Advent of Colonialism in Late 19th to Mid-20th Century

The Nigerian economy was basically agrarian before colonization; the agrarian economy was supported with various craft works on which the local industries (of low technology) thrived. With the advent of colonialism in late 19th to mid-20th century, agricultural products were exported abroad encouraging peasants to produce at full capacity. After independence in 1960, manufacturing technology had been intensified, and the by-products of agriculture were manufactured in the modern way for internal consumption. Invariably, efforts by government and individuals intensified on the establishment of industries, thus, many industries in the areas of agro allied, textiles, ceramics, beverages, building materials were set up. (Shokan, 2000)

Nigeria was one of the richest 50 countries in the early 1970s, but has retrogressed to become one of the 25 poorest countries at the threshold of the 21st century. It is ironic that Nigeria is the sixth largest exporter of oil and at the same time host the third largest number of poor people after China and India. (Igbuzor, 2006, p.2)

However, by the early 1970s, large crude oil reserves were discovered in Nigeria, and exploration commenced earning huge foreign exchange opportunities from exporting large quantities of crude oil. Unfortunately, the nation’s gain in the oil sector was not directed towards the development of the industrial sector, hence the industrial sector could not make significant contributions to the Nigerian economy. The dominance of the oil sector is reflected by the share of oil revenues which accounts for over 95% of the country’s export earnings. (Akinbogun, 2008, p.664)

Despite Nigeria’s vast oil wealth and abundant human resources, fluctuating oil prices, endemic corruption and mismanagement of resources have undermined economic progress and made the majority of the population live in abysmal poverty. With the return of democracy in 1999, the Obasanjo’s administration launched a series of economic reforms designed to address the structural and institutional weaknesses of the Nigerian economy. After the 2003 election, these policies were encapsulated in an all-embracing home-grown economic program known as the National Economic Empowerment and Development Strategy (NEEDS) designed to last from 2004 to 2007. To further enhance the implementation it involved both the state and local tiers of government thereby fostering effective economic coordination of and close collaboration by designing equivalent programs based on the NEEDS model with acronyms like (SEEDS) State Economic Empowerment and Development Strategy and (LEEDS) Local Economic Empowerment and Development Strategy respectively. (Adogamhe, 2007, p.1)

The National Economic Empowerment and Development Strategy (NEEDS), the economic development blueprint, developed by the Peoples Democratic Party (PDP) led government under the tenure of General Olusegun Obasanjo, as well as the 2007 Manifesto (Programme Implementation) of the PDP, are two distinctive documents that have persuaded the creation of the 7-Point Agenda by late president Umaru Musa Yar’Adua. The agenda aimed to strengthen the reforms and build the economy to benefit the citizenry. It encompassed; sustainable growth in the real sector of the economy, physical Infrastructure: power, energy & transportation, agriculture, human capital development: education & health, security, Law and Order, combating corruption, and Niger Delta development (Nigerian Project Agenda, 2007, p.2; Akpobasah, 2004, p.9).

The fiscal policy under the umbrella of the NEEDS programme was intended to achieve macro-economic stability and internal balance. Fiscal policy is also aimed at achieving fiscal transparency, viability, efficiency and improved revenue base (Jhingan, 2003, p.xx). Under the reform, a medium-term expenditure framework (MTEF) was adopted as an instrument to support public expenditure management, the introduction of an oil price-based fiscal rule, which attempted to disconnect government expenditure from the volatility of oil prices and effectively ensures that excess crude revenues are saved and efforts to curtail budget deficits by limiting it to no more than 3% of GDP. This had served to reduce undue burden on monetary policy and provide the right environment for private investment.

