Upload
others
View
6
Download
0
Embed Size (px)
Citation preview
http://www.iaeme.com/IJM/index.asp 665 [email protected]
International Journal of Management (IJM) Volume 11, Issue 10, October 2020, pp. 665-677, Article ID: IJM_11_10_063
Available online at http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=10
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: 10.34218/IJM.11.10.2020.063
© IAEME Publication Scopus Indexed
ECONOMIC FACTORS AND SMALL SCALE
BUSINESSES PERFORMANCE: THE CASE OF
NIGERIA
OBOREH, Justina, PhD
Department of Business Administration & Marketing
Delta State University, Abraka, Nigeria
ASOGWA, Ogochukwu PhD
Department of Business Administration
Nnamdi Azikiwe University, Awka, Nigeria
OBI, Martha
Delta State University, Abraka, Nigeria
ABSTRACT
The paper investigates implications of economic factors on the recital of small
scale enterprises in Nigeria using inflation rate and exchange rate as major economic
factors. The study used ex-post factor design of which secondary data were obtained
from Central Bank of Nigeria (CBN) statistical bulletin. Ordinary Least Square (OLS)
formed the basis for the estimations. The study found a significant negative
correlation between high inflation rate and performance of small scale enterprises
and significant negative relationship between high exchange rate and performance of
small scale enterprises. From the findings, the study concludes that economic
environmental factors (inflation rate and exchange rate) have a significant negative
effect on the performance of small scale enterprises in Nigeria.
JEL: M19,N15,012,Q58
Key words: Small scale, business, economic, inflation, exchange rate
Cite this Article: OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha,
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria,
International Journal of Management, 11(10), 2020, pp. 665-677.
http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=10
1. INTRODUCTION
Small-Scale businesses previously have been identified by the three tiers of government as an
essential instrument for economic development in both developed and under-developed
economies of the world. This is premised on the fact that small scale businesses all over the
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 666 [email protected]
world are known to have a significant effect on the economy as it provides job creation,
bridging the gap between the science and the markets, technology, etc. Historically, the
recognition of the pertinent role of small scale businesses according to Odeyemi (2003) is a
bedrock that drive and sustain economic growth to the fore.
The 1970 development plan of Nigeria, as observed by Ihua (2004) succinctly identified
the imperativeness of Nigerian economy to be stabilized and self reliant by entrenching
industrialization policy and entrepreneurship development. The three tiers of government and
economic policy experts identified small scale businesses as a sector that needed government
attention by providing a conducive environment that thrive their operations (Abiodun, 2011).
The aforementioned was necessitated following government predispose desire to stabilize the
economy as a measure of meeting up with its commitment to the development plan and
indigenization policy.
Conversely, Odeyemi (2003) observed that 70% of industrial employment and over 50%
of Gross Domestic Product (GDP) were a direct product of small scale businesses. In view of
the aforementioned, the federal government before now promulgated and enshrines several
regulatory framework aimed to guide the operations of small scale businesses in Nigeria
(Alawe, 2004). This regulatory framework of operations as observed by Alawe (2004)
includes Nigeria Enterprise Promotion Act. No.3 of 1977, Patient right and Design Act. No 60
0f 1979, Industrial Promotion Act. of 1979, Customs Duties, Dumped and Subsided goods
Act no. 9 of 1959, respectively.
In recognition of the pertinent role of small scale enterprises on the economy, made
Nigerian government to establish and entrench the following establishments to assist small
scale enterprises in the country (Paul, 2010). These establishments among others includes:
Bank of Industry (BOI) established in 2000, Small and Medium Industries Development
Agency of Nigeria (SMIDAN), Nigerian Agricultural Cooperative and Development Bank
(NACRDB) established in 2000, Macro Finance Bank in 2005 (George, 2000). Others include
Family Support Programme (FSP), Family Economic Advancement Programme (FEAP) and
Obasanjo’s programme on National Poverty Eradication Programme (NAPEP) in 2001, (Paul,
2010). The abovementioned programmes were designed to see that the banking industry
contribute towards the effort of the government in stimulating economic growth, through fund
mobilization, and small scale business promotion. The establishment of the aforementioned
programmes was line with the presupposition of Schumpeter (1934) who argued that
economic recession could be stimulated, when the government of any country provides a
sustainable framework that drives small and medium scale enterprises. The foregoing is
however, premised on the ground that through creative and innovating idea, small scale
businesses conceive idea that result to invention of new products and services to increase
productivity, which perhaps create jobs, and wealth for a nation.
