FACTORS CONSTRAINING THE GROWTH OF SMALL BUSINESSES IN NIGERIA A CASE STUDY OF SOME SELECTED FIRMS IN UKWUANI LOCAL GOVERNMENT AREA

FACTORS CONSTRAINING THE GROWTH OF SMALL BUSINESSES IN NIGERIA A CASE STUDY OF SOME SELECTED FIRMS IN UKWUANI LOCAL GOVERNMENT AREA

ABSTRACT

Purpose The purpose of this paper is to investigate the factors that hinder the growth and survival of small businesses in Nigeria. Design/methodology/approach A survey method was used to gather data from 211 small business owners and managers located in selected cities in Nigeria. Several statistical analyses were conducted to identify the factors constraining the growth and survival of SMEs in Nigeria. Findings The results of the study reveal that the most common constraints hindering small business growth and survival in Nigeria are lack of financial support, poor management, corruption, lack of training and experience, poor infrastructure, insufficient profits, and low demand for product and services. Research limitations/implications The instruments used for this study need to be subjected to more statistical tests in order to establish a more robust validity and reliability. Based on what we have learned, the instruments could be further refined to more closely capture each of the problem areas identified in the literature. Replication of this study using larger samples and a broader geographic base is suggested for cross‐validation purposes. Practical implications Understanding the factors hindering the growth and survival of SMEs in Nigeria will help policy makers – governments (federal, state, and local), NGOs, and other stakeholders – to design targeted policies and programs that will actively stimulate innovation, as well as helping those policy makers to support, encourage, and promote SMEs for poverty alleviation in Nigeria. For SMEs, this study offers alternative models to counteract the problem of collateral and lending issues. Strategic alternatives on how to address issues such as poor management, poor infrastructure, and corruption are discussed. Originality/value The significance of this study stems from the fact that very few studies have explored the issue of factors constraining the growth and survival of SMEs for poverty alleviation in Nigeria. The results provide additional insights into operations of SMEs in Nigeria, a sub‐Saharan African country. Sub‐Saharan Africa has been negated and, therefore, has been less researched. Also, the insights gained from this study to contribute the future development of this line of research, particularly in a non‐Western context.

TABLE OF CONTENTS

TITLE PAGE - - - - - - - ii

DECLARATION - - - - - - - - iii

CERTIFICATION - - - - - - - - iv

DEDICATION - - - - - - - - v

ACKNOWLEDGEMENTS - - - - - - vi

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study - - - - - 1

1.2 Statement of  Problem - - - - - - 8

1.3 Objective of the Study - - - - - - 10

1.4 Research Questions- - - - - - - 11

1.5 Statement of the Hypothesis - - - - - 12

1.6 Significance of  Study - - - - - - 13

1.7 Scope of the Study - - - - - - 14

1.8 Definition of Key Terms - - - - - 15

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction - - - - - - - - 18

2.2 Conceptual Framework - - - - - - 33

2.3 Theoretical Framework - - - - - - 45

2.4 Empirical Review - - - - - - - 50

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design - - - - - - 56

3.2 Population of the Study - - - - - - 57

3.3 Sample Size - - - - - - - - 57

3.4Sampling Technique - - - - - - 58

3.5 Method of Data Collection - - - - - 58

3.6 Technique for Data Analysis - - - - - 59

3.7 Model Specification and Variable Definition - - 59

3.8 Measurement of Variables - - - - - 59

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA

4.1 Presentation of Data - - - - - - 60

4.2 Discussion of Findings - - - - - - 79

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary - - - - - - - - 80

5.2 Conclusion - - - - - - - 80

5.3 Recommendations - - - - - - - 93

References - - - - - - -    - 95

Appendix - - - - -         - - - 98

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The Small business enterprise is a sector of the economy that needs Nigeria government attention due to the role it plays in job creation and. economic growth in a nation’s economy.

As described by Mambula and Sawyer (2004), strategies for meeting developmental goals in this new millennium cannot overlook the important role of small business and entrepreneurship as the engine for growth. In almost all economies, small businesses are vital for sustained growth. A high filure rate is a huge negative for an economy, especially a developing economy with limited capital. This is the situation in Ukwuani despite programmes established on paper to help entrepreneurs, they still face principal constrains to success. These constraints include poor management, lack of capital, corruption, weak infrastructure, poor record keeping etc. Contributions of small business to development are generally acknowledged, entrepreneurs face many obstacles that limit their iongterm survival and development. Research on small business development has shown that the rates of failure in local environment are high (Arinaitwe, 2002). Scholars have indjcated that starting a business is’risky venture and warns that the chances of small business owners making it past the five-year mark are very slim. They should develop long-term and shorts-term strategies to guard against failure (Sauser, 2005).

