Impact of Small-Scale Business on Growth of Nigerian Economy

impact of small-scale business on the nigerian economy

The impact of small-scale businesses cannot be overlooked in any part of the world. Its role in the development of nations, including developed and developing nations is insurmountable.

In spite of their role in economic growth and development, developing nations like Nigeria have overlooked them for a long. This neglect has made small-scale businesses in Nigeria suffer and contribute little to the Nigerian economy.

However, in recent times, the government has developed an interest in the growth of small-scale businesses. This they have done through different forms of education and financial channels. Yet, their efforts are not enough to develop and position the sector for a sustainable growth path.

This study buttresses the importance of small-scale businesses on the growth of the Nigerian economy. It looked at what is small-scale businesses, and their characteristics.

It went further to use the linear regression model to evaluate the impact of small-scale enterprises on GDP. Using data from the CBN statistical bulletin, it specifically analyzed the following:

  • The impact of small-scale business financing on productivity
  • The impact of growth in small-scale industries on the country’s export
  • The relationship between growth in the small scale industries’ manufacturing and growth in Gross Domestic Product (GDP).

1.1      Background of the Study

The relative importance of small and medium scale business in developed and developing countries cannot be over-emphasized.  It has led and would continue to lead to a reconsideration of the role of Small-Scale businesses in the economy of nations. Economic development of many countries is often measured by such indices as:

  • the level of industrialization,
  • modernization & urbanization,
  • gainful and meaningful employment for all those who are able and willing to work,
  • the income per capital,
  • equitable distribution of income, and
  • the welfare and quality of life enjoyed by the citizenry.

There is no doubt that small-scale businesses exist in most economic environments. The historical background of small and medium scale businesses in Nigeria can be traced back to 1946. During which the essential paper No. 24 of 1945 on “A Ten-year plan of development and welfare of Nigeria 1946” was presented (Aremu and Adeyemi, 2011).[1]

Since then, small-scale businesses have gained prominence and will increase their importance till tomorrow. This is simply dictated by the developmental needs of Nigerian society.

The depth and breadth of the consequences of small-scale businesses in alleviating poverty and national development have been recognized. There has been a deep-self interest in recent years in the development of Nigerians small-scale businesses particularly since the adoption of the economic reform in 1986. The small and medium scale industry is seen as a key to Nigeria’s growth and alleviation of poverty and unemployment in the country.

Therefore, the promotion of such enterprises in developing economies like Nigeria is of paramount importance since it brings about a great distribution of income and wealth, economic self-dependence, entrepreneurial development employment, and a host of other positive, economic uplifting factors (Aremu 2004).[2]

Moreover, in a country like Nigeria with an adverse Balance of Payment situation, the growing contribution of the Small Scale Industries sector in Nigeria’s export portfolio goes a long way in generating foreign exchange and smoothening out the adverse Balance of payment situation.

Aremu (2004) posited that Small-Scale businesses play an important role in the economics of any country following their relative levels of development. He further emphasized that Poverty is a worldwide phenomenon and its incidence in Nigeria had been high and on the increase since 1980. This position is in line with (Adeyemi and Badmus 2001 and Schmitz 1982), they also argued that adequate financing of small and medium scale businesses will reduce the unemployment level in Nigeria.

There is a general belief that desired employment generation in this country can be achieved through the development of small and medium-scale enterprises (Awosika 1997,[3] Schmitz 1995)[4]. Gunu (2004)[5] and Aremu (2010)[6] posited that Small-Scale businesses provide income, savings, and employment generation. They are seen as veritable engines for the development of entrepreneurial capabilities and indigenous technology which will generate employment in the country.

Small and medium scale industries constitute the basis for industry and natural economy in many countries. It has been estimated that SME’s employ 22% of the adult population in developing countries (Fisseha 1991).[7] Small and medium scale businesses can be regarded as one of the important element of country development and this play a crucial role in the economy of this nation. Small and medium scale enterprises speed up the rate of social-economic development of many countries, particularly developing countries, Nigeria is not an exception.

