SMALL FIRMS ARE THE BACKBONE OF THE NIGERIAN ECONOMY

By Debbie Ariyo

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.


Back to top of page

Back to AEA Home Page
Copyright Africa Economic Analysis 2000