Arinaitwe (2002) observed that it is essential to understand the problems facing small business development because they are significantly different from one place to another. According to Ekpenyong (2002), the government of Nigeria has at various time tried to help the growths of small business enterprise of the economy by establishing agencies such as National Directorate of Employment (NDE), Peoples Bank, Community Bank, Family Economic Advancement Programme (FEAP), others are National Economic Reconstruction Fund (NERFUND), Nigeria Bank for Credit (NBC) and Commerce. These agencies as mentioned by Ekpenyong were created to support small business r.nanagers in the areas of finance such as borrowing funds in starting or expanding their businesses and also to train those individuals who have interest in going into various types of businesses in Nigeria. Despite the efforts of the government to sustain small business enterprise, none of these agencies mentioned by Ekpenyong (2002) has come up with a well-articulated plan or method or strategy to make sure that small business enterprise are given adequate attention. According to Aiyedun (2004), government is expected to provide adequate enabling environment for the private sector to invest and operate in a free market system. Once policy decisions have been made by government, they should be implemented. No matter how well intentioned and well-articulated such policies on small business enterprise may be, they cannot be successfully implemented without effective administrative public sector driven machinery whose technical competence, loyalty and commitment should translate into action. Furthermore, Aiyedun (2004) stress that in Nigeria, micro and small business enterprises (such as those business of restaurant, bakeries, cafes, petrol station etc.) by the nature of their activities and locations, often transgress - health and hygiene laws, traffic rules etc. Some of the obstacles also include lack of financial resources, Lack of managements experience, poor location, laws and regulations, general economic conditions as well as critical factors such as poor infrastructure, corruption, low demand for products and services and poverty.

There is increasing recognition that identifying the problems of facing small business managements may be meaningful in terms of the type of assistance (finance, training, management and technology). Following the research of Birch (1979), he discovered that over 80% of new jobs where being generated in small firms rather than large firms. In fact, new and young firms were the engine of growths in other countries economy. Evidence exists that new firms and a small number of rapidly growing young firms are responsible for a significant proportion of gross and net new jobs.

Nigeria’s past and present rulers failed to diversify the economy which is growing rapidly in population. Small businesses are generally regarded as the driving force of the economic growth, job creation, and poverty reduction in developing countries. They have been the means through which accelerated economic growth and rapid industrialization process of converting a socio-economic order in which industry is dominant. Examples of government support of SMEs are taken from countries such as Taiwan, China and Japan, Sweden and Germany whose performance of their economics are attributed to the role of individuals or group of individual who are captains of small business enterprise in these countries. These countries were able to achieve such high interest in business through the encouragement by their various governments which provided well-articulated programmes of providing soft loans and skill acquisition for the people who have shown interest in establishing businesses of their own. Therefore, government, scholars and practitioners should understand the level of small business developments which plays a significant role in providing services to the environments having in mind that development and sustenance of small business in Nigeria will go a long way in helping economic recovery. Although economy may be the engine room of any meaningful national development, small scale enterprises play an important role in a nation’s economy. Their role in the economy of the country is such that the large business can hardly survive without small business enterprise, as they give the important links between the large business enterprise and the consumer. It is through the small scale business that large scale business can survive.

Ukwuani Local Government with headquarters in Obiaruku Was carved out from the former Ndokwa Local Government on the 4th of December 1996 by the late General Sani Abacha of blessed memory. Geographically, the local government area is bounded in the North by Orhiomwon Local Government Area of Edo State to the South by Ughelli North Local Government Area, to the East by Ndokwa West Local Government, while it is bonded on the West by Ethiope East Local Government. It has a surface land area of about 20 l6sq kilometers. The area is made of nine clans broken into sixteen (16) wards. The clans are Akoku, Amai, Ebedei, Eziokpor, Obiaruku, Umukwata, Umuebu, Umutu and Ezhionum, The local government area is rural in nature. The people are predominantly peasant farmers. The main agricultural, products are cassava, yam, plantain and vegetables. Apart from arable agriculture, the people also engage in small business and petty private business to boost its general economic developments. At various levels since the inception of the local government area, government has designed and introduced measures to promote small business development. These measures have included livestock, fishery, and financial incentive to the people and through this, small business has in turn added value to the socio-economic life of the area.

