CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL LITERATURE

2.1.0 Small scale and medium enterprise (SMEs):

The definition of small and medium enterprises varies with the culture and peculiar circumstances of the
person attempting the definition. Study on small scale enterprises identifies more than fifty different
definitions in seventy-five countries. The small-scale business net passed by the United State Congress in
1953 state that "A small business is one which is independently owned and operated and not dominant
in its field of operation".

In Britain, the standard definition of small business is a business with an annual turnover less than at
two million pound starting or less with a less than two hundred paid employees. In Nigeria, the
multiplicity of the definition is quite apparent. The Nigeria Banks for commerce and industries (1990)
defines a small scale enterprises as one whose capital does not exceed N750,000 where as the Federal
Government in 1973 viewed small scale industries to includes all trading and manufacturing units with a
total capital investment up to N60,000 and paid employees up to fifty person (Ihyembe, 2002). The
industries research unit of the Obafemi Awolowo University defines small scale enterprises as one
"whose total assets in equipment, plant and working capital are less than N250, 000 and employee
fewer than fifty full time workers. (Banmbach, 1992), while the central Bank of Nigeria (CBN) operational
guideline in 1988 defines small scale enterprises with references to two financial areas: The merchant
bank and commercial banks, it state for lending purposes of merchant, a small scale enterprises is one
with a minimum annual return of N500,000, However, Ozazee and Anao (1989) defines a small business
as any business undertaken, owned, managed and controlled by not twenty employees, has no definite
organizational structure (i.e all employee report to the owners) and has a relative small shares of its
markets.

Therefore, base on this, there is no universally accepted definition of small and medium enterprises,
even in single country, different institution, may adopt different definition depending on their focus.

2.1.1 Nigeria remains country with very high potential but an equally high inertia to develop. The
country is blessed with abundant supply of enormous human agricultural, petroleum, gas and large
untapped solid mineral resources (obadun, 2003). Since her independent from Britain rules in 1960, the
country has gone through decades of political instability and this has brought with it a climate of social
intension and an unpredictable market for business. The successive forceful takeover of government by
the use of military coup and the indigenization policy on the late 70's has put off investors who hitherto
saw the country as a large and growing markets. Due to the nature of this government, there is
perceived corruption, policy instability, poor infrastructural development and lack of accountability of
public funds. For these reason, the World Bank described Nigeria as a paradox. This is also true for most
sub-Saharan African countries as industrial production has declined or stagnated over the past decade.
Since it independence, the Nigerian Government has been spending and immense amount of money
obtained from external funding institution for entrepreneurial and small business development
programmes, which have generally yielded poor to bureaucratic bottleneck and end up in account of
public office holders.

Despite these setback, the role of small business owned by middle, class Nigerians setup by individuals
saving, gift, loans and sometimes sustained by profit, cannot be ignored, the significant role SMEs plays
in development is acknowledge World over, who noted that in develop countries such as the USA,
where big cooperation are dominant, SMEs still play enormous role in the country's economy. Also
according to the report of the Indian working group on science and technology for small and medium
scale enterprises, SMEs occupy and important in all countries constituting as high as 90% of enterprises
in most countries Worldwide, SMEs are the driving force behind a large number of innovation and
contribute to the national economy through employment creation, investment and export.

2.1.2 The Role of Small and Medium Enterprises in Economic Development and Growth

Despite the problem of SMEs faced in Nigeria, ie, poor infrastructure which affect manufacturing and
production, there is also limited access to credit and capital to finance projects, there is also an internal
problems like poor business management skills, lack of the meeting standard organizations
requirements, poorly skilled human resources etc.

Small and medium enterprises still plays a very vital role in the economic growth and development of a
nation, particularly Nigeria being a developing country. Empirical study have shown that both in
developed and developing nation, small and medium scale industries are vital instrument in generating
economic growth as the industries tend to promote not only a stable industrial structure, but also a
balanced capital distribution of industrial developments. SMEs play a significant role towards economic
growth of developing country like Nigeria.

Therefore, the development of SMEs should form part of priority of state development objectives, this is
because they are the training ground for local skills and entrepreneurs and a channels for local saving,
ensuring a more equitable distribution of income and reduce the migration of manpower from rural to
urban areas. In addition, they are the panacea for poverty alleviation and wealth creation for the under
privileged. Sanusi (2003), Small and medium enterprises have no doubt been indeed recognized as the
main engines of economic growth and development and a major variables for promoting private sector
development and partnership (Onugu, 2005). He further state that the major drawback in Nigeria quest
for industrial development over the past years has been absence of a strong, vibrant and virile, small
and medium enterprises sub-sector, 80% of total industrial labour force in Japan, 50% in Germany and
40% in USA. Small and medium enterprises contribute nearly 39% of the country's national income
(Sanusi 2004).

