of Nigeria.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Small and Medium Enterprises (SMEs):

SMEs are defined as enterprises that employ fewer than a certain number of employees, varying by country and industry. In Nigeria, SMEs are categorized based on employment size and asset value, typically employing up to 200 people (Small and Medium Enterprises Development Agency of Nigeria, 2020).

Economic Growth:

Economic growth refers to the increase in the market value of goods and services produced by an economy over time, typically measured by changes in Gross Domestic Product (GDP) (World Bank, 2020).

Impact:

Impact in this context refers to the measurable effects or outcomes resulting from the activities of SMEs on economic indicators such as GDP growth, employment rates, and sectoral contributions (International Labour Organization, 2020).

Entrepreneur:

According to Hagen, an entrepreneur is an individual who conceives the idea of business, design the organization of the firm, accumulates capital, recruits labour, establishes relations with supplies, customers and the government and converts the conception into a functioning organization business.