The Role of Government in the Growth of Small and Medium Industries

The Role of Government in the Growth of Small and Medium Industries

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Interest in the role of Small and Medium Industries in the development process continues to be in the forefront of policy debates in developing countries. The advantages of Small and Medium Industries are numerous, including: the encouragement of entrepreneurship; the greater likelihood that Small and Medium Industries will utilise labour intensive technologies and thus have an immediate impact on employment generation; they are easily established rapidly and put into operation to produce quick returns. More generally the development of Small and Medium Industries can be seen to be accelerating the achievement of wider economic and socio-economic objectives, including poverty alleviation.

The role of finance has been viewed as a critical element for the development of small-scale industries. Previous studies have highlighted the limited access to financial resources available to smaller industries compared to larger organisations and the consequences for their growth and development (Udechukwu, 2003). Typically, smaller industries face higher transactions costs than larger industries in obtaining credit (Olorunshola, 2003). Poor management and accounting practices have hampered the ability of smaller industries to raise finance. Information asymmetries associated with lending to small-scale borrowers have restricted the flow of finance to smaller industries. In spite of these claims however, some studies show a large number of small industries fail because of non-financial reasons.

The panacea for solving problems of economic growth in developing countries often reside in the development of Small and Medium Industries. The establishment of those industries has been the centrepiece of industrial development of many countries such as India, Malaysia, Pakistan and Indonesia, to mention a few. It is expected that the gains to be derived from the establishment of small-scale industries will be translated into the generation of employment at a low investment cost. These industries will also be able to harness raw materials locally and serve as raw inputs to the large-scale industries.

A business whether small of big, simple of complex, private or public is created to provide competitive prices. Business in Nigeria has been classified as small, medium and large. In both the developed and developing countries, the government is turning to Small and Medium Industries, as a means of economic development and a veritable means of solving problems. It is also a seedbed of innovations, inventions and employment. Presently in Nigeria, SMI assist in promoting the growth of the country’s economy, hence all the levels of government at different times have policies which promote the growth and sustenance of SMI. Small and Medium Industries orientation is part of the Nigerian history. Evidence abound in the communities of what successes our great grand parents, made of their respective trading concerns, yam barns, cottage industries, and the likes. The secret behind the success of a self reliant strategy does not lie in any particular political philosophy, so much as the people’s attitude to industrial and in the right incentive is adequate enough to make risk worthy businesses a necessity for the nation. There had been many policy actions by the government, governmental agencies and the private sector to promote SMI in Nigeria. Many experts recognize marketing as a major problem and relevant solution to the growth of SMI.

This research work identifies the historical development and orientation of SMI in Nigeria, tackles the operational definition and scope, describes the role of the Nigerian government as a participant, regulator and facilitator, both legally and politically in the growth of SMI. It identifies the marketing problems of SMI in Nigeria, the provision and enactment of beneficial and supportive laws, the provision of infrastructural facilities, constant man- power and development, direct financial assistance to SMI and the establishment of finance institutions to support SMI. It identifies the roles of SMI in Nigeria’s development and growth. It concludes by clearly specifying the role of government to the survival of SMI in Nigeria, and advances relevant recommendations. For SMI to survive marketing practice and principles must be given prominence.

Economic history is well stocked with enough insights into the humble beginnings of present great corporations. Evidence abound that almost all of the multinational giant corporations in America, Europe and even Nigeria were cottage industries, growing as their industry grew, and through their own sheer ability, marketing skills, and efforts to reproduce and produce existing products better and cheaply. Japan’s economy was dominated by traditional industries, cottage firms and by many SMI, who drew their strength, not only from the abundance of capital, but from the role of marketing in guaranteeing the growth of SMI.

1.2 STATEMENT OF THE PROBLEM

The key problem facing most Small and Medium Industries is lack of finance whether for the establishment of new industries or to carry out expansion plans. The inability to attract financial credit or resources has hindered or stifled the growth of small-scale industrial. The reasons for the lack of fund include the followings:

– High rate of inflation that led to the vast depreciation of Naira exchange rate, thus making it difficult for most Small and Medium Industries to obtain required inputs for expansion.

– Low level of savings in the economy, which leads to low capital formation.
– High rate of interest charged on loans, which scares off potential small and medium scale industrialists. The unwillingness of retail banks to grant credit to   Small and Medium Industries because of the low creditworthiness of these industries has also hampered their growth over the years.

Bothered by the persistent decline in the performance of the industrial sector and with the realization of the fact that the Small and Medium Industries hold the key to the revival of the manufacturing sector and the economy, the Central Bank of Nigeria successfully persuaded the Bankers’ Committee in 2000 to agree that each bank should set aside 10 percent of its annual pre-tax profit for equity investment in Small and Medium Industries. To ensure the effectiveness of the programme, banks are expected to identify, guide and nurture industries to be financed by the scheme. The activities targeted under the scheme include agro-allied, information technology, telecommunications, manufacturing, educational establishments, services, tourism and leisure, solid minerals and construction. The scheme was formally launched in August 2001. At the end of June 2004 over N24 billion had been set aside under the scheme while less than N10 billion had been invested. However, 2001 World Bank survey on Nigeria showed that although 85 percent of firms had relationships with the Small and Medium Industries Equity Investment Scheme (SMIEIS), not all of them has access to credit.

The main thrust of this study is to evaluate the effectiveness of the Small and Medium Industries Equity Investment Scheme (SMIEIS) as regard the extent to which it has been able to solve the financial problem of Small and Medium Industries in Nigeria.