In order to fully implementing these policies, the “Due Process” mechanism was introduced, the Nigeria extractive industry transparency initiative (NEITI), public sector restructuring; as well as anticorruption agencies (EFCC and ICPC). (Nigerian Project Agenda, 2007)

However, the growth performance of the Nigerian economy, has until recently, been sustained at a relatively high level due largely to the sustenance of macroeconomic stability – a product of effective conduct of monetary policy, financial sector reforms and relative improvement in fiscal prudence which is evident in the World Economic Forum report (WEF, 2010, pxx). The current global financial melt-down has weakened growth considerably in the first quarter of 2009 to 4.85 per cent from 5.75% estimated for 2008 and projections for the future are not encouraging (CBN, 2010, pxx). To ameliorate the situation, the Central Bank of Nigeria took measures to encourage the flow of credit for productive investment. The MPR was reduced by 175 basis-points in April 2009 while the liquidity and cash ratios declined from 30% and 2% to 25% and 1% respectively. As these actions did not seem to have yielded the desired economic outcomes in time, the Bank resorted to direct control measures involving interest rate caps and the re-introduction of exchange control measures.

The failure of the economy to respond favourably to the monetary easing measures reflected mainly the under-developed character of the financial market and, concomitantly, the weakness of the transmission mechanism of monetary policy. (CBN, 2010, pxx)

According to a report by the Central Bank of Nigeria (2010), the financial market lacked the depth required to foster stability in policy reforms because bank lending rates remained high and the spread between lending and deposit rates were too wide (interest rate spread) which is difference between bank’s earning from loaned funds and its costs of funds is influenced by non-interest expense, prudential and reserve requirements, market structure, inflation, credit risk and profit expectation of banks. This wide gap is usually caused by high non-financial costs. (MACRO TEXT)

Despite major steps to foster the growth of the private sector through economic reorientation policies, promotion of non-oil small and medium enterprise (SME), foreign investment, financial reforms, and struggle against corruption, these steps proved abortive following the competitive reports. These efforts and momentum, attributable to the return of a democratic government, are reflected in the “improvement and optimism indexes” compiled by the World Economic Forum’s Africa Competitiveness Report (WEF, 2010), which ranks Nigeria fourth among 12 African countries in terms of improvement and first in terms of “optimism”, remains ranked 20th in its macroeconomic environment which is the country’s greatest area of strength , with the government running budget surpluses, a high national savings rate, and low national debt. On the other hand, Nigeria’s economy is characterized by weak institutions (ranked 102nd), including a serious security problem (117th), high levels of corruption (122nd), and government spending that is perceived as wasteful (120th). It also receives poor assessments for its infrastructure (127th) as well as health and primary education (132nd). In addition, the country is not harnessing the latest technologies for productivity enhancements, as demonstrated by its low rates of ICT penetration.

A good business environment or investment climate will encourage private firms to be well managed and efficient, be profitable to grow, create jobs, increase the rate of economic growth, and reduce poverty (Development Gateway 2004, pxx). The Nigerian case is quite different as the World Bank Development report (2005) established a defining feature of the Nigerian business environment; a pervasive legacy of widespread corruption and the breakdown of the normal institutions of civil society which act to ensure a supportive business environment. The manufacturing sector at all levels is performing below-expectation in Nigeria. Many sectors, such as the ceramic industry, glass industry and textile industry among others, are facing difficult times. The non-performance has been traced mainly to the unfavourable economic environment. (Akinbogun, 2008 p.663)

Gnyawali and Fogel (1994, pxx) view the business environment as the overall economic, socio-cultural and political factors that influence people’s willingness and ability to undertake entrepreneurial activities. An adverse business environment can increase production costs substantially. It is estimated that the manufacturing sector in Nigeria has to bear additional indirect costs amounting to 16% of sales because of bottlenecks in the business environment (Larossi, Mousley & Radwan, 2009, pxx).

The World Bank annually conducts a Doing Business survey which investigates the scale and conduct of regulations that enhance business activity and those that constrain it. The 2010 survey of 183 economies corroborates the statistics on set of regulations affecting 10 stages of a business’s life; starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business in developing countries. The 2010 report covers all 36 Nigerian states and Abuja, FCT (Appendix 1). However, the following variables used in measurement do not necessarily capture the full position of the economies under study. Other certain variables also affect the business environment of an economy such as the country’s proximity to large markets, the quality of infrastructure services (other than services related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions, or the underlying strength of institutions, access to raw materials, gross domestic product or current economic reforms, interest rates, available capital for business development among other factors studied by the report.

