CHAPTER ONE

1.1 Background of the Study

Small and medium scale enterprises (SMEs) are generally regarded as the engine of economic

growth and equitable development in developing economies. They are labour intensive, capital

saving and capable of helping create most of the one billion new jobs the world will need by the

end of the century. They are also perceived as the key to Nigeria’s economic growth, poverty

alleviation and employment generation. But their unimpressive performance in employment

generation in recent years has generated a lot of research interests on their challenges and

prospects. After Nigeria’s independence in 1960, much emphasis has been laid on the growth of

small and medium scale industries as a means of reducing the incidence of poverty and

unemployment in the country. Since the adoption of the economic reform programme in 1986,

there has been a decisive shift from grandiose, capital intensive and large scale industrial projects

based on import substitution to small scale industries with immense potentials for developing

domestic linkages for sustainable industrial development.

It has been argued that one of the major ways of propelling economic growth and development in

developing countries is through the encouragement of Small and Medium Enterprises (SMEs)

(Ameh, Alao & Amiya, 2020). Based on this, the Nigerian government has overtime launched

economic reform schemes aimed at positioning Small and Medium Enterprises to play major

roles in the development of the national economy and boosting the nation’s Gross Domestic

Product (GDP), thereby stimulating national development (Onyedikachi et al, 2022; Ekwochi et

al, 2019). The initiative was borne out of government’s frustration that despite the abundant

natural resources in the country, her developmental strides since independence had assumed a

slow pace and was almost grinding to a halt. Basic infrastructure had collapsed while all sectors
of the economy were plaque by one challenge or the other; unemployment rate had skyrocketed

and with increase in the poverty rate, many people resorted to owning their own businesses

(Berisha & Pula, 2015).

With many hitherto big and profitable companies folding up, small businesses are fast springing

up and entrepreneurship has become the toast of many unemployed graduate and non-graduates

alike. Small and Medium Scale Enterprises (SMEs) have become means of generating

employment, technological transfers, effective and efficient utilization of local raw materials and

opening up of the economy thereby contributing to the economic growth and development of the

nation. Undoubtedly, SMEs remain the catalyst for economic recovery and sustainability and this

fact has led to its wide acceptance by governments in both developed and developing economies.

It has become the focus of general interest and research with regards to how the sector can be

better positioned to achieve its aim of contributing to nation building, especially in developing

countries (Imeokparia & Ediagbonya, 2014; Folorunsho, Abodunde & Kareem, 2015).

Despite the benefits derivable from the emergence of SMEs, the full potential of their

contribution to national growth can only be realized with the full support of the government.

Consequently, successive government in Nigeria have since the 1980s been evolving policies

and programmes aimed at consolidating the gains of the sector (Wasiu, 2019; Yahaya, Dutse &

Bello, 2021). With the emergence of Micro finance bank in 2005 by virtue of the Central Bank

of Nigeria microfinance provision which stipulated short-term financing to Medium, Small and

Micro Enterprises (MSMEs), the needed boost in the country for the growth of the SMEs sub-

sector was set in motion. However, even with the intervention of government, the full potentials

of the sector is still yet to be achieved and so it requires the collaboration of all-government, the

private sector and development partners for the sector to accomplish its goals (Anthony & Harry,
2015).). It is against this backdrop that this study examined the impact of government policy on

the growth of Small and Medium Enterprises in Nigeria.

1.2 STATEMENT OF THE PROBLEM

Most SMEs in Nigeria die within their first five years of existence, a smaller percentage goes

into extinction between the sixth and tenth year while only about five to ten percent survive,

thrive and grow to maturity. Many factors have been identified contributing to this premature

death of SMEs. Key among them include: insufficient capital, irregular power supply,

infrastructural inadequacies (water, roads etc.), lack of focus, inadequate market research, over-

concentration on one or two markets for finished products, lack of succession plan, inexperience,

lack of proper book keeping, lack of proper records or lack of any records at all, inability to

separate business and family or personal finances, lack of business strategy, inability to

distinguish between revenue and profit, inability to procure the right plant and machinery,

inability to engage or employ the right caliber of staff, cut-throat competition. Beckman contend

that most of the problems of SMEs are external to it, among them are those related to capital

shortage, taxation and regulations, product liability patent and franchising abuses. The internal

problems of SMEs in Nigeria include: inadequate working capital, stiff competition from larger

companies, difficulties in sourcing raw materials, low capacity utilization, lack of management

strategies, poor educational background of operators, and huge financial problems while the

external problems include: policy inconsistencies, multiple taxation, harsh regulatory

requirements and trade groups.

1.3 SIGNIFICANT OF THE STUDY

The ability of Small and Medium Enterprises (SMEs) in Nigeria to effectively and efficiently

contribute to the nation’s economic growth and development by responsible for government’s
continuous intervention in the sector. Impact of government policy on small and medium

enterprises have been able to sustain development through a well-developed SMEs sub-sector

that has seen to the reduction of hunger and poverty, unemployment and underemployment as

well as improved the general well-being of the citizenry (Alabi et al, 2019)). Nigeria therefore

needs to understand what these countries have done to make their SMEs vibrant and a major

contributor to national growth. This will enable Nigeria to unlock the potentials inherent in the

SME sub-sector to help in lifting the citizens out of extreme poverty, hunger, poor standard of

living, create employment and impact positively on national development.