Onugu, (2005) argue that poor budget implementation over the years account for the unsavory impact
of SMEs on the Nigerian economic which has had a record sluggish growth and declining future as
measured the populations of Nigeria becoming literate having more access to better health care,
shelter, food and other necessities of life and better playing jobs but low per capita income. It has also
been lamented that the parameter usually used to measure the performance of SMEs including the
percentage of working population employed by the SMEs in given economic, the percentage
contribution of the country's GDP managerial and technical capacity building, percentage of locally
generated revenue of government from SMEs employees (Tudun Wada, 1999).

2.1.3 Government Efforts towards the Development of SMEs:

Over The Years, The Federal Governments has seen SMEs as the cradle for industrialization and a
prerequisite for rapid economic growth and self reliance, as a result of this, the government enunciated
a numbers of policies and programmes/incentives that would create a conducive environment for the
development and promoting of SMEs.

The government for instance, enunciated a number of financial policies through national development
plan and budget as well as necessary extension services to SMEs. This government financial policy thrust
is to ensure adequate financing of SMEs through loans or equity participation and to provide fiscal
incentives designed to aids their growth and rapid development.

Among these policies programmes are the small industries credit committee (SCC) set up to administer
to the country between 2010 and 2011 However, the performance of the small-scale industries credit
scheme was unfortunately rather poor in the sense that many unavailable projects were funded
(Thyembe 2002). The Federal Government in 1973 established Nigerian Banks for Commerce and
Industries (NBCT) to provide financial services to Small Scale Business. NBCI loans and equity investment
in small business continued to of immense help in the development of SMEs in the country (Anyunwu,
2006). The national directorate of employment (NDE) was established in 1986 to promote the
development of small- scale enterprises. As a result of its activities in 1987, over 148,000 new jobs were
directly created through the founding and setting of small scale enterprises (Philip 2010). The national
economic recovery funds (NERFUND) was established to promote SMEs by providing medium to long
term loans (5-10 years) to those in agro Allied industries, industrial support services, mining, quarrying,
equipment leasing and others ancillary project. The federal government provided N190 million while
CBN contributed the remaining counterpart funds. (Izedomi, 2011).

It should be mentioned that with the same period, other agencies, such as directorate of food, roads
and rural infrastructure (DFRRI), better life for rural dwellers, peoples bank, community banks, new
micro finance bank (MFB), working for yourself programmes, the centre for management development
were established to enhance the growth and development of SMEs. The formation of small and medium
scale industries apex unit within the central; bank to assist in the disbursement of World Bank $270
million loan to small scale enterprises and the latest official concern by Federal Government towards
encouraging the creation of small scale industries is encouraging. Therefore, consoling the effect of
poverty and unemployment was the establishment of Poverty Alleviation Programme (PAP), Youth
Empowerment Scheme (YES), National economic Empowerment and Development Strategy.

2.2 IMPHERICAL REVIEW

According to NUTEK (2004) Swedish industrial policies have traditionally focused on arge
regarding small enterprises and entrepreneurship have grown over the last two decades and

main reason is that small business enterpriseshave become an increasingly important source

reasons why the focus of industrial policy has shifted more towards small enterprises.The

sectors that experienced probems due to structural changes in the economy. Policies

we have seen a shift in perspective from existing enterprises to an increased interest in the

enterprises and individua sectors. Earlier, policies regarding industry mainly supported

processes that contribute to the creation and survival of enterprises. There are several

of employment and growth.

NUTEK (2004) further stress that recent developmentshave shown that arge enterprises no

operations. Small enterprises, then, can replace larger enterprises in providing employment

opportunities. Furthermore, the public sector in Sweden has been downsized and its relative

longer create the same number of jobs, dueto globalization and the rationalization of

share of employment has decreased, even though it is still of significant importance. The

Objective of the government is, in other words, to promote favourable institutional

support, etc. This policy change has been primarily in response to new imperatives, and to a

preconditions for business in genera, i.e. rules of the game, access to markets, financial

marginal extent to evaluations of previous policy measures.