1.2       Statement of Problem

The Nigerian economy, on its 60th birthday, is still suffering from problems of hunger, poverty, unemployment, low industrialization, and inconsistent government policies. Policymakers and the government in recognizing the immense contribution of Small-Scale Businesses subsector to economic growth have adopted various means and measures to support their growth and increase productivity. As such, they understood that Small and Medium Scale Enterprises (SMEs) constitute the driving force of such industrial growth and development.

In Nigeria, the current problems of hunger, poverty, and unemployment have undermined the capacity of the economy and small and medium scale enterprises are seen as a mechanism for intervention to addressing these long-term problems of the economy. Unfortunately, SMEs have not been able to propel economic growth and development which are the quintessence of mitigating the effect of poverty, hunger, unemployment, and low standard of living on the economy. The challenge of addressing the problem of hunger, poverty, and unemployment is even more worrisome when considering the actualization of the Millennium Development Goals by the country in 2015. If Nigeria is to achieve the millennium development goals by 2015, one of the sure ways is to enhance the capacity of its SMEs. The core issues identified by the Millennium Development Goal such as hunger, poverty, literacy, maternal and mortality rate would not be achieved unless the problems of SMEs are tacked.

The challenges and the problem of small and medium scale enterprises are tied to some economic variables and the challenges that generally characterized the nation’s economy. Some of the challenges and problems include a high level of unemployment, high poverty incidence, and low industrialization capacity, lack of finance, inconsistent government policies and inadequate infrastructure, and insecurity of the business climate among others. Nevertheless, the internal characteristics of small and medium scale enterprises have also interacted with some economic variables to undermine the capacity of the economy. Issues of low level of entrepreneurial skills, poor management practice, inadequate equity capital, and lack of information among other problems.

Despite these problems and challenges, the current economic reform process ongoing in Nigeria aimed at reducing poverty, unemployment, and strengthening of basic institutions and sub-sector of the economy target at improving and enhancing the capacity of small and medium scale enterprises is beginning to show a renewed optimism on small and medium scale enterprises as an instrument of economic growth and development. To assist the SME sector to accelerate economic growth, the government has played a significant role in policies, finance, and empowerment; yet the nation does not ascertain the actual impact the Small Scale industry sub-sector has on the development of the economy. Economic development, in a nutshell, is measured by increases in the nation’s productivity (GDP); therefore the problem lies in the impact of small-scale manufacturing on the growth of the economy, in terms of employment creation and poverty reduction.

The government of Nigeria, in her great potential at ensuring diversification and expansion of industrial production as well as the attainment of the basic objectives of development, has placed Small-Scale businesses at the fore-forefront of attaining increased productivity that will lead the way to economic development. It is obvious to note that SMEs utilize local raw materials and technology thereby aiding the realization of the goal of self-reliance. Also, governments at various levels (local, state, and federal levels) have in one way or the other focused on the performance of Small Scale Enterprises for economic gains.

While some governments had formulated policies aimed at facilitating and empowering the growth and development and performance of the SMEs, others had focused on assisting the SMEs to grow through soft loans and other fiscal incentives to enhance the socio-economic development of the economy like alleviating poverty, employment generation, enhance human development and improve the social welfare of the people.

Empirical evidence has shown that before the late 19th century, cottage industries, and most small and medium scale businesses controlled the economy of world giants like Europe and America. The industrial revolution changed the status quo and introduced mass production. The Small and Medium Scale Enterprises (SMEs) development facilitates the mobilization of human and capital resources towards economic development, in general, and the rural sector, in particular. They have been identified as a vehicle for employment generation and providing opportunities for entrepreneurial sourcing, training, development, and empowerment.

Developing nations such as Nigeria are characterized as low-income earners by the World Bank, value small and medium scale enterprises (SMEs) for several reasons. Viewed in static terms, the main argument is that SMEs, on average achieve decent levels of productivity especially of capital and factors taken together (that is, total productivity factor) while also generating a relatively large amount of socio-economic development. In dynamic terms, the SME sector is viewed as being populated by firms most of which have considerable growth potential. According to Christopoulos and Tsionas (2004) in Akingunola (2011),[8] SMEs in developing countries achieve productivity increases to a great extent simply by borrowing from the shelf of technologies available in the world.