The Nigerian economy has over the years been plague by policies which make no impact on

national development owing to lack of the political will to effectively implement them. This has

led to a plethora of challenges begging for government attention such as increased rates of

unemployment, violent crimes, high mortality rate, banditry, cultism and terrorism (Oluwadare

& Oni, 2016; Imoisi & Ephraim, 2015). Owing to these challenges, it may not be out of place if

the government takes a critical look at the SMEs subsector with the aim of encouraging more of

her citizens to go into entrepreneurial activities that will create productive businesses in order to

stimulate the growth of the economy. Doing so will no doubt further open up the sector so that

the nation can reap from its full potentials. Based on the above, this study therefore investigates

the impact of government policy on Small and Medium Enterprises in Nigeria.

1.4 RESEARCH QUESTIONS

1. What are the effects of government expenditure on small and medium enterprises in Nigeria?

2. What are the effects of Unemployment rate on small and medium enterprises in Nigeria?
1.5 OBJECTIVES OF THE STUDY

The broad objective of the study is to examine impact of government policy on small and

medium enterprises in Nigeria. Specifically, this study seeks to:

1. Determine the effect of government expenditure on small and medium enterprises in Nigeria.

2. Examine the effect of Unemployment rate on small and medium enterprises in Nigeria.

1.6 RESEARCH HYPOTHESES

Ho1: Determine the effect of government expenditure on small and medium industry output.

Ho2: Examine the effect of Unemployment rate on small and medium industry output

1.7 SCOPE OF THE STUDY

1.8 OPERATIONAL DEFINITION OF TERMS

Impact: the force of impression of one thing on another, a significant or major effect

Policy: A policy is a principle or course of action proposed or implemented by a governing body.

Government: A government is a body of people that work to effectively and successfully guide

a unit or community

Government Policy: policy is a set of decisions by governments and other political actors to

influence, change, or frame a problem or issue that has been recognized as in the political realm

by policy makers and/or the wider public.

Small and medium: Small and medium-sized enterprises (SMEs)

are businesses whose personnel and revenue numbers fall below certain limits, Small-size

enterprises are companies with fewer than 50 employees, and medium-size enterprises are ones

with fewer than 250 employees.

 CHAPTER TWO

2,0 LITERATURE REVIEW

2.1 CONCEPTUAL REVIEW (SMALL AND MEDIUM ENTERPRISES)

Globally, Small and Medium Enterprises (SMEs) accounted for up to 99% of all business

activities (Jalali, Jaafar, & Ramayah, 2014; Kusumawardhani et al., 2009) and the growing

number of SMEs indicate the economic well-being of a nation (Buli, 2017; Laukkanen, Nagy,

Hirvonen, Reijonen, & Pasanen, 2013). It is generally acknowledged that SMEs promote

innovation, generate a new idea, and identify new opportunities that larger enterprises do not

realized. Specifically, SMEs create wealth, improve economic growth and offer employment

(OECD, 2017; SMEDAN, 2013). Besides, SMEs function in a dynamic and competitive business

environment (UNIDO & OECD, 2004). For instance, in the developing economy like Ghana,

SMEs contribute up to 70% and 80% to gross domestic product (GDP) and employment

respectively (D’Imperio, 2014). Similarly, in South Africa, it contributes 57% to GDP and 61%

to employment. Despite this more evident of SMEs contribution, in Nigeria, it only contributes

46% to GDP and 25% to employment (Aminu & Shariff, 2014; Terwase, Abdul-Talib, &

Zengeni, 2014). Therefore, for a nation to achieve its economic objectives, the survival and

performance of SMEs must be prioritized.

However, some issues have been recognised as constraints to the performance and survival of

SMEs, in Nigeria. These include lack of access to capital (AC), law level of strategic orientation

such as. market orientation (MO), learning orientation (LO) and entrepreneurial orientation (EO)

(Abiodun & Kida, 2016; Mahmoud, 2011; Shehu & Mahmood, 2014; SMEDAN, 2013). What is

generally missing from the issues expected to be constraining the success, competitiveness, and

performance of SMEs is their ability to focus on strategic orientations (Abiodun & Kida, 2016;
Aminu & Shariff, 2015; Zamani, Abdul-Talib, & Ashari, 2016). Several studies have revealed

that those enterprises that adopt strategic orientations including market, learning and

entrepreneurial orientation as an important culture of business do perform better (Buli, 2017;

Laukkanen et al., 2013; Lumpkin & Dess, 1996; Suliyanto & Rahab, 2012).

Market Orientation (MO) concerns with the continuous search of information relating to

customers, competitors, and inter-functional coordination for enhancing an enterprise

performance (Abdul Talib, 2005). Meanwhile, learning orientation (LO) involves questioning

enterprise practices and old assumptions (Calantone, Cavusgil, & Zhao, 2002). Similarly, it

appears that the extent to which an enterprise uses vital market information is a function and

outcome of what it has previously learned (Sinkula et al., 2007) but, entrepreneurial orientation

(EO) is an enterprise decision-making propensity of favouring entrepreneurial activities through

risk-taking, innovativeness and pro-activeness (Covin & Slevin, 2009; Lumpkin & Dess, 2016).

However, the intrinsic association of MO, LO, EO, and SMEs performance in developed

economy has received considerable attention both from practitioners and scholars (Brouthers,

Nakos, & Dimitratos, 2015; Laukkanen et al., 2013; Nasir, Al Mamun, & Breen, 2017).

Nevertheless, the potential differences of the influence of MO, LO EO on SMEs performance in

developing countries has received insignificant attention in the available literature, and

researchers have called for re-examination of the extent of an impact of MO, LO and EO have on

enterprises performance (Buli, 2017; Mahmoud, Blankson, Owusu-Frimpong, Nwankwo, &

Trang, 2016; Rauch, Wiklund, Lumpkin, & Frese, 2009).