More so, Shane (2014) argues that economic environment is referred to as the totality of
economic factors, such as employment, income, inflation, interest rates, productivity,
government tax revenue, government policy and exchange rate that influence the activities of
small scale business performance. Shane (2014) observes that small scale business
performance thrive in a suitable economy. Economic environment of small scale businesses to
a large extent determines the success or failure of business enterprises in the country
(Emefiele, 2012). Shane (2014) opines that an economy is considered stable when there is
constant output, fix government tax revenue, economic growth, exchange rate, interest rate,
gross domestic product and low inflation. The derivative of having a suitable economy
includes increased productivity, improved efficiencies, and low unemployment (Sid, 2000).
Giving the conceptions of small scale business and the plethora of government interventions,
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 667 [email protected]
a study of the relationship between the government interventions and the performance of
small scale enterprises becomes necessary.
Unfavorable economic environments are in most cases orchestrated by the arbitrary
increase or fluctuation of exchange rate, interest rate, and inflation rate on Nigeria economy
has continue to frustrate Small scale enterprise (Salihu, 2015).
Statistical Bulletin (2018) has succinctly shown the proportionate increase on inflation
rate from 1970 to 2018 as: 0.23% to 26%, respectively. Most small scale enterprises incur
relatively high cost in the procurement of raw materials as a result of inflation. High inflation
rate to a large extent affects the operations of small scale business. Following the costs
incurred by small scale enterprises due to high inflation rate, has led to increase in per unit
cost of producing domestic products in Nigeria. The degree at which high inflation rate affects
the performance of small scale enterprises is yet to be established, hence, this study. The main
objective of the paper is to find out the implications of economic surroundings on the
performance of small scale businesses in Nigeria. The paper seeks to determine the effect of
inflation rate on the performance of small scale enterprises in Nigeria and also to examine the
effect of exchange rate on the performance of small scale enterprises in Nigeria.
In order to achieve the objective of the paper, the following hypotheses were formulated:
Ho1: Inflation rate does not significantly affect the performance of small scale enterprises in
Nigeria.
H02: Exchange rate does not significantly affect the performance of small scale enterprises
in Nigeria.
The study is significant to the extent that it will help business owners most especially
small scale enterprise in ensuring the survival and sustaining their business/enterprise.
2. LITERATURE
Hings (2011) perceives economic environment as those economic factors, such as inflation
rate, interest rate, exchange rate, government tax revenue, unemployment rate etc which have
considerable effect on the performance of small scale business. Omobolanle (2009) observes
that the success and failure of small scale enterprises increasingly depend on the economic
environment (open system) for all the needed inputs. Thus, economic environment
engendered considerable influence on the performance of small scale businesses. In other
words, economic ecology consists of those economic measures that directly or indirectly
influence the performance of small scale businesses in Nigeria, it include inflation rate,
exchange rate, interest rate, government tax revenue, etc. Asiedu (2002) affirms that
“economic stability is the attainment of price stability, low inflation, fixed exchange rate,
interest rate and maintaining full employment on the economy”. Asiedu (2002) also observes
that small scale enterprises do not only thrive in stable economy but achieve operational
efficiency in terms of service delivery to the people.
Economic ecology or environment according to Gabriel (2006) is referred to “as those
economic variables such as inflation rate, exchange rate and others that interact within the
environment of small scale business operations”. Issues relating to economic environmental
problems affecting the operations of small scale enterprises have elicited several
presuppositions especially in a developing country like Nigeria, where the economy is in
recession, regarding how to stimulate the economy, selling of national assets etc, (Olaniyi,
2015). Yet, the concerns are continually being exacerbated by the ever evolving challenges to,
and conspicuous changes in the fundamentals on which the matrixes of the economic
environment are predicted. The resulting flux in the business environment continues to
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 668 [email protected]
pressurize small scale enterprises towards superior performance, especially by being proactive
rather than reactive in responding to the environment ( Nwekpa and Ewans, 2015).
