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SMALL FIRMS ARE THE BACKBONE OF THE NIGERIAN ECONOMY
By Debbie Ariyo
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At the forefront of recent efforts to modernise and
improve Nigeria’s ailing economy has been a strong
focus on macroeconomic stabilisation, and the pursuance
of a massive trade and investment liberalisation
programme to encourage foreign direct investment in the
country(i). In achieving this, the country has relaxed
most restrictions on current and capital transfers,
introduced tax relief for those multi-nationals willing
to invest in the country, and improved access to foreign
exchange at near market rates. Another caveat to the
liberalisation programme has been the embarkment on a
massive privatisation campaign of public institutions,
again largely to attract foreign investment with the hope
that this would help increase economic activity and bring
in the much needed revenue.
This particular approach to trade and investment
liberalisation can be seen as a right step in the right
direction. In terms of revenue generation, large
multi-nationals do help to bring in the much needed
foreign exchange. They help create the much needed jobs
by employing Nigerians. But in reality, how much do they
contribute to the nation’s economic development and
how much can they help us attain lasting and sustainable
prosperity?
My opinion is that although trade liberalisation is a
step in the right direction, if Nigeria is to reach its
full potential in terms of economic and social
development, it cannot afford to ignore the importance of
its indigenous small and medium enterprises (SMEs), and
the contributions that they make to the country’s
economy. In this wise, trade liberalisation and the
encouragement of foreign direct investment has to go hand
in hand with a thorough and concentrated effort to help
the growth and development of SMEs.
Nigeria’s SMEs (generally an umbrella term for
firms with less than 250 employees), at present
experience a lot of problems and hardship, and this is
not just as an effect of the economic downturn. There are
a number of bottlenecks, including serious
undercapitalisation with difficulty in gaining access to
bank credits and other financial markets; corruption and
a lack of transparency (although this is very general to
the Nigerian society); very high bureaucratic costs; but
most damagingly, a seemingly lack of government interest
in and support for the roles that SMEs play in national
economic development and competitiveness.
Looking back, there has never been any real attempt on
the part of government to formulate any tangible and
lasting policies and/or programmes to support the small
business sector. The only programme that comes to mind
is, in the aftermath of the SAP riots of 1989, the
establishment of the Peoples’ Bank under the
headship of the late Tai Solarin. The bank did help to an
extent by giving out loans to existing micro businesses,
and helped those willing to start up by providing the
necessary part-finance. However, as with all other
Nigerian public institutions, with no vision and no sense
of direction, it has since joined the rank of the
non-functioning and moribund public organisations.
What is more damaging, however, is that this lack of
support for small businesses has been negatively
complemented by misplaced government intervention in what
is seen as the commanding heights of the economy. This
intervention manifests in the concentration of efforts
and resources on large, wasteful and white elephant
public projects and enterprises, and on creating large
import substitution manufacturing businesses managed or
part owned by foreign partners(ii). The woeful failure of
such capital projects like the Iwopin Paper Mill, the
Ajaokuta Steel Complex, the Bachita Sugar Factory and
Leyland Daf all come to mind here.
But why is it important that the new Nigerian
government puts small firms policy at the top of its
agenda? A study done by the Federal Office of Statistics
shows that 97% of all businesses in Nigeria employ less
than 100 employees. Looking at our earlier definition of
SMEs, it then means that 97% of all businesses in Nigeria
are, to use the umbrella term, "small
businesses". The SME sector provides, on average,
50% of Nigeria’s employment, and 50% of its
industrial output. Which government can afford to ignore
such a high contributor to its economy?
The proportion of Nigerian SMEs and their impact on
the economy is pretty much similar to those in other
countries of the world, especially in the advanced
economies. There are approximately 23 million small
businesses in the US. These altogether employ more than
50 % of the private workforce, and generate more than
half of the nation’s gross domestic product
(GDP)(iii). In the European Union, SMEs are seen as
largely essential for European employment. Each year, one
million new SMEs set up in the European Union. SMEs
account for 99.8% of all companies and 65% of business
turnover in the European Union.
In the UK where DMA Consulting Limited is based, the
figures are again pretty similar. At the start of 1997,
there were 3.7 million businesses, with 99% of these
having less than 50 employees, just like in Nigeria. So
what is the difference?
The difference lies in the importance attached to the
SME sector by the governments of each country and the
role they play in national economic development. In the
UK, these businesses not only form the bedrock of the
British economy, but they are widely accepted as the main
hub of economic activity in the country. They are seen
not just as job creators, but as creators of wealth. But
to top it all, the UK government firmly believes that
small and medium sized businesses are crucial to a
successful enterprise economy and is fully committed to
stimulating the creation, competitiveness and growth of
new and small businesses. These are not just mere words.