Furthermore, most of the previous studies focussed on the individual effects of strategic

orientation on performance, and still, the results of these studies came up with mixed findings.

Some of these studies have revealed a significant relationship between MO and SMEs
performance (Eris & Ozmen, 2012; Ho et al., 2017; Mahmoud, 2011; Reijonen et al., 2012;

Slater & Narver, 2000; G. Wang & Miao, 2015). In the same vein, other studies have revealed an

insignificant relationship between MO and SMEs performance (Haugland, Myrtveit, & Nygaard,

2007; Keskin, 2006; Mahmoud et al., 2016; Polat & Mutlu, 2012; Suliyanto & Rahab, 2012).

Moreover, studies on LO such as (Farrell, Oczkowski, & Kharabsheh, 2008; Frank, Kessler,

Mitterer, & Weismeier-sammer, 2012; Jiménez-jiménez & Sanz-valle, 2011; Rhee, Park, & Lee,

2010) have found a significant relationship with SMEs performance. In contrast, some studies

such as (Farrell, 2002; Lam, Lee, Ooi, & Lin, 2011; Long, 2013; Suliyanto & Rahab, 2012) have

found an insignificant relationship between LO and enterprise performance. Additionally, studies

such as (Fairoz, Hirobumi, & Yukiko, 2010; Li, Huang, & Tsai, 2009; Rodríguez-Gutiérrez,

Moreno, & Tejada, 2015) have revealed a significant relationship between EO and performance.

Contrary to these studies, EO was reported to have an insignificant relationship with SMEs

performance (Alegre & Chiva, 2013; Matsuno, Mentzer, & Ozsomer, 2002; Walter et al., 2006).

However, scholars argued that achieving the performance implication of strategic orientation

(MO, LO, EO) requires a huge resource commitments (Covin & Slevin, 1991; Wiklund &

Shepherd, 2005). Nevertheless, due to the insufficient resources, SMEs usually were unable to

satisfy this resource obligation (Fatoki, 2012; Wang, 2016). Hence, access to capital can play a

critical role in whether SMEs can translate strategic orientation into superior performance

(Wiklund & Shepherd, 2005). However, there are limited studies on the combined effect of

strategic orientation (MO, LO. EO) which is gradually considered compulsory for greater

performance of SMEs (Kajalo & Lindblom, 2015; Nasir et al., 2017; Nikraftar & Momeni, 2017;

Zamani et al., 2016), yet the impacts of MO, LO and EO are inadequate without resources

commitment (Zhongfeng Su, Xie, & Wang, 2015).

In addition, past studies failed to consider other tangible resources like capital which may likely

make a significant contribution to the success of intangible resources such as EO, MO, LO on

organisational performance (Alizadeh, Alipour, & Hasanzadeh, 2013; Keskin, 2006; Mahmoud,

2011) Based on this, it is important to know and understand the relationship between market

orientation and SMEs performance in Nigeria. Therefore, this supports the rationale for this

proposed framework for understanding the relationship between market orientation and SMEs

performance. Accordingly, it is hypothesised:

2.1.1 Market orientation would have a significant effect on SMEs performance in Nigeria.

Learning Orientation (LO) simply refers as the ability of an enterprise to use knowledge to

challenge an old belief or assumptions about their marketplace and practices or how the

enterprise should strategize to have a more competitive advantage (Farrell et al., 2008). This

comprises gathering and evaluating as well as sharing critical information regarding

technological advancement, changes in customer needs, or market development as well as

competitors action (Calantone et al., 2002; Spicer & Sadler-Smith, 2006). Enterprises with a

strong learning orientation inspired their employees to question the process of their business

activities and also develop a new way in which the information is processed and interpreted to

create new knowledge that can be transformed into business performance (Day, 1994; Mavondo

& Chimhanzi, 2005). Also, Farrell et al., (2008) argued that learning orientation is an enterprise

value that allows the exploitation of opportunities and neutralises competitors’ threats in a

dynamic environment. For instance, learning orientation gives an enterprise ability to effectively

identify customers need more than their competitors (Panayides, 2007). Learning orientation lead

to new product success, increase in customers’ loyalty, improve growth and thereby increase
SMEs performance (Melton & Hartline, 2012; Pesämaa, Shoham, Wincent, & Ruvio, 2013;

Salim & Sulaiman, 2011).

Several studies have reported that successful learning orientation improved firm productivity and

innovation (Keskin, 2006; Long, 2013; Nybakk, 2012), good customer relationship, and an

overall enterprise performance (Rhee et al., 2010). Still, there are many numbers of SMEs that

do not devote any resources for enhancing their enterprise learning orientation (Suliyanto &

Rahab, 2012). Moreover, SMEs usually fail to use subsidized offerings for their workers for

individual lifelong training programs effectively (Keskin, 2006) and effective learning depends

on the culture of the enterprise. This is because most of SMEs are incapable to exercise LO due

to their liabilities of newness, inexperience and smallness (Lam et al., 2011; Nybakk, 2012).

Similarly, SMEs are usually regarded as adaptable and flexible organizations, meanwhile, on the

other hand, adaptability and flexibility require resources, which are generally limited in this kind

of organization (Zhongfeng Su et al., 2015).

Studies report that LO has a significant impact on SMEs performance (Dulger et al., 2016;

Karimi & Ahmadpour Daryani, 2017; Kropp et al., 2006; Wang, 2008; Wolff et al., 2015).