SMALL BUSINESS ENTERPRISES (MANUFACTURING SECTOR)

The development of SME is an essential element in the growth strategy of most economies and holds particular significance for Nigeria as well. SMEs not only contribute significantly to improved living standards, they also bring about substantial local capital formation and achieve high levels of productivity and capability. From a planning stand point, SMEs are increasingly recognised as the principal means for achieving equitable and sustainable industrial diversification and dispersal; and in most countries SMEs account for well over half of the total share of employment, sales, and value added (CBN, 2003, pxx).

Prior to Nigerian independence, the business climate was almost totally dominated by the colonial and other European multinational companies like United African Company (UAR),

GB Olivant, Unilever Plc, Patterson Zechonics, Leventis, etc. These companies primarily engaged in bringing into Nigeria finished goods from their parent companies overseas. These companies have vast business experience and strong capital base, and dominated the Nigerian economy. The government encouraged these companies by granting incentives as favourable tariffs and tax concessions (Ayozie, 2006 p.2).

Towards the tail end of the 1950s, the Nigerian Industrial Development Bank (NIDB) was founded to assist potential entrepreneurs to get involved in agriculture exploration of national resources, Commerce and industrial production. This time and the early 1960s saw the substantial increase in Nigerian imports and the economy became largely dominated by very few large foreign firms. However, few Nigerians mostly the Semi-illiterates benefited from the generous government attitude of this time. The educated Nigerians then were not interested in entrepreneurship mainly because their focus was on the positions being vacated by the expatriates who were leaving the civil service to return home because of the imminent independence in 1960. (Ayozie, 2006, p.3)

A remarkable breakthrough in small scale business came about through the indigenization Decree 1972 and later in Nigeria Enterprises Promotion Act 1977. A genuine attempt by the Federal Government to make sure that Nigerians play an active and worthwhile role in the development of the economy. The idea behind indigenization was to give Nigerian’s greater opportunities compared to preceding years to participate in the productive sectors of the economy. The decrees sought also to limit the sections of the economy in which foreign companies could operate. The overall aim was to push foreign capital into higher technology areas thereby creating opportunities for Nigerian’s in other areas. The Indigenization Policy was only partly successful in that it did not shift control to Nigerians and it reduced the extent of Foreign Direct Investment (FDI) which came into the country. (Imevbore, 2002, p.5)

According to the Central Bank of Nigeria (2003) small scale enterprise can be defined as an industry with a labour size of 11-100 workers or a total cost of not more than 50 million naira, including working capital but excluding cost of land. Nigeria’s National Council on Industry defined SME in terms of employment as one with between 10 and 300 employees

In the United States of America, the Small Business Administration (2003) has various definitions for small businesses depending on the type of industry. Manufacturing and mining businesses with fewer than 500 employees are considered small businesses while businesses in wholesale trade industries must have fewer than 100 employees. For other industries, such as retail and construction, businesses are classified based on annual revenue.

Tybout (2000, p.11) highlighted the manufacturing sector as the darling of policy makers in less developed countries (LDCs) because it is viewed as the leading edge of modernization, skilled job creation, as well as a fundamental source of various positive spillovers. He further pointed out government participation through special tax concessions and relatively low tariff rates for importers of manufacturing machinery and equipment. In his research, Tybout (2000) also considered whether small firms have been suppressed, and more generally, whether the business environment in less developed countries has bred non-competitive pricing behaviour and low productivity. He concluded that the manufacturing sectors of developing countries have traditionally been relatively protected and subject to heavy regulation, much of which is biased in favour of large enterprises. Therefore, he posited that manufacturers in these countries perform poorly in several respects. Firstly, the markets tolerate inefficient firms, so cross- firm productivity dispersion is high, small groups of entrenched oligopolies’ exploit monopoly power in product markets; and many small firms are unable or unwilling to grow, so important scale economies go unexploited.

The Central Bank of Nigeria conducted a survey in 2003 and described features of SME’s (Ref). “In this survey it is suggested that” One of the general features of SMEs is that they are either sole proprietorships or partnerships. Even when registered as a limited liability company, which is merely on paper (tell me what this means). Secondly, most (Most requires some form of supporting reference) SMEs have labour intensive production processes, centralised management and have limited access to long-term capital; even their access to short-term financing is inadequate and sometime attained at a penal rate of interest and other conditionality.