Given the contributions of SMEs to the growth and development of developed countries of Europe and America, this research would evaluate the impact of Small-Scale Businesses on the growth of the Nigerian Economy.

1.3      Objectives of the Study

The major objective of the study is to determine the impact of small-scale businesses on the growth of the Nigerian economy. In seeking to understand the impact of Small-scale businesses on the growth of the Nigerian economy, this research will attempt to measure productivity growth. According to Ajayi (2002),[9] small-scale businesses represent 90% of the Nigerian industrial sector and contribute about 10% of total manufacturing output. This implies that the impact of small-scale businesses can be measured in terms of their contribution to the Nigerian Gross Domestic Product (GDP). Specifically, this study will seek to analyze:

  1. The impact of small-scale manufacturing output on the nation’s GDP.
  2. The significant contribution of small-scale businesses to the country’s overall export and exchange rate gains.
  3. The relationship between productivity and financing in small-scale businesses.

1.4      Research Questions

To what extent have the Small-Scale businesses contributed to the growth of the Nigerian Economy? To further analyze the above question, the researcher will investigate the following questions:

  1. Is there any significant relationship between growth in GDP and growth in manufacturing output?
  2. What impact does growth in the manufacturing output has on overall country’s export?
  3. Is there any significant relationship between Nigerian productivity and Small-Scale business financing?

1.5      Statement of Hypothesis

Following the above questions, the researcher will test the following hypotheses:

Ho1: There is no significant relationship between growth in manufacturing productivity and growth in Gross Domestic Product.

Ho2: There is no significant relationship between growth in Gross Domestic Product and growth in the country’s export.

Ho3: There is no significant relationship between the increase in SME financing and an increase in productivity.

1.6      Significance of the study

Small and medium scale enterprises have been long recognized as an instrument of economic growth and development. This growing recognition has led to the commitment of the World Bank Group on the SMEs sector as a core element in its strategy to foster economic growth, employment, and poverty alleviation. In the year 2004, the World Bank Group approved roughly $2.4 billion in support of micro small and medium enterprises (World Bank, 2001).[10]

This research will provide an additional tool to assessing the importance of small-scale businesses in a country’s economic growth and development. This research will help the government determine the extent the small scale manufacturing is contributing to the total productivity of the nation. This research will form the basis for government financing to small-scale businesses. If there is no significant relationship between growth and finance, then financing small-scale enterprises will mean wastages of resources.

1.7      Scope and Limitations of the Study

The study will use secondary data obtained from CBN bulletin and annual reports and data obtained from the National Bureau of Statistics to analyze the impact of Small-scale businesses in the growth of the Nigerian economy. The scope of the study will depend on the variables used per model, specifically; the study will cover the period from 1980 to 2010.

One of the major limitations of the study is the paucity of data. The researcher observed that data on the unemployment rate is scarce, however, the researcher would use the available data obtained from different sources to analyze the models specified to test the various hypothesis.

2.1      Theoretical Literature

2.1.1   Conceptual framework: operational definition of small-scale businesses

Small and Medium Scale Enterprises (SMEs) as defined by the National Council of Industries (2009) refers to business enterprises whose total costs excluding land is not more than two hundred million naira (N200,000,000.00) only.

Although, there exists no consensus among policy makers and scholars concerning the point at which a business firm is deemed to be small or medium. Indeed, there is no universally or even nationally acceptable standard definition except that the scale of business needs to be defined for a specific purpose. The problem of SMEs identification is more acute in the developing countries because apart from the fact that, small and medium scale business are difficult to count, they are also difficult to measure individually, hence statistics on the number, size, geographical distribution, and activities of enterprises and the SME sub-sectors are partial and highly unreliable (USAID,2004).