Specifically, LO is considered as one of the important strategic resource required by the SMEs to

utilize and maintain a competitive position and achieve better performance (Karimi &

Ahmadpour Daryani, 2017; Nasir et al., 2017). Also it is clear most SMEs facing the resources

challenges which hindered effective implementation of LO especially in developing countries

(Wang, 2008; Wang, 2016). Generally studies on LO frequently conducted in developed nation

where there is free flow of resources (Hernández-Linares, Kellermanns, & López-Fernández,

2018; Huang & Wang, 2011).

2.1.2 Learning orientation would have a significant effect on SMEs performance in

Nigeria.

Entrepreneurial Orientation (EO) is described as the enterprise that focuses on technological

innovation, identification and exploitation of opportunities pro-actively through risk-taking

(Hassim, Asmat-Nizam, & Addul Rahim, 2011; Rauch et al., 2009; Wiklund & Shepherd, 2005).

EO is a process and practice of decision making that results in new venture creation (Lumpkin &

Dess, 2001). EO is an extent of how the enterprise exists through their ability to exhibit

distinctive decision making in a systematic process and practice that will provide company

competitive advantage and leadership position in the market. According to Covin and Slevin

(2009), EO is a simultaneous exhibition of business activities based on risk-taking,

innovativeness and pro-activeness. Entrepreneurial enterprise always improves EO behaviour

based on inclination to risk-taking behaviour, innovative action and futuristic pro-activeness

(Miller, 2013). Risk-taking signifies to a proclivity of moving into business with unknown

outcomes while innovativeness is the inclination to back up new ideas which involved in the

creation of process, experimentation and invention that could result to new products and services

or production processes but pro-activeness specifies the extent of forecasting and acting on

customers future needs with intention to drive untapped opportunities (Covin & Slevin, 2009;

Rauch et al., 2009).

Based on the entrepreneurship literature, EO is vital for the enterprise to achieve better

performance (Covin & Wales, 2011; Gupta & Gupta, 2015; Rauch et al., 2009). EO is the ability

of an enterprise to search and act to any promising opportunities which will lead access into a

new market. Similarly, Zahra, et al., (2008) debated that entrepreneurial orientation specified an

enterprise’s ability to identify and exploit novel opportunities. This idea of opportunity
identification is also affirmed by Lumpkin and Dess (2016), who maintain that EO is concern

about how enterprise chases a new marketplace with new approach or practices, and systematic

decision-making that assists the enterprise to act in a more entrepreneurial way.

SMEs need to increase EO for their survival and growth in dynamic business environment

(Fairoz et al., 2010) because of rapid technological change and shortage of product life cycle

increase the need for an enterprise to be innovative and creative in order to come up with new

idea that will improve product quality or production process and cope with constant

environmental change (Brouthers et al., 2015; Engelen, Gupta, Strenger, & Brettel, 2015). The

increase in globalization and local competition support the need for an enterprise to build

capabilities and be ahead of the competitors. The capability to spot and unearth new opportunity

is an important determinant of greater enterprise performance (Mahmood & Hanafi, 2013;

Wiklund & Shepherd, 2005) and is commonly related with a pro-activeness and innovativeness

leadership in an enterprise (Aktan & Bulut, 2008; Zahra, 2005). Enterprise distinctive

capabilities, for instance, innovative, decision-making process, and new technology

implementation are the main source of competitive position, which can be cultivated and allocate

to raise profits and consequently achieve superior performance (Nasir et al., 2017; Rahomee,

Aljanabi, Azila, & Noor, 2015).

Earlier studies have established that entrepreneurial orientation has a significant effect on

performance (Covin & Slevin, 1989; Gupta & Batra, 2016; Hussain, Abbas, & Khan, 2017; Real,

Roldán, & Leal, 2014; Zhonfeng Su, Xie, & Li, 2011). However, Lumpkin and Dess view the

complexity of EO relationship to performance and proposed that the performance effects of EO

are specifically contextual. That is, the extent of the association between EO and enterprise

performance is conditional upon the business environment and internal system of an

organization. As far as the business environment is involved, EO has been extensively

researched in the western context and other developed nation, while very few studies have been

carried out in emerging economies. Based on this, this study hypothesizes that:

H3 Entrepreneurial orientation would have a significant effect on SMEs performance in Nigeria.

Access to capital (AC) is referred to as the SMEs availability to obtain financial capital from

external sources (Bouri et al., 2011). The SMEs ability to obtain financial resources either from

internal or external sources indicating important capabilities for the enterprises’ survival in a

competitive environment (Adomako et al., 2016; Fonseka, Yang, & Tian, 2013). This is due to

the fact that without access to capital the enterprise objective will be difficult to achieve

(Agyemang & Ansong, 2017; Wang, 2016). With the availability of financial resources,

enterprises can implement a sound strategic orientation and meet customer expectation which

subsequently transformed into superior performance (Wiklund & Shepherd, 2005). Scholars have

considered access to capital as a determinant factor for attaining business objective including

business growth and performance (Adomako et al., 2016). However, most of SMEs found it

difficult to obtain financial services as a result of the cost of borrowing including administrative

cost, high-interest rate and cost of loan processing. (Bouri et al., 2011; Tumwine, Akisimire,

Kamukama, & Mutaremwa, 2015).

Several studies reported that there is a relationship between access to capital and the performance

of an enterprise. For example, the study by Asad and Sharif (2016), reported that access to

capital for SMEs was positively and significantly associated with enterprise growth. The finding

recommended that Pakistan enterprises were more prospective to expand their business when

they ensured affordable access to capital hence, indicating that the enterprises are growing larger.