The reality and relevance of the pressure emanating from the economic environment
underscore the imperativeness of small scale enterprises to buoy up their efforts by taking
abreast of the prevailing economic indices for decision making (Gabriel, 2006). Small scale
businesses are better off especially when they consciously appreciate their environment,
taking into cognizance those economic factors that interplay in the environment in so far as
the going concern of the business is of paramount (Friday, 2000). The foregoing is apparently
consistent with Udu and Udu (2015) who maintained that business environment presents
divergent opportunities and threats to the operations of the small scale enterprises. As a result,
small scale businesses that have in-depth knowledge of their strength, weakness, opportunity
and threat (SWOT) in the environment have the operational dexterity to turn their weakness
into strength, and threat into business opportunities in order to remain creative and innovative
in business. Udu and Udu (2015) notes that failure of any small scale enterprise in creating a
sustainable framework of confluence between SWOT and the various elements of the
environment craves for business failure. The following are some of the economic
environmental factors that interact within the environment of small scale enterprises, inflation
rate, exchange rate, interest rate, government tax revenue, government policy etc.
Economic factors have a direct impact on the potential attractiveness of various strategies
and consumption patterns in the economy and have significant and unequal effects on
organization in different industries and in different locations. Economic variables such as
fiscal and monetary policies of the government, inflation, interest rates and foreign exchange
rates. These variables influence the demand for goods and services and hence the growth of
new SMEs (Ehlers and Lazenby, 2007).
Inflation causes the persistent increase in general price levels in an economy over time.
Inflation effectively reduces the purchasing power of a country’s currency. Low or medium
levels of inflation in a country can have a positive effect on the business sector, in that it can
act as an incentive to production. High levels of inflation however can harm company’s
profitability by affecting the cost of inputs as well as reducing final demand for its output
(Meyers, 2001). The inflation rate which refers to the change in the general level of prices in
the economy over a given period of time have a significant effect in the purchasing power of
money and the cost of production mostly in the manufacturing sector. The effects of inflation
are viewed in two perspectives: effect on the aggregate demand and effect on the cost of
production. During period of high inflation consumers with fixed income have a low
purchasing power due to the reduced value of money hence reduced demand for products.
Equally inflation increases the cost production hence reducing profitability (Osoro & Ogeto,
2014). Pandey (2009) argues that if capital markets were perfect the investments of equal risk
should offer equal return in different countries. This is due to the process arbitrage that will
see movement of funds from one country to another continuously until equilibrium is
achieved.
An exchange rate is the ratio at which one currency is exchanged for another; it is the
value of one country’s currency in relation to another currency. Exchange rates are
determined in the foreign exchange market, which is opened to a wide range of different types
of buyers and sellers, The performance of small scale enterprises heretofore has not received
much attention especially from macroeconomic point of view in Nigeria (Blume, 1978). Yet,
most of the studies conspicuously have shown the direct influence of macroeconomic
variables on the performance of small scale enterprises within the context of their interactions
on business environment (Arthur and Hope, 2013). Ani and Nwandu (2007) contend that most
of the small scale operators could possibly take advantage of exchange rate volatility in
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 669 [email protected]
making pertinent decisions that can drive their businesses. However, the fluctuations of both
the real and nominal exchange rate regime in Nigeria came to the fore following the collapse
of the Bretton Woods system of fixed exchange rate (Adeoye, 2012). The magnitude of its
volatility became of great concern to small and medium enterprises due to its potentiality of
influencing their performance in the wake of 2007 and 2008 financial crises.
3. THEORETICAL FRAMEWORK
The paper is anchored on the Keynesian Economic Theory which was propounded by Keynes
(1936). This theory believes that small scale enterprises play a vital role in the economic
development of a country. Keynes (1936) inferred that government can reverse economic
instability through efficient economic policies. The theory asserts that government intervenes
on the economic environment by its economic policies to allow effective allocation of
resources, regulation of markets, as well as enabling business environment that can make
small scale enterprises flourish.