1.2 Statement of the Problem

Okpara and Wynn (2007) research on small business development has shown that the rate of failure in developing countries (Nigeria) is very high. According to Arinatwe (2006) small businesses are faced with the problems of lack of technological know-how, lack of managerial skills, lack of financial resources, lack of adequate legislature to protect small business against the competitions from multinational and imported goods or difficulty in obtaining soft loan Credit policies in Nigeria have also tended to discriminate against small businesses.

Consequently, most of these enterprises have been forced to obtain funds from family members or from micro credit markets which interest rates are very high and often injurious. Again, while small business is been acknowledged for its developments contributions, it still faces many obstacles that limit their long term survival and development. Okpara and Wynn (2007) further stated that some constrains faced by SMEs includes lack of resources, lack of management experience, poor location laws and regulations etc. The firms dominate every opportunity for obtaining loans and raw materials. They attract employees by offering better wages and benefit. Small business enterprise mostly lack managerial skills and hardly offers training and development to their employees. They are also characterized by informality and poor information system which result to poor decision making. SMEs mostly lack the capabilities of assessing new technologies which enhances innovation. However, there are still rooms for improvement in Nigeria.

The problem therefore is to find out how small business in Nigeria could be encouraged to ameliorate and sustain small business not withstanding their various constrains Over the past six years, government has pursued policy that should provide fertile ground for small business (support and incentive programme) In the light of these support and incentive programme, it would seem reasonable to expect that small business would grow and flourish. However, the effectiveness of these programmes remains unclear and the rate of business failure continues to increase.

Accordingly, the present study explores the constraints to small business growth despite all the programmes established to help them succeed. Small business problems have been identified as administrative, operating or strategic. Administrative problems includes personnel, finance and management issues. Operating problems deals with allocating resources in an efficient manner and are more common in the functional areas of a business. Examples include marketing, operations and inventory management. Strategic problems involve the ability of small business owners to match their product or service with the demands of the externals environment (Harris and Gibson’s 2006). This requires business owners to understand the nature of their business and the needs of their customers. Business owners with strategic issues will need assistance with management and marketing. Another area identified in the literature that is particularly important to small business in Ukwuani is external problems, which includes infrastructure issues, corruption, technology and low demand.

1.3 Objectives of the Study

The specific objective of this study is to clearly:

1. Identify the factors constraining growth of small business in Nigeria (A case study of Ukwuani Local Government Area).

2. The need to create an enabling environment that will promote and sustain the growth and development of small businesses.

3. To find out small businesses in Nigeria could be encouraged to ameliorate and sustain small businesses notwithstanding their various constraints.

4. To determine how small businesses are fairing in Ukwuani with policies developed in Nigeria.

1.4 Research Question

1. To what extent does small business have positive relationship between corrupt practices and business success in Ukwuani Local Government Area?

2. Do small business have management experience and small business success in Ukwuani Local Government Area?

3. Is there any relationship between financial resources and business success in Ukwuani Local Government Area?

4. Do small businesses encounter the problems of bank loan in Ukwuani Local Government Area?   

1.5 Research Hypotheses

This is an exploratory study to determine small business growth constrain in Nigeria (Ukwuani as a case study). Based on what our findings would be, it will be important to closely capture each of the problems or constraints in the business environment.

Hypothesis I: There is no significant positive relationship between financial resources and business success in Ukwuani Local Government Area.

Hypothesis II: There is no significant positive relationship between management experience and small business success in Ukwuani Local Government Area.

Hypothesis III: There is no significant positive relationship between corrupt practices and business success in Ukwuani oal Government Area.

Hypothesis IV: There is no significant positive relationship between infrastructure and small business success in Ukwuani Local Government Area.

1.6 Significance of the Study

Our literature research revealed that to date very little research has been conducted on the growth constraints of small businesses in Nigeria, hence this study. The significance of this study is as follows:

In a globalized economy, there is increasing recognition that identifying the problems facing small business management may be meaningful in terms of the types of assistance (finance, training, management and technology) that may be provided.

It is essential to determine how small businesses are faring in Ukwuani with policies developed in Nigeria.

The study draws management and policy maker’s attention to the urgent need for specific management practices to enhance the effectiveness and sustainability of small business in Nigeria.

Given the importance of small business to a nation’s economic growth, and also the role that small business plays in poverty reduction, we postulate that an understanding of the problems negatively affecting small business in Nigeria is a vital first step in managing and avoiding the massive failure of these small businesses. Finally, from an academic perspective, this study should contribute to the future development of this line of research, particularly in a developing country like Nigeria. Therefore, the present study is of significant value to practitioners and scholars alike.

1.7 Scope of Study

This study was carried out in the year 2015. It was aimed at examining constrains to small business growth m Ukwuani Local Government Area of Delta State.