Another major feature highlighted by this survey of many SMEs is their over-dependence on imported raw materials and spare parts. It also suggested that Many entrepreneurs who set up and manage SME’s lack the appropriate management skills. This the authors suggest was due to lack of adequate capital or sheer ignorance of technological advances, such entrepreneurs purchase obsolete and inefficient equipments thereby setting the stage “ab initio” [1] for lower level of productivity and poor product quality with serious consequences on product output and market acceptability.

According to the Manufacturers Association of Nigeria (2000,p.34) which is the principal private sector institution serving the industrial sector, accredited the situation of declining contribution by the manufacturing sector to GDP is due to a number of factors: the high cost condition in the country occasioned by poor and inadequate infrastructural support services and other policy-included distortions which pose a series of threats not only for output growth in the manufacturing sector but also for competitiveness. A major constraint is the poor sourcing of local raw materials for the local industries caused by several factors: dysfunctional infrastructural obstacles, inadequate technical facilities to process raw materials of the right technical specifications and quality, uncertainty of supply arising from irregular production and supply schedules, the relatively exorbitant prices of some local raw materials compared with the imported counterparts occasioned by high cost conditions and the failure of government to demonstrate commitment to local manufacturing.

In XXXXXX report (200X,pXX) it was found thatThere is also the lack of a level playing ground for local industries to compete with cheap import owing to premature and uncoordinated pursuit of import liberalization, dumping and inconsistency in government policies. To worsen the situation the report suggested that while the best quality imports from advanced countries catch the fancy of the upper echelon of income groups those lower priced substandard quality products from South-East Asian countries attract the lower income groups whose buying power has been weakened by the massive depreciation of the Naira value. In the face of all this, the high incidence of dumping and under-invoicing of imports, especially from Asian countries is threatening the survival of local industries.

Despite the prospective of the manufacturing sector as the engine of industrial growth, an antidote of mass unemployment, a creator of wealth and the key to sustainable development, it continues to suffer severe decline in its contribution to national output and still plagued by similar issues as described by a recent report by the Manufacturers Association of Nigeria (2009). The sector’s performance decreased from nearly 13% in the 1980’s to a shocking 4.13% in 2008 as a result of the global economic crisis which destabilized macroeconomic variables causing a reduction in capacity utilization of the sector and hindering the potential growth in the sector based on speculations regarding certain economic variables and challenges such as depreciation of the value of the naira, increase in the cost of raw materials procurement, high interest rate, increased taxes by state and local government, port congestion as 48 hours cargo clearing is not working, inconsistent power supply, high cost of petroleum produce and more.

In an overview of the sector, it reported that since the return of democracy in 1999, the emergence of political entrepreneurs and predators that have acquired political influence to direct and control economic policy thereby destroying the developing industrial sector. Government policies are influenced towards granting import waivers to certain products in sub-sectors especially textiles, tyres, paper and vegetable oil in an attempt to reduce local prices thereby providing cheaper alternative products in the market. This may be interpreted as not only strengthens the smuggling cartels in regions involved (Cotonou, Seme Border) but leads to transfer of wealth from the majority to few political entrepreneurs and rent seekers, creating pockets of wealth in amidst the poverty of plenty. If only such price reduction policy were implemented in petroleum products which is vital for industry growth. This aspect is consistent with the view of XXXXXX (200X,p.) who referred to….

The president Bashir Borodo, in his report revealed that manufacturing contributes less than 4 percent to the country’s GDP when it should be contributing 25 percent as projected by the vision 2010 which was adopted in 1998, projected an annual GDP growth of 7% between 1997 and 2000, accelerating to 9% between 2001-2005 and then 10% between 2006-2010. This rapid industrial growth, if achieved was expected to increase the GDP share of manufacturing to 25% in 2010 up from 6.9% in 1996 (Imevbore, 2002, p.8). In order to solve the problem the president suggested an act should be passed by the Nigerian national assembly to protect and sustain the industry.

CHALLENGES OF SME’S IN NIGERIA

Spring & McDade (1998) outlined some factors limiting the growth of small enterprises in Africa, including lack of access to capital, lack of business training of owners, and poor facilities. They noted that legal requirements and regulations for establishing and operating formal sector businesses work against the expansion of firms, ranging in size from micro to more visibly small and medium-sized businesses. This leads entrepreneurs to prefer to diversify into other micro-enterprises rather than expand or upgrade existing ones.

