1.1 Introduction
Small and Medium Scale Businesses (SMEs) are widely regarded as the backbone of economic development in both developed and developing economies because they play a vital role in job creation, income generation, poverty reduction, and innovation. According to the World Bank (2015), SMEs are defined as enterprises whose personnel numbers fall below certain limits, typically employing fewer than 300 workers and maintaining an annual turnover not exceeding $15 million. In the Nigerian context, the Central Bank of Nigeria (2010) defines small and medium enterprises as business enterprises with asset base excluding land and working capital of between ₦5 million and ₦500 million, and a staff strength between 11 and 200 employees.
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of the Study
Small and Medium Scale Businesses (SMEs) have long been recognized as vital drivers of economic growth, innovation, and social development across both developed and developing nations. According to Udechukwu (2003), SMEs serve as the backbone of industrialization by creating employment opportunities and promoting equitable income distribution. The World Bank (2015) reported that SMEs contribute up to 60% of total employment and 40% of national income in emerging economies, underscoring their critical role in sustainable development. In Nigeria, SMEs occupy a strategic position in the economy by providing goods, services, and employment for a significant proportion of the population, thereby serving as engines of poverty reduction and social inclusion.
Government policy has a direct influence on the establishment, growth, and sustainability of SMEs. Adebisi and Gbegi (2013) asserted that government interventions, such as tax policies, access to credit facilities, and infrastructural provisions, are designed to stimulate SME growth. However, the authors also observed that inconsistent implementation and multiple taxation reduce the effectiveness of these interventions. Similarly, Osotimehin et al. (2012) stated that despite various government initiatives, many SMEs in Nigeria still struggle with challenges such as inadequate access to financing, infrastructural decay, and poor regulatory support, which limit their capacity to expand.
According to Okafor (2020), one of the pressing issues facing SMEs in Nigeria is the unstable policy environment, which creates uncertainty and discourages investment. He contends that policies often appear promising at the design stage but fail during implementation due to corruption, bureaucratic inefficiencies, and lack of continuity across different administrations. Oteh (2010) affirmed that government policies are sometimes skewed in favor of large corporations, leaving SMEs disadvantaged and unable to compete on an equal footing. This imbalance has slowed down the expected transformative impact of SMEs on Nigeria's economy.
The infrastructural challenges facing SMEs further expose the limitations of government policies. Olawale and Garwe (2010) reported that poor electricity supply, inadequate transport systems, and insufficient technological infrastructure weaken the productivity of small businesses. They contended that without addressing these fundamental constraints, government policies aimed at enhancing SME growth will remain ineffective. Additionally, monitoring and evaluation mechanisms are often weak, making it difficult to track the actual impact of government interventions on SME performance.
The growth of SMEs is closely tied to government policy because policy decisions determine the regulatory environment, access to finance, infrastructural support, and market opportunities available to entrepreneurs. Effective policies are expected to promote business development by reducing barriers to entry, ensuring access to credit, simplifying taxation, and protecting property rights (Adebisi & Gbegi, 2013). In Nigeria, government policies such as tax reforms, establishment of microfinance banks, and programs like the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) have been introduced to support SME development. However, many entrepreneurs continue to face challenges resulting from inconsistent implementation, and bureaucratic bottlenecks (Osotimehin et al., 2012).
The significance of SMEs to Nigeria's economic diversification agenda cannot be overstated. According to the Central Bank of Nigeria (2010), SMEs hold the potential to reduce overdependence on oil revenues by promoting non-oil sectors such as manufacturing, agriculture, and services. This assertion aligns with Nigeria's broader development goals of job creation, poverty alleviation, and inclusive growth. However, the mismatch between policy formulation and actual implementation has continued to limit the capacity of SMEs to contribute optimally to national development. This study is set against the backdrop of examining the impact of government policies on the growth of Small and Medium Scale Businesses in Nigeria.
1.3 Statement of Problems
Investigation revealed that the growth and sustainability of Small and Medium Scale Businesses (SMEs) in Nigeria is largely influenced by government policies, which are intended to create a favorable business environment, stimulate entrepreneurship, and drive economic development. However, the reality is that many SMEs still struggle with challenges such as multiple taxation, and inadequate infrastructure, all of which hinder their ability to thrive and compete effectively in the market. Government policies that are meant to empower SMEs often fall short in their implementation, thereby creating a gap between policy intentions and actual business outcomes (Adebisi & Gbegi, 2013).