Similarly, Wang (2016), revealed that bank financing has a significant impact on enterprise
growth and survival. Nevertheless, the study discovered that the enterprise growth depends

heavily on external financing sources despite internal financing. Moreover, the study reported

that more than half of SMEs preferred internal financing to improve the performance of their

enterprise. In fact, SMEs in need of external financing faces serious challenges of high-interest

rates, difficult application process and high collateral need.

In another study by Song Yu and Lu (2018), there is significant evidence that access to capital

has a direct influence on business firm, which then favourably transformed into economic growth

and development. As reported by Harash, Al-timimi and Alsaad (2014), SMEs access to capital

has a positive connection on the survival and performance of a firm. Equally, the study by

Mamun (2016), showed that SMEs are greatly dependent on capital from external sources to

increase financing and achieve sustainable development. Preceding evidence indicates that

access to capital among SMEs brings higher productivity in developing economies. For example,

a study in Ghana indicates that financial literacy and access to capital provide a significant

achievement to SMEs. It also shows that higher access to capital absolutely increases the

productivity and enterprise performance (Adomako et al., 2016).

However, theoretically, market orientation, learning orientation and entrepreneurial orientations

all facilitate the exploitation and development of new opportunities that improve SMEs

performance; thus, strategic orientation would have a significant performance effect on SMEs

(Covin & Slevin, 2009; Mahmoud, 2011; Nybakk, 2012). Yet, adopting a strong strategic

orientation are progressively considered indispensable but inadequate for competitive position

and performance of SMEs (Kajalo & Lindblom, 2015; Lonial & Carter, 2015). The empirical

results concerning the intensity to which strategic orientation (MO, LO EO) is related to

enhanced performance are inconsistent and contradictory (Real et al., 2014; Tang, Tang, Marino,
Zhang, & Qianwen, 2008). Although several studies report a strong positive association between

MO, LO EO and performance, other researches find insignificant correlations (Lumpkin & Dess,

2001; Menguc & Auh, 2006; Suliyanto & Rahab, 2012; Voss & Voss, 2000; Walter et al., 2006).

Such differences obviously reflect the point that strategic orientation (MO, LO EO) may

occasionally, but not constantly, contribute to enhanced performance (Wiklund and Shepherd

2005). Therefore to address this, scholars specify that strategic orientation (MO, LO EO) is

resource consuming (Covin & Slevin, 2009; Pratono, 2016; Zhongfeng Su et al., 2015). MO LO,

EO all involve making huge assets commitments to new technology, new products and services

to the new market (Kajalo & Lindblom, 2015; Sok, Snell, & Sok, 2017). However, resource

constraints may be related to internal financing as a major source of resources to the most SMEs

(Wiklund & Shepherd, 2005). Without significant resources, the performance effect of MO, LO,

EO will be hindered (Tang et al., 2008). Thus, only with adequate resources can strategic

orientation (MO, LO EO) be translated into superior performance (Pratono, 2016; Zhongfeng Su

et al., 2015).

2.2 CONCEPTUAL FRAMEWORK

Small-medium enterprises are well recognized and acknowledged worldwide as vital and

significant contributors to economic development, job creation, and the general health and

welfare of economies, both nationally and internationally (Morrison, et al, 2003).

The Nigerian Government has used various definitions and criteria in identifying what is referred

to as small and medium sized enterprises. At certain point in time, it used investment in

machinery and equipment and working capital. At another time, the capital cost and turnover

were used. However, the Federal Ministry of Industry, under whose jurisdiction the micro and

small sized enterprises are, has adopted a somewhat flexible definition especially as to the values
of installed fixed cost. Amidst several definitions provided by the Government and its attendant

agency, the National Council on Industry defined small and medium enterprises as an industry

whose total project cost excluding cost of land but including working capital is not more than

N500,000:00 (i.e. US$50,000). Small scale enterprises on the other hand is defined by the

council as an industry whose total project cost excluding cost of land and including working

capital does not exceed N5m (i.e. US$500,000).

Furthermore, the National Council on Industry of Nigeria at its 9th Meeting adopted the report of

its Sub-Committee on Classification of Industrial Enterprises in Nigeria and approved a new set

of classifications and definitions of the cottage/micro and small scale enterprises. According to

the Council, cottage/micro industry is an industry whose total cost, including working capital but

excluding cost of land, is not more than N1 million and a labour size of not more than 10

workers; while small scale enterprises is an industry whose total cost, including working capital

but excluding cost of land, is over N1 million but mot more than N40 million and a labour size of

between 11 and 35 workers. Stanley and Morse classified industries into eight by size. They

adopted the functional approach, and emphasized how small and medium sized industries differ

from larger industries by bringing out clearly the differing characteristics which include little

specialization, close personal contact of management with production workers and lack of access

to capital. They argued that establishments employing not less than 100 workers should be

defined as medium sized whereas those with less than 100 employees be defined as small sized.

The UNDP/UNIDO Report, 2000 noted that while the limit of 10 workers for Micro/Cottage

Industries was flexible enough to capture about 95% of rural industries and micro enterprises in

this category, the ceiling of N1.0 million may however exclude about 40% of such entrepreneurs
with modest factory buildings and basic infrastructures which they require (e.g. access road,

generator, bore-hole wells, storage facilities etc).

Small and Medium Enterprises (SMEs) have been recognized as driving force for economic

growth in any nation. Empirical evidences have shown that they contribute to employment,

alleviate poverty and increase productivity level in a nation. In recognition of the role of SMEs

in the economic growth process of Nigeria, government has taken concerted efforts to foster the

growth of SMEs and also develop entrepreneurship. SMEs are of necessity to a nation’s

industrialization process. One foremost way of promoting SMEs is by having easy access to

finance. Finance is of high importance to the growth of SMEs. (Aernold, 2008).