It is estimated that the manufacturing sector in Nigeria has to bear additional indirect costs amounting to 16 percent of sales because of bottlenecks in the business environment. Losses due to power outages amount to 10 percent of sales, and production lost while in transit (4 percent of sales) is also significant (Larossi, Mousley, & Radwan, 2009)

According to the World Development Report (2005), electricity is the biggest infrastructure problem in developing countries, and larger firms express more concerns than smaller firms about all services. The irregular power supply affects all other sectors of industrial manufacturing. Regular power supply is the backbone of industrial manufacturing, however, the incessant power failure is one of the factors responsible for the high cost of manufacturing in Nigeria. Nigeria depends basically on hydroelectric power generation which is insufficient in meeting the demands of the nation as a whole and does not correspond with the total energy required in the country (Agboli & Ukaegbu, 2006). As of May 1999, the total energy generated was 1,600 MW (Olowo, 1999), by 2004, this has been increased up 4,000 MW. Unfortunately, according to Olori (2006,p.XX) by 2006 it dropped to 3500 MW

However, Olori suggests in this article (p.XX) that 3500 MW is too small for the whole country, hence, the persistent problem of erratic power supply. Some African countries such as South Africa, Egypt, and Ghana have already overcome this kind of problem. For example, the city of Cairo alone in Egypt is supplied with the energy output of 6000 MW, which is far above what Nigeria as a nation contends with. Also, Ghana in the year 2003 celebrated a whole year of an uninterrupted power supply.

Studies and commentaries on Kano, a town that used to be one of the hopes for the industrial development of Nigeria, provide clear examples of the contemporary situation. Kazaure (2003) explains that the epileptic supply of power by the state monopoly (National Electric Power Authority, now Power Holding Company Nigeria, plc.) has been the most important reason for the collapse of industry in Kano. Over 50% of the stressed firms in that city blamed their misfortunes on NEPA. Electricity supply to Kano got so bad that NEPA became the standby, and company owned and maintained generating sets became the main source of industrial power. Other problems of businesses in Kano include the dumping of finished goods from foreign countries and inadequate water supply (Kazaure 2003). These views corroborate the findings of Frishman’s (2004) study of enterprise survival in Kano.

In 2003, the Commonwealth Business Council lamented the lack of maintenance and widespread deterioration of many facilities in Nigeria: while the United Nations Industrial Development Organisation (UNIDO) stated in 2004 that Nigeria had very high costs for the most important inputs when compared to the input costs of a panel of countries with which it competes (Young-Ahiaume 2004)

Mimiko (2002) identified two critical features that define Nigeria’s economy since 1960; the first is a high propensity for policy turnover resulting from acute political instability. And the second feature is government tendency at managing the more peripheral indexes of the economy, the attendant marginalization of the productive orientation and development agenda. The policies that have negatively affected the small-scale industries in general are the monetary policies, export and import policies, and incessant upward review of petroleum products prices.

Kilby (2003) eloquently reiterated his longstanding thesis on the problems of managerial coordination and control in developing countries. He noted that the managerial gaps, especially the reluctance to delegate power and authority, would have been more visible if the external turbulence had been less extreme

A survey conducted by the Regional Program on Enterprise Development (RPED) which explained that value added per worker is driven by firm size. The smallest firms have the lowest value added and the very large firms have a value added per worker that is significantly greater than other types of firms. Local firms have less than half the value added of firms with foreign equity, and firms owned by indigenous entrepreneurs have a lower value added than firms owned by entrepreneurs of non-African descent.