The key principles underlying the UK Government’s
approach include fostering an enterprise culture that
encourages innovators and risk takers; providing and
maintaining a supportive economic environment;
identifying and removing barriers to growth and providing
high quality business support for firms at all stages of
their development(iv) .
This is where the problem resides. Whilst the UK
government and indeed the governments of other advanced
economies see their SME sector as crucial to their
continued growth and development, the Nigerian
government, to put it mildly, does not have any concrete
idea of what hidden potential lies within its SMEs, and
if it does, has no idea how to harness it.
Obviously, it would be unreasonable of me to equate
Nigeria’s level of development with that of the UK.
This means that I do not expect Nigeria to be able to
provide the same level of sophisticated support for its
small businesses, not only for financial reasons, but
also because in terms of economic development, we are not
on the same par as the British. Having said that,
however, there is nothing wrong in learning from them and
adopting (not blindly, of course) some of their policies
and programmes, that best suit our needs.
However, in order for us to be able to do that, there
has to be some acceptance that things are not going in
the right direction. It means that the government has to
concede that up till now, it’s policies towards SMEs
have been seriously flawed, and that if any progress has
to be made, there has to be a change of direction. This
is the first step which the new Obasanjo government has
to consider.
Small Firms are the backbone of the Nigerian economy,
and to reflect its acceptance and recognition of this,
the Government must have small business policy at the top
of its agenda. It has to put concrete steps in place to
ensure they are able to grow and prosper.
One way of doing this, will be to set up a National
Small Business Office (NSBO), along the line of the Small
Business Agency in the US, and the Small Business Service
in the UK. The NSBO will be an independent body and will
have overall responsibility nationwide for all policies
and programmes relating to small businesses, including
micro businesses, and start-ups, will have its own
budget, and will be closely monitored by and answerable
directly to the National Assembly. The NSBO can be
replicated at the State level. The State Small Business
Office (SSBOs) will have responsibility for running
national policies and programmes set up by the NSBO at
the state level and will also be directly answerable to
the State Assemblies. A particular task appropriate for
the NSBO will be the promotion of exporting activities
amongst small businesses to make them more outward
looking and more able to participate in the global
marketplace.
Another useful raft is the establishment of a Small
Business Development Bank (SBDB) to concentrate solely on
the funding of indigenous businesses. The SBDB will help
to combat the problem of undercapitalisation, by
providing the necessary, cost effective and easily
accessible funding for businesses.
Lastly, it should not be the sole role of Government
to provide financial assistance to businesses. The NSBO
will then have to seriously look into how it can
encourage the growth of equity funding in Nigeria.
Largely practised in both the US and the UK, equity
funding can help provide the necessary funds for large
scale growth and development. Equity funding, or venture
capital as it is widely known, has been the secret behind
the growth of Silicon Valley, and the mass number of fast
growing high technology companies that abound there. With
the high number of billionaires originating from Nigeria,
the NSBO has to find a way of encouraging them to invest
their wealth in small up and coming businesses, thereby
helping them and the country to grow and prosper.
Nigerians are probably one of the most entrepreneurial
people on earth. But this is not enough. In order to
positively encourage the spirit of enterprise among our
young people, universities and other institutions of
higher learning must be encouraged to become more
commercially focused and more entrepreneurial. They
should be encouraged to develop more ties with local
businesses and hold more business related activities on
campus. Students should be encouraged to take business
studies modules as part of their main courses. This will
help develop the interest in business, and provide the
basic understanding of what to expect when going into
business. The knowledge gained will help provide students
with a ready option when they graduate, rather than
wasting their time looking for the jobs that are not
available. This will ultimately help to reduce the pool
of unemployed young people in the country.
Foreign multi-nationals can only contribute so much to
the Nigerian economy. To attain lasting and sustainable
prosperity, we have to accept that our small firms are
the real backbone of our economy. It’s really time
we wake up to the fact.
(i) WTO Report on Nigeria: June 1998
(ii) Ajulu Uzodika. Small Firms and Nigeria’s
Restructuring. April 1999
(iii) Small Business Administration Web Site
(iv) Our Competitive Future: Creating the
Knowledge Driven Economy. DTI December 1998
Debbie Ariyo is a
Director of DMA Consulting Limited, an organisation
providing strategic advice on small firms policy to
governments in developing countries.
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