1.3 OBJECTIVES OF STUDY

The main objective of this study is to assess the role of government in the growth of Small and Medium Industries. However, specific objectives includes;

• The evaluation of the various survival strategies put in place by the government for Small and Medium Industriesin Nigeria.
• The examinination of the mode of operations of the schemes or strategies
  in terms of its lending policies, guiding principles etc.
• The identification of the major constraints hindering the effectiveness of the strategies adopted by the government.
• To make suggestions as to how the performance of the Small and Medium IndustriesEquity Investment Scheme (SMIEIS) could be improved.
• Finding out the role of banks (Banks of Industries, Commercial Banks, Micro-finance banks and the Central Bank of Nigeria ) in supporting the growth of Smalll and Medium Industries in Nigeria.

1.4 RESEARCH QUESTIONS

This research work shall be guided by the following
research questions:

• How effective has the survival strategies put in place by the Nigerian government been in solving the financial problem of Small-Scale industries in Nigeria?
• Is there any significant relationship between the past efforts by the government to revamp SMI and its performance in Nigeria?
• Is there any significant relationship between Small and Medium Industriesand the growth in the Nigerian economy?

1.5 STATEMENT OF HYPOTHESIS

The hypotheses to be tested in the course of the study are stated below:

H_O1: The survival strategies put in place by the Nigerian government has not been effective in solving the financial problem of Small and Medium Industries in Nigeria.

H₁₁: The survival strategies put in place by the Nigerian government has been effective in solving the financial problem of Small and Medium Industries in Nigeria

H₀₂: There is no significant relationship between Small and Medium Industries and the growth in the Nigerian economy.

H₁₂: There is no significant relationship between Small and Medium Industries and the growth in the Nigerian economy.

H₀₃: There is no significant relationship between the past efforts by the government to revamp SMI and its performance in Nigeria.

H₁₃: There is a significant relationship between the past efforts by the government to revamp SMI and its performance in Nigeria.

1.6 SIGNIFICANCE THE STUDY

Small and Medium Industries in Africa rely largely on own savings, not only to grow but also to innovate. These industries often need real services support and formal finance assistance, failing which under-investment in long term capabilities (training and Research & Development) may result, (Oyelaran-Oyeyinka, 2003). It was in the bid to solve the problems confronting small and medium scale Industrialist that the Small and Medium Industries Equity Investment Scheme (SMIEIS) was established. Years after its establishment, it is necessary to evaluate the performance of the scheme in the light of its purpose and other roles played by the government in revamping the vital and indispensable subsector of the Nigerian economy. This study would be beneficial to small scale operators, students, bankers, financial institutions etc who desire to know more about the the role of the government in the growth of Small and Medium Industries (SMI).

1.7 DELIMITATION OF THE STUDY

Every notable task always has its own ups and downs. Hence, the factors that can militate against the success of this research work but which the researcher hopes to successfully manage include the following:

1. Availability of relevant and up-to-date literatures on government policies and incentives in a country like Nigeria where less attention is paid to documentation and even where the documents are available, they usually not frequently updated;
2. The stress involved in getting relevant and up-to-date literatures and researchable materials and;
3. The reluctance of data owners to release them for research purpose.
4. Finance and time constraint on the part of the researcher.

1.8 OPERATIONAL DEFINITION OF TERMS

The following terms are defined as used in the research in order not to cause confusion for the users of the research.

• Micro/Cottage Industry: An industry with a labour size of not more than 10 workers, or total cost of not more than N1.50 million, including working capital but excluding cost of land.
• Small-Scale Industry: An industry with a labour size of 11-100 workers or a total cost of not more than N50 million, including working capital but excluding cost of land.
• Medium Scale Industry: An industry with a labour size of between 101-300 workers or a total cost of over N50 million but not more than N200 million, including working capital but excluding cost of land.
• Industry: an industry is defined as a group of firms producing the total amount of the particular goods supplied to the market.
• Policy: This is described as a principle or rule to guide decisions and achieve rational outcomes.
• Incentives: This is any factor (financial or non financial) that enables or motivates       a particular course of action, or counts as a reason for preferring one choice for the alternative.
• Small and Medium Industry: This is defined is any industry within the minimum asset base on N200m excluding land and working capital, with the number of staff employed by the industry to between 10 and three hundred.
• Fiscal Policies: These are government policies about the collection and spending of money.
• Capital Intensive: This describes the process that require a high concentration of capital relative to labour per unit of output produced by such processes.
• Labour Intensive: This is referred to as the processes involved in production that requires relatively large amount of labour (skilled, semi skilled and unskilled)
• Monetary Policies: These are government policies regulating whether the country’s money supply grows, and if so, how fast.
• Management: This is the process of making prudent use of industrial resources in order to achieve pre-determined goals and objectives.
• Marketing: This is referred to as all activities aimed at identifying and satisfying customers’ needs through beneficial exchanges with target markets.
• Industrial Resources: These are raw materials that are used in the production of other goods and services. Such resources includes land, labour, capital and industrialists.
• Gross Domestic Product: This is the output of goods and services produced by indigenes and non-indigenes in a country.
• Business Sector: This include corporate enterprises and all organisations producing goods and services with a view of making profit.
• Growth: This refers to an increase in the sizes, amount, degree and positive activities.
• Job: This is defined as a series of tasks performed by an individual or an incumbent with a view to achieving organisational goals and objectives.
• Bank Rate: This is the rate of interest a bank for lending money which is fixed by the charged by Central Bank in a particular country.
• Bank: This is referred to as an organisation that renders various financial services and also an institution where money and other valuables are kept.
• Loan: This refers to the money that an organisation such as bank lends to another organisation or individual.

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