As summarized byStevenson and Lundström (2001)access to financing is one of the oldest

lacked access to the resources necessary to expand, modernize or grow. Their stunted

and deal with established firms (lower risk). Small firms were disadvantaged in capital

growth prevented small firms from increasing employment and productivity and contributing

lending are being debunked and traditional lenders are increasingly targeting the small

measures to address these financing gaps. In today’s economy, capital markets are much

‘market failure’. Conventional lenders preferred to do larger loans (lower transaction costs)

more developed. Myths about the higher risk and lower profitability of smallbusiness
markets because they lacked the collateral security or knowledge to secure conventional

small business enterprisespolicy issues; it has a history of at least half a century (e.g., the US

financing, were perceived as higher risks and deemed less profitable. Therefore, small firms

fully to overall economic growth in the economy. Governments responded with policy

Small Business Act of 1953; Canada’s Small Business Loans Act of 1961). Central

enterprisesfinancing. Historicaly, the major rationale for government intervention was

business sector as a profitable growth market. Australia was the strongest example of the

governments in each of our cases have policies related to improving access to small business

latter case. Many Australian experts noted that grants and subsidiesare out.

Tucker and Lean (2003) summarized their knowledge on this matter as follows: Smallest

significant fixed assets to secure on in their early years of establishment. The stage of

problems of adverse selection. That is why access to formal finance is usually difficult for

rather than focusing their attention on evaluating income streams flowing from an

financial market is weakly efficient, there is high information asymmetry between financial

firms generally have smaller financial reserves geared compared to larger firms due to the

investment project they may focus more on the value of collateral available in the event of

financial distress. This creates a problem for smal firms in that they often do not have

development then may be an important determinant of, and constraint on, the type and

institutions and small business enterprises. As a result, financial institutions face severe

difficulty and expense of attracting new equity finance. Thus, such firms do not only bear

by adopting a capital-gearing rather than an income-gearing approach to lending. Thus,

amount of externa fund. Particuarly in developing countries like Ethiopia, where the

higher business risk but a so higher financial distress risk. Banks tend to respond to this risk

small business enterprises.

The case above is not only an Ethiopia’s small business problems but asoone of the
proper sustenance and development of small business enterprisesin these parts of the

without banks and other financial sectors providing an easier accessibility of funds for them

problems facing small business enterprisesin Nigeria and other developing countries. For a

world, there is need for adequate attention hence these sectors can not be well developed

instead of paying more attention to large enterprises.

Aiyedun (2004)mentioned that another area in which small enterprises have disadvantaged

to registering businesses at the Corporate Affairs Commission (CAC) in Abuja, which is not

necessary technical know-how nor legal expertise. A case in point is the centralized approach

is with regard to the inordinate impact, which government regulations have on them. First,

compliance with such regulations could be prohibitive, since such firms possess neither the

the mere existence of regulation is a burden to these smal enterprises. Second, the cost of

only cumbersome and time consuming but financially prohibitive.

Operators of small enterprises are also subjected to other risks and uncertainties, including

harassment by government authorities in the form of seizure of stock or equipmentand

demoition of illegally erected shops and workshops, without compensation (Aiyedun 2004).

As summarized by Ekpenyong(2002) on the past government policies focused on smal scale

enterprises development which hasthe capacity to exploit loca endowments and propel the

engine of growth if properly managed. This policy focus on small scale enterprises which

started with the Third National Development Plan (1975-1980) as follows:

1. Nigerian Bank for Commerce and Industry (NBCI), the Nigerian Development Bank

(NDB), the National Economic Reconstruction Fund (NERF), the World Bank Scheme

(WBS) administered through the Central Bank of Nigeria (CBN), the introduction of Rural Banking
Scheme, the People’s Bank of Nigeria (now closed), and the

Community Bank were the measures taken to meet the financial needs of small

business enterprises.

2. To generate employment and stimulate economic development, the Federal

Government established the National Directorate for Employment (NDE) to train the

youths to become self –employed.

3. The National Open Apprenticeship (NOA) an offshoot of NDE was established to

provide them with take –off loans.

Okpara & Wynn, (2007)stated that over the past six years, the present government has

this support and incentive programs it would be reasonable to see and to expect that small

pursued a policy that should provide fertile ground for small –business including trade

liberalization and making the operating environment friendly to entrepreneurs, in light of

business enterprises would grow and flourish in Nigeria. However, the effectiveness of these

programs remains unclear and the rate of business failure continue to increase.

According to NUTEK (2004) Sweden has during the last decades, taken a number of

initiatives to improve the microeconomic climate. A more dynamic competitive environment

has resulted in an increased interest in entrepreneurship, not least among the young, over

industries, and the opening of financial and currency markets. Improvements in the intensity

has emerged through the deregulation of telecom, transportation, energy and media

of local competition, availability of venture capital, company innovativeness and quality of

science and engineering talent have contributed to strengthening Sweden’s position. This

the last decade.