For SMEs to perform their role in the economy, they need adequate funds in terms of short and

long-term loans. Adequate financing of SMEs is paramount to their survival, as it has been

recorded in literature that financial constraint is one of the main reasons SMEs fail in Nigeria

(Ayeni-Agbaje et al., 2015). Osoba argued that financing strength is the main determinant of

small and medium enterprises growth in developing countries. There is no gainsaying that

finance would boost the performance of SMEs if adequate and optimally utilized. The dearth of

funds in these businesses is capable of crippling their operations. Lack of funding for SMEs

creates obstacles in allowing them contribute to economic growth and development. Onugu

ranked access to finance as the second problem faced by SMEs in Nigeria

According to Yoshino (2015), SMEs account for 70% to 60% of all employment and GDP in

developing countries. Likewise, SMEs play a significant role in the Nigerian economy. Most

people are survived on subsistence agriculture, and around 70% of the workforce makes a living

in agriculture (Economic Recovery & Growth Plan [ERGP] 2017). The vulnerable life and

difficulties of agriculture, coupled with limited availability of jobs in the formal sector, the hike
in population growth, the large expansion of formal education, and fast acceleration of

urbanization all contribute to an increasing number of people in the SMEs (ERGP, 2017; World

Bank, 2014). However, due to the high dissolution of SMEs in Nigeria, there is no corresponding

increase in GDP and employment (Anudu, 2016; Muddaha, Kheng, & Sulaiman, 2018). What

led to the dissolution of SMEs is attributed to the lack of strategic orientations (e.g. lack of

access to market, skill and lifelong learning and weak entrepreneurial spirit), insufficient access

to capital and unfavourable business environment (Salisu & Abu Bakar, 2019; SMEDAN, 2013).

To address these problems, countless measures were taken by the federal government of Nigeria

which` include macro-level intervention through Central Bank of Nigeria (CBN) of direct

assistance to enterprises, providing the enabling business environment and many organised

approach of developing the whole market were introduced (Pulka, Ramli, & Mohamad, 2019;

SMEDAN, 2012). Despite that, SMEs’ performance is still below expectation. The poor-

performance of SMEs has increased the poverty level and a high level of unemployment (Aminu

& Shariff, 2015; Pulka, Ramli, & Bakar, 2018; Shehu & Mahmood, 2014).

Preceding studies indicated that SMEs are the major contributor to employment in all nations or

countries (Kanibir et al., 2014; Muddaha et al., 2018; OECD, 2017; Zhongfeng Su et al., 2015).

For instance, the contribution of SMEs to employment in Ghana and South Africa accounted to

80% and 61% respectively. While in Morocco and Ecuador SMEs contributes 55% and 46% to

employment. But in Bangladesh and Turkey, SMEs contributes 58% and 80% respectively

(D’Imperio, 2014). In comparison with Nigeria, SMEs contributes 25% to employment which is

very little considering the country is among emerging nations (Aminu & Shariff, 2014). It is

conspicuous in emerging countries an increased in SMEs performance has a direct impact on

economic growth. For instance, it has been reported in Bangladesh, India, and Indonesia an
economic grow with the performance of SMEs (D’Imperio, 2014). Consequently, economic

growth is critical for poverty reduction and employment generation (Acquaah & Agyapong,

2015; May-Chiun, Mohamad, Ramayah, & Chai, 2015; Tehseen, Ahmed, Qureshi, Uddin, &

Ramayah, 2019)

According to Wolff and Pett (2006), the performance of SMEs is attributed to the firm’s

capability to grow and make a profit, which subsequently improves the economic well-being of a

nation through job creation. On the other hand, Neely, et. al (1995), viewed performance as a

process of satisfying customer needs and wants efficiently and effectively. Moreover, Sandberg,

(2003) viewed SMEs performance as the ability to add individual wealth, provision of

employment as well as survival and growth with the objective to reduce poverty. Whatever

SMEs performance is viewed, it focuses on the use of all available resources at its disposal to

achieve and maintain a better competitive position and higher performance that might guarantee

its success and profitability.

Market orientation (MO) is a fully established construct in the literature of strategic orientation

and has been researched widely in terms of its structure, nature, and outcomes (Abd-Razak &

Abdul-Talib, 2009). Market orientation refers to the degree to which the enterprise’s strategies

and processes are set to respond to customer demand and any market change (Alam, 2010; Nasir

et al., 2017; Zakaria & Abdul-Talib, 2010). Also, Buli (2017) suggests that enterprise with a high

MO is expected to have better customer relations and develop higher customer value. A meta-

analysis of MO by Kirca, Jayachandran and Bearden (2005) revealed that marketing orientation

research has been conducted in various continents concerning more than 114 publications, and

generally agree with the finding that MO has a significant effect on enterprise performance.

Previous findings of empirical researches revealed positive effects of MO on enterprise

performance across firm sizes and industries (Eris & Ozmen, 2012; Hartono, 2013; Herath &

Mahmood, 2013; Mahmoud & Yusif, 2012). The study conducted in Indonesia by Hartono

(2013), reports that MO has a significant impact on firm performance, however, when the

moderating variable is introduced such as market turbulence and competitive intensity provided

non-significant effect between and MO and performance. Another study conducted by

Mahmoud, (2011) reported that MO directly influences SMEs performance in Ghana. Most

recent studies have also reported that MO has a positive influence on enterprise performance

(Amin, Thurasamy, Aldakhil, & Kaswuri, 2016; Buli, 2017; Kocak, Carsrud, & Oflazoglu, 2017;

Nasir et al., 2017).