Access to Finance

Furthermore, another formidable challenge is finance. In a continent where finance is a major constraint on development, the problem confronting the private sector in Nigeria with emphasis on SMEs still stands. Enterprises suffer from high interest rates, terms of rarely more than one year, collateral requirements that are heavy and exacerbated by land-titling problems and an absence of equity capital. Other financial instruments, such as leasing, remain underdeveloped. Most large-scale enterprises in Nigeria have reduced their borrowings from banks due to high interest rates and the short-term nature of available loans. At the same time, banks are unwilling to lend to the small businesses due to its high perceived risks rather funds are currently used to finance primary consumer imports and speculation in the foreign exchange markets. (CBN, 2002)

In a study conducted by Ukaegbu (2003) on post-founder durability of manufacturing firms in the Igbo states of Nigeria (Abia, Anambra, Ebonyi, Enugu and Imo), which is the same region as the company under study. Ukaegbu surveyed 26 firms in total with employees from 55 to over a 100 workers. Both functional (20) and non functional firms (6) whose owners had passed on were part of the survey. The study was spurred by research of the authors’ industrial sociology class at the University of Nigeria, Nsukka initially focusing on functioning firms. In summary, lack of continuity in most of the non-functioning firms was attributed to polygamy and the non-existence of succession plans. Further research would possibly benefit from considering other factors affecting post-founder durability; political, economic factors considering that only 6 firms were surveyed in the course of the research, and this is somewhat limited (Insert information on this type of research).

Tybout (2000) in his research on manufacturing firms in LDC claimed that small firms are unable or unwilling to grow, thus, important scale economies go unexploited. In 2003, PMS electrical made an appeal to UNIDO (Investment and technology promotion branch) estimated at US$ 1.3 million to expand its production and market share and growth in 15amp joint boxes, 13amp fuse plugs, 13amp multi socket, 1 gang 1way switch, 13amp flush switches, 25 mm deep white boxes up to 60% of the market (Appendix 2). This was made possible through the World Bank initiative MSME Project (Micro, small and medium enterprise). Also, the government passed legislation to establish the small and medium enterprises development agency of Nigeria (SMEDAN) as an umbrella agency to coordinate SME sector development. Prior to SMEDAN, another initiative instituted by the CBN-headed Bankers’ Committee in 1999, comprising the central bank and all banks as members, required banks to set aside 10% of pre-tax profits in a Small and Medium Industries Equity Investment Scheme (SMIEIS) to be used for equity investment in SME’s. The scheme, which commenced in 2001, had amassed a fund of about N14.6 billion by mid- 2003.Members of the financial donor working group were DFID, USAID, World Bank, IFC, UNDP, UNIDO, EU, FAO, GTZ. Nevertheless, the company never received any finance, despite the genuine course it would serve to the company and the industry where the policies followed to the latter.

MANAGING INNOVATION

One may argue that environmental hostility in Nigeria should challenge small businesses to greater innovativeness and aggressiveness because necessity, Link, is the mother of invention. This depends on the nature and type of environmental hostility. A hostile business environment, which is within the control of the business, such as competition from other firms, scarcity of market information, and low demand for a firm’s services, can encourage pro-activity, aggressiveness and innovativeness. But a hostile environment outside its control is indeed an actual or potential inhibitor of the success of the enterprise (Mary & Ukaegbu, 2006).

“He that will not apply new remedies must accept new evils – for time is the greatest innovator” (Francis Bacon).

There are several challenges affecting the innovation process these occur from the idea generation stage to the commercialisation of the idea. This research will consider a few of those challenges.

One of the major barriers to innovation is creativity. Large corporations lack the motivational capacity of small companies to nurture or motivate innovative people who have new, creative and break-through ideas. However, some companies rely upon historical experience to help them solve their problems and come with solutions (Marnix, 2006). Creativity in new product development can be approached in different ways, such as technology driven product development or in some cases companies have been successful through a thorough understanding of the customer needs (Mahesh & James, 2008, p.1021).

The level of priority given to the innovation process in an organisation affects its implementation and contributes to its achievement. Many organisations itemise innovation as part of its goals but without the necessary steps to put it into action (Kuczmarski, Middlebrooks & Swaddling, 2000, p21).

Without fail risk aversion is the most frequent barrier to innovation. Most companies inform employees that they simply will not tolerate failure. The challenge of balancing the need for success with the need to accept risk can be daunting (Kuczmarski et al., 2000, p23). Knight (1971) suggests that innovation is risky because innovative actions aimed at the future always confront uncertainty. Innovation can create human resource risk as explained by Henrik (2007) that there was an ever-present risk of losing key people especially technically skilled personnel; this is due to the