In United States of America for example, recently the House Speaker Nancy Pelosi said that

unveiled a separate measure designed to stimulate small business growth in part by making

capital cheaper for community banks source:

Obama, also would increase the maximum size of Small Business Administration (SBA)

government can loan to small businesses. She further stated that the House of

Congress is set to consider a measure increasing the amount of money the federal

Administration loans from $2 million to $5 million. The bill, backed by President Barack
Representatives will detectivedebate a bill increasingthe ceiling on Small Business

backed microloans from $35,000 to $50,000. On the same period, President Barack Obama

(http://politicalticker.blogs.cnn.com/2009/10/22/stimulus) In Sweden, another significant reform with a

likely substantial impact on theSME sector is a

statutory obligation (SFS 1998:1828) for public authorities to carry out an ex-ante impact

assessment of all regulations in regard of possible consequences on the SME sector. This ex

The SimpLex team’s main task since the start has been to ensure the quality of the impact

responsible for this work but each agency carries out its impact assessments independently

have an effect on the competitiveness of SMEs, the necessity of launching an information

campaign, and so on. This regulation was enacted in January 1999. The SimpLex team is

of Government influence. The Government reports annually to the Riksdag on its progress.

ante impact assessment should mainly focus on costs for the enterprise, if the regulation will

assessments of new or altered regulations issued at Government level, NUTEK (2004).

Also there should be proper provision of facilities such as tax incentives for small business

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

and supply chain. The Provision of targeted tax deductibility incentive for science,

technology, research and deveopment spending wil create a good opportunity for small

that support large businesses to promote growth of small business enterprises in their value

business enterprises (Aiyedun 2004).

THEORETICAL FRAMEWORK

The Nature of Small Scale Enterprise

A small scale enterprise can be defined in many ways. The parameters for the definition include

value of assets, number of employees, sales revenue, size of capital, and turnover rate. A small

scale enterprise is one that is independently owned and operated, and in which the owner is the

sole decision maker and the overall boss (Onuoha, 1944).

In general, a small scale enterprise is a business in which its owner influences the entire

workers and having capital base not exceeding N2 Million Naira. The American small business

business which is independently owned and operated and is not dominant in its field of

requirement for its operation. A small scale enterprise has also been described as a small

business in which the manager personally performs all the functions of management. Other

authors see small scale enterprise as a manufacturing establishment employing less than ten (10)

Act of 1953 also advanced its own definition. The act defined a small scale enterprise as a

decision-making process and the business has relatively small market share and low capital

operation.

Characteristics of Small Scale Enterprises

A major characteristic of small-scale enterprises in Nigeria relates to ownership structure which

enterprises is either sole proprietorships or partnerships. Even where the registration status is

largely revolves around a key man or a family. Hence, a preponderance of the smallscale

takes the shape of limited liability company, the true ownership structure is that of a oneman or
partnership business. Policy makers and scholars such as Dozie (1995), Owualah (1999), and

Lawal (2000), described the characteristics of small scale enterprises as follows:

(1)Personal savings of the owner forms the start-up capital of the business

(2)Low Initial capital requirement

(3)Simple technology

(4)Low level of managerial skills

(5)Difficulty in accessing external funds for establishing and running the business

(6)Keeping little or no accounting records of the business

(7)Reluctance in risk taking by the owner to expand the business

(8)Low level of education and technical expertise on the part of the business owner

(9)Little influence on the market and small market share.

10.Small scale enterprises general have high mortality rate.

Government Intervention in Small-Scale Enterprises

In every economy be it the developed or developing nation, small-scale enterprises are seen as

that the small-scale enterprises in Nigeria are not only catalysts of economic growth and national

the instrument of economic growth and national development. Data from the Federal Office of

Statistics in Nigeria confirmed that about 97% of the entire enterprises in the country are small

contributing about 50% of the country’s industrial output Ariyo (1999) and Ihua (2009) averred

scale enterprises and they employ an average of 50% of the working population as well as

development but are also the bedrock of the nation.

Although small-scale enterprises had existed since the period of independence in Nigeria,

and national development started in 1970-79 when Nigeria adopted the policy of indigenization

conscious attention on small and medium scale enterprises as the instrument of economic growth

through its national development plan programme. The development plan articulated the need for the
Nigerian economy to be self reliant through industrialization, entrepreneurial

The Federal government singled out the small-scale enterprises as the key area of intervention.

way of meeting up with its commitment to the development plan and the indigenization policy.

international capitalist entrepreneur and on the account that revitalizing small and medium scale

The intention was that it would be a reaction against the dominance of the economy by the

This was premised on the government desire to support small-scale industries in the country as a

enterprise would enhance the capacity of the indigenous capitalist class, as a potential player in

development employment generation and development through increasing export trade.

economic growth and national development.