However, must of the previous studies on Market orientation dwell on large business enterprises

(Im & Workman Jr, 2004; Narver & Noble, Sinha, & Kumar, 2002; Qu & Zhang, 2015), and

most of the researches were conducted in developed countries (Frambach, Fiss, & Ingenbleek,

2016; Morgan, Vorhies, & Mason, 2009; Morgan, Anokhin, Kretinin, & Frishammar, 2015;

Voss & Voss, 2000). While some were in banking industries (Javalgi, Whipple, Ghosh, &

Young, 2005; Mahmoud et al., 2016; Mahmoud & Yusif, 2012). Therefore, little attention has

been given in determining the relationship between market orientation and SMEs performance in

developing countries (Amin et al., 2016). This increases the need for more research on the

relationship between market orientation and SMEs performance especially in developing

country.

2.2.1 IMPORTANT OF SMALL AND MEDIUM ENTERPRISE (SMES)

The importance of SMEs, Rogers (2013) stated that: they enhance capacity building as they

serve as entrepreneurial training avenues; they create more employment opportunities per unit of

investment because of their labour intensive operations; they achieve a much more relative high
value added operations because they are propelled by basic economic activities that depend

mostly on locally sourced raw materials; they provide feeder industry services as they serve as

major suppliers of intermediate goods and components to large-scale industries as well as major

agents for the distribution of final products of such industries; they provide opportunities for the

development of local skills and technology acquisition through adaptation.

2.2.2 OPERATIONAL CHALLENGES OF SMES IN NIGERIA INCLUDE:

Financial Problems: About 80% of Small and medium enterprises are stifled because of poor

financing and other associated problems. The problem of financing SMEs is not so much the

sources of funds but its accessibility. Factors identified inhibiting funds accessibility are the

stringent conditions set by financial institutions, lack of adequate collateral and credit

information and cost of accessing funds. Harper (2015) believes that the capital shortage problem

in the small firm sector is partly one, which stems for the uneconomic deployment of available

resources by the owner-managers. This view was shared by Ihyembe (2017) who claimed to

have seen businessmen take loan for expansion projects only to turnaround to marry new wives,

acquire chieftaincy titles or buy houses abroad. Bruch and Hiemenz (2018) in a study of SMEs in

Asia observed that financing working capital needs was the most frequently mentioned problem.

Binks and Ennew (2019) expressed the view that the funding problem of SMEs is primarily due

to the behavior of banks and imperfection of the capital markets.

Management Problems: Lack of trained manpower and management skills also constitute a

major challenge to the survival of SMEs in Nigeria. According to West and Wood (2020), “…

90% of all these business failures result from lack of experience and competence.” Rogers

(2013), also added that inefficiency in overall business management and poor record keeping is

also a major feature of most SMEs; technical problems/competence and lack of essential and
required expertise in production, procurement, maintenance, marketing and finances have always

led to funds misapplication, wrong and costly decision making.

Inadequate Basic Infrastructure: Government has not done enough to create the best

conducive environment for the striving of SMEs, the problem of infrastructures ranges from

shortage of water supply, inadequate transport systems, lack of electricity to improper solid

waste management. Nigeria’s underdeveloped physical and social infrastructures create a

binding constraint to SMEs growth, since; they heavily rely on the inefficiently provided state

infrastructures and cannot afford the cost of developing alternatives.

Socio-Cultural Problems: Most Nigerian Entrepreneurs do not have the investment culture of

ploughing back profits. Bala (2021) stressed that the attitude of a typical Nigerian entrepreneur is

to invest today and reap tomorrow. Also, the socio-political ambitions of some entrepreneurs

may lead to the diversion of valuable funds and energy from business to social waste. The

problem of bias against made in Nigeria goods is significant. Most Nigerians have developed a

high propensity for the consumption of foreign goods as against their locally made substitutes.

Strategic Planning Problems: SMEs often do not carry out proper strategic planning in their

operations. Ojiako (2017) stated that one problem of SMEs is lack of strategic planning. Sound

planning is a necessary input to a sound decision-making.

Location/Economic Problems: Market stores are dominated by absentee landlords who charge

exorbitant rates. The ownership of market stores by politicians is crowding real small-scale

operators out of the market. The high rents charged by store owners on good locations have

forced real small-scale operators into the streets or at best into accessible places. Also, domestic

economic problems of deregulation and removal of protection as well as the global financial

crisis have been detrimental to SMEs.

Poor Accounting System: The accounting system of most SMEs lack standards hence, no

proper assessment of their performances. This creates opportunity for mismanagement and

eventually leads to the downfall of the establishment.

Multiple taxation: This has become a major problem especially given the role of tax consultants

and agents hired by local governments. They are often crude in their operation, excessive in their

assessment and destructive in their relationship with the production process. They tax everything

in their bid to generate revenue without considering the net effect to household incomes and

employment.

Unstable policy environment: Instability in government policies have caused some SMEs to

collapse. One of such policies is that of the 1980s when government specified that cocoa should

not be exported in raw or unprocessed form after a specified deadline. Many SMEs had to import

machineries only for government to reverse this policy. This negatively affected so many SMEs

in the cocoa industry. The present high mortality rate of SMEs in Nigeria is awful to contemplate

and constitute danger to the entire economic system. It represents serious financial pressure on

the nation’s economy as well as a waste of valuable resources. The business owner should

always consider challenging situations and be prepared to meet them with preplanned strategies.