The United Nations Industrial Development Organisation (UNIDO) identified fifty definitions of small-scale business in seventy-five different countries based on parameters such as installed capacity utilization, output, employment, capital, type of country, or other criteria, which have more relevance to the industrial policies of the specific country. However, it has been suggested that the SMEs sub-sector may comprise about 87 percent of all firms operating in Nigeria, excluding informal – enterprises. This study adopted USAID definition of -enterprises as informal businesses employing five or fewer workers including unpaid family labour; small enterprises as those operating in the formal sector with five to twenty employees; and medium enterprises as those employing 21 to 50 employees (Kayanula & Quartey, 1999 in Akingunola, 2011).

Small-scale businesses are certainly not a transnational company, multinational cooperation, publicly owned enterprises, or large facility of any kind. However they can depend on business and ownership structure to become a large business unit (Macqueen 2006)[11] while it can be argued that 80% of the financing of SMEs come from owners, friends, and families, the business form can take different form including private ownership, limited partnership, contract and sub-contracts, cooperatives or associations (Kozak, 2007).[12]

Small-scale businesses have a narrow context within which their operation is carried out. However, where it is effectively operated it can sprout economic growth and national development. Despite its definitional problem, there exists a high level of consensus on the importance of SMEs, especially the SMEs sub-sector to economic growth and development. Oluba (2009 in Akingunola, 2011) has, however, observed that the importance of SMEs varies with sectors and with the developmental stage of a country. He opined that developing characteristics such as the level of capital allocation /requirements, management size, and arrangement, as well as limited market access, make SMEs less amenable to the disappointing results of development strategies that focus on large, capital intensive, and high import dependent industrial plants as well as failed public enterprises.


[1] Aremu, Mukaila Ayanda and Adeyemi, Sidikat Laraba (2011). “Small and Medium Scale Enterprises as A Survival Strategy for Employment Generation in Nigeria.” Journal of Sustainable Development. Vol. 4, No. 1; February 2011.

[2] Aremu, M. A. (2004). Small Scale Enterprises: Panacea to Poverty Problem in Nigeria, Journal of Enterprises Development, International Research and Development Institute, Uyo, Akwa Ibom, Nigeria, I(1): 1 – 8.

[3] Awosika, B. O. (1997). Evolving a National Framework for the Emergency of a Strong and Virile Small and Medium Scale Industry Sub-Sector in Nigeria. A Seminar Paper Presented at MAN House, November 5th. 3.

[4] Schmitz, H. (1995). Collective Efficiency: Growth Path for Small – Scale Industry, Journal of Development Studies, 31 (4): 529 – 566.

[5] Gunu, U. (2004). Small Scale Enterprises in Nigeria: Their Start-Up, Characteristics, Sources of Finance and Importance, Ilorin Journal of Business and Social Sciences, 9 (1 & 2): 36 – 43.

[6] Aremu, M. A. (2010). Small and Medium Scale Enterprises As A Means of Employment Generation and Capacity Building In Nigeria, A Paper Presented at the International Conference on Management and Enterprise Development on “Intellectuals and New Strategies for Sustainability Development of the Third World” Held at Conference Center, University of Ibadan, Ibadan, Nigeria, October 5th – 8th.

[7] Fissaeha, Y. (1991). Small Scale Enterprises in Lesotho: Summary of a Countrywide Survey, Gemini Technical Report, No 14 Washington D.C, Development Alternatives Inc.

[8] Akingunola, Richard Oreoluwa (2011), “Small and Medium Scale Enterprises and Economic Growth in Nigeria: An Assessment of Financing Options.” Pakistan Journal of Business and Economic Review, Vol. 2, No. 1.

[9] Ajayi, O.A. (2002): “Development of Small Scale Industries in Nigeria”. Being paper presented at Workshop on Grassroots Advocacy and Economic Development. September 11-13.

[10] World Bank, 2001 World Development Report.  Washington, Oxford University Press for the World Bank.

[11] Macqueen D (2004), Association of Small and Medium Forest Enterprises: An initial Review of Issues for Local Livelihood and Sustainability. International Institute for Environment and Development (IIED), Briefing Paper. London, United Kingdom

[12] Kozak Robert (2007), Small and Medium Forest Enterprises: Instrument of change in the developing world. Vancouver, British Colombia, University of British Columbia.

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