On the other hand, certain government interventions, such as grants, skill development programs, and regulatory reforms, are designed to provide relief and encourage growth. Yet, these policies are sometimes poorly coordinated, politicized, or inaccessible to the majority of entrepreneurs, especially those operating at the grassroots level (Okafor, 2020). The lack of consistency in policy direction and the frequent changes in regulations create uncertainty, which discourages both local entrepreneurs and foreign investors from committing resources to the SME sector.
Furthermore, infrastructural deficits such as unreliable electricity supply, poor road networks, and limited technological support continue to frustrate the growth of small businesses despite government promises of reform (Olawale & Garwe, 2010). In addition, many policies exist only on paper without measurable indicators of success, making it difficult to assess their true effectiveness in fostering business expansion (Osotimehin et al., 2012). It is against this backdrop that this study seeks to examine the impact of government policy on the growth of Small and Medium Scale Businesses in Nigeria.
1.4 Aim and Objectives of the Study
The aim of this study is to assess the extent to which government policy influences the growth and sustainability of Small and Medium Scale Businesses in Nigeria.
The specific objectives of this study are:
- To examine the relationship between government policy and the growth of SMEs in Nigeria.
- To identify the challenges SMEs face as a result of government policies.
- To evaluate the effectiveness of government interventions in promoting SME growth.
- To suggest strategies that will enhance policy effectiveness in supporting SMEs.
1.5 Research Questions
Based on the stated objectives, the study will address the following questions:
- What is the relationship between government policy and the growth of SMEs in Nigeria?
- What challenges do SMEs face as a result of government policies?
- How effective are government interventions in promoting the growth of SMEs?
- What strategies will improve the effectiveness of government policies in supporting SMEs?
1.6 Significance of the Study
The outcome from the findings of this research will hold significant relevance in the following ways.
- Government agencies will benefit from the findings as it will help them evaluate and strengthen policy implementation strategies.
- SME operators will gain insights into policy opportunities and challenges that will guide their business decisions.
- Financial institutions will benefit as the findings will provide data that will encourage them to design SME-friendly loan products.
- Researchers and students will find the study useful as it will serve as a foundation for further studies on SME development and government policy.
- The general public will benefit because stronger SME growth will translate into increased employment opportunities and economic stability.
1.7 Research Hypotheses
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: Policy-related challenges do not significantly hinder the growth of SMEs in Nigeria.
- H1: Policy-related challenges significantly hinder the growth of SMEs in Nigeria.
Hypothesis Two
- H0: Government policy does not have a significant impact on the growth of SMEs in Nigeria.
- H1: Government policy has a significant impact on the growth of SMEs in Nigeria.
1.8 Scope of the Study
The scope of this research is focused on the impact of government policy on the growth of SMEs in Lagos State, Nigeria. The state is chosen due to its status as the nation's commercial hub, hosting a large number of small and medium scale enterprises across different sectors.
1.9 Limitations of the Study
A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:
- Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
- Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
- Lack of Cooperation: Many of the respondents are usually aggressive on issue that border cooperation among the respondents border.
- Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.
1.10 Definition of Terms
Small and Medium Scale Businesses (SMEs):
These are enterprises whose personnel numbers, assets, and turnover fall below defined thresholds. In Nigeria, SMEs are classified as businesses with assets between ₦5 million and ₦500 million and a staff strength of 11 to 200 employees (Central Bank of Nigeria, 2010).
Government Policy:
This refers to the decisions, laws, regulations, and programs initiated by government to regulate, support, or influence the behavior of businesses within the economy (Okafor, 2020).
Economic Growth:
Economic growth is the increase in the value of goods and services produced by an economy over a period of time, usually measured by Gross Domestic Product (GDP) (World Bank, 2015).
Policy Implementation:
This is the process of executing government plans and decisions through institutions and agencies to achieve desired economic or social outcomes (Osotimehin et al., 2012).
Entrepreneurship:
Entrepreneurship is the process of identifying, developing, and managing a business venture to make a profit while taking on financial risks in the hope of success (Adebisi & Gbegi, 2013).
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