The survival of SMEs is only possible through a systematic analysis of the problems they are

facing and mapping out appropriate strategies of overcoming them, through a proper

understanding of the business environment. For a business to survive in unfriendly

environmental conditions it should adopt a strategy that utilizes its strengths to exploit

opportunities while avoiding its weaknesses.

Nwoye (2015), argued that strategic changes might take place in a firm without initial

formulations, such decision could be informed by expansion strategy, preference to cash sales
policy, innovation strategy, change in production techniques, local sourcing or use of alternative

materials, backward integration and merger. Thus, any entrepreneur who wants to succeed must

identify business opportunities, be creative, visionary, daring, risk taking, courageous and

sensitive to changes in the business environment

2.2.3 BENEFITS OF SMALL AND MEDIUM ENTERPRISES

According to Ojo (2018) the benefits of small and medium Enterprises include:

1. Stimulation of indigenous entrepreneurship.

2. Greater employment creation per unit of capital invested.

3. Development of local technology.

4. Enhancement of regional economic balance through industrial dispersal.

5. Production of intermediate products for use in large scale enterprises.

6. Facilitation of managerial training for unskilled than large enterprises at making

specialized goods such as embroidery. Mobilization and utilization of demos tic savings

2.3 THEORETICAL FRAMEWORK

Firm growth theories

It has been found that small firm growth can be influenced by several factors. Some of these

factors are external to the firm (can be referred as environmental factors), while others are

internal and within control of owner-managers. It has been found that, firm growth is relating to

firm size and to the age of the firm (Evans, 2000; Jovanovic, 2002). Apart from that, the impact

of human capital on entrepreneurial growth has been also recognized by economic theory

(Casson, 2001)
Economic theories about Growth

According to classic economic theory, the size of the firm is determined by the efficient

allocation of available resources, utilized by available technologies. Accordingly, the observed

business size is an efficient size, which means that long run costs are minimized at that point. It

is assumed that firm growth follows the assumption of profit-maximizing behaviour and from the

shape of the production cost functions (Davidsson, 2001). Therefore a firm will grow until it has

reached the size where long run marginal costs equal price, which is assessed as the “optimum”

size of the firm (Yong, 2005). According to this theory, growth constitutes a limited process, by

which the growth expansion experienced by large companies cannot be explained using this

theory. In order to explain the continuous expansion of large firms, we have to refer to

behavioural approach, which was initially developed by Baumol (2009), and Penrose (2009).

According to this approach, growth is a continuous process that arises the moment that

management strives to exploit under-used resources to the utmost, the only limit being the

coordinating capacity of the management team to inspire confidence and security. Penrose

(2011) argued that, as firms expand; new managers are drawn in who require training and who

need to be integrated into the existing organizational framework of the firm. The abilities and

experience of new management personnel added to those already in the firm will lead to further

potential for expansion, including diversification into new product areas (Penrose, 2009).

Sociological Theories about Growth

According Harre and Gillet (2004) human behaviour is the sum of interactions of individual

mechanisms with each other and with the environment. It is a collective activity, in which

individuals work with others to fulfill their intentions and achieve their projects according to

local rules and norms (Harre, 2009). Harre and Gillet (2004) argue that, actions and the acts,
which people do accomplish, make up a discursive practice. A discursive practice is defined as

the repeated and orderly use of some sign system, where these uses are intentional, directed

towards something. They continue to say that, norms and rules emerging in historical and

cultural circumstances do operate to structure the things people do.

However, Wortham (2007) argues that, it is cultural context and discursive practices, as well as

individuals’ physical and mental states that provide resources which people use to accomplish

their judgments, displays and other actions and turn into capabilities. Social learning theory by

Bandura (2007) emphasizes the importance of observing the behaviours, attitudes, and emotional

reactions of others. Social learning can occur through the observation of behaviour in others

(either in a family or in a society), often referred to as role models. The learning process

transmits social norms, language, educational aspirations, and shapes career preferences through

observational learning and modeling (Bandura 2007).

Through observing others, one forms an idea of how new behaviours are performed, and on later

occasions this coded information serves as a guide for action. According to social learning

theory, if the observer values the reinforcements or recognizes the positive outcomes of such

behaviour, the observer will attempt to replicate the model’s behaviour and obtain similar types

of reinforcement. In relation to career selection, it has been argued that role models are an

important environmental pull factor into one’s decision to engage in entrepreneurship (Scherer,

et al, 2009).

Psychological Theories about Growth

Another approach, which explains small firm growth, holds that, business growth is a result of

conscious human action, which is in turn driven by personal motives (Tuck and Hamilton, 1999).

It is argued that, owners and managers of small firms, rather than firm-specific and
environmental factors, will determine whether or not the firm grows. Davidsson (2001) argues

that economic theories take the willingness to grow a business for granted, by assuming profit

maximization. He says that, growth is a choice of the ownermanager and that profit

maximization is only one of the possible motives for business growth. In this section, we present

psychological theories in relation to what influences entrepreneurial behaviour and business

growth.

Characteristics of Entrepreneurs

According to psychological school of entrepreneurship (Cunningham and Lischeron, (2011),

entrepreneurs are viewed as individuals with unique values, attitudes and needs which drive them

and differentiate them from non-entrepreneurs. It is argued that one’s needs, drives, attitudes,

beliefs and values are primary determinants of a particular behaviour. As such, this school of

thought focuses on personality factors and characteristics. Lachman (2000) suggested that people

who possess personality characteristics would have a higher tendency (or potential) to perform

entrepreneurial acts than people who do not possess such characteristics.

Figure 1: SMEs development framework