Keynes (1936) assumes that small scale enterprises strive in an environment where there
are policies that maintain fixed interest rate, exchange rate and inflation rate that could have
propulsive effect on the operations of small scale enterprises. The ability of the small scale
enterprises to understand its environment of operations taking cognizance of the dynamism in
the business environment will not only make them proactive to the changing environment but
make pertinent decisions that enhance their performance. The following are the assumptions
of the theory:
The theory assumes that small scale enterprises operate in environment orchestrated
by the interplay of various elements of the environment. Therefore, small scale
operators should take abreast of its economic environment, though external to them,
but help them to be proactive in their operations.
The theory also assumes that small scale enterprises drive in stable economic
environment where there are fixed exchange rate, interest rate, inflation rate etc.
Keynesian economic theory, which this paper hinges on take a modern approach on how
to improve the performance of small scale business enterprises through entrepreneurial
innovation in a stable economic environment. Applying the Keynesian economic theory in the
investigation of the research problem offer direction in examining the factors of economic
environment which are critical to the success of SMEs and also focusing on entrepreneurs as
change agents.
4. METHODOLOGY
The paper is a survey research design. Secondary time series data covering 1970 to 2018 were
sourced from the Central Bank of Nigeria and the National Bureau of Statistics.
4.1. Model Specification
The study employed multiple regression models and applied Anderson Darling Normality test
on the chosen variables. Test for Autocorrelation (Durbin-Watson), Co-integration test, Unit
root test and Error Correction Model were also used.
The paper however is quantitative in nature and tends to build mathematical models that
captured the relationship between the studied variables under investigation. The analytical
procedure includes multiple regression model, the co-integration test, and normality test. The
multiple regression models estimated the effects of economic environment on the corporate
performance of small scale enterprises in Nigeria. The study adopted Euler’s theorem on
Business performance (BP). Theoretically, the statistical/economic relationship according to
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 670 [email protected]
Euler’s (1987) states that: BP =f(X1, X2, … Xn). These explanatory variables represent the
parameters of economic environment that interact within the environment of small scale
enterprise.
4.2. Model Specification and Justification
The paper build a mathematical models that captured the relationship between the studied
variables under investigation.
For simplification, if the economic variable components are represented as X1, and X2, for
inflation rate, and exchange rate respectively. It is pertinent to note that these are economic
prevailing parameters, whose values would be deduced from Central Bank of Nigeria. Based
on the aggregative nature of the aforementioned, X1, and X2, respectively, was used to
decompose values of these parameters. Thus, it is expressed as:
BP = X1 + X2 (1)
Generally, Equation 1 is addictive. In order to use Equation 1 to predict the
implications of X1 on BP, X2 on BP and the sum of X1, and X2, on Business Performance
(BP), X1, i =1,2, becomes a function of inflation rate, exchange rate, respectively. Therefore,
the general function becomes:
BPbiz = f(INF, EXT, ) (2)
Where: BP is business performance, INF is inflation rate, and EXT is exchange rate.
Estimating Equation 2 should basically require the introduction of stochastic error
term in order to minimize the variance of the scores. Therefore, Equation 2 may specifically
be rewritten as:
BPbiz=β0 + β1INF1 + β2EXR2 (3)
Where:
BP = Business Performance
INF. = Inflation rate
EXR. = Exchange rate
β0 = Intercept
β1-2 = Parameters to be estimated
μ1 = stochastic error term
4.3. Normality Test
Table 1 Result of Anderson Darling Normality Test on the variables
Variables Skewness AD(Probability) Normality
Distribution
BP 0.753410 3.113967(0.023415) Yes
INFL 0.667649 3.064387(0.343256) Yes
EXR 0.038713 2.988361(0.194328) Yes
The normality test in Table 1 showed the Anderson Darling Normality test on all the
variables in ascertaining the degree, they could affect the results. Normality tests are
employed in an attempt to determine if a data is well-modeled by a normal distribution. The
efficiency and effectiveness of the result in terms of consistency is succinctly related to the
normality distribution of the error terms. Anderson normality test utilizes mean, standard
deviation, skewness, probability etc., in consonance with the minimum and maximum values
to engender the normality distribution that could be compared proportionately with the
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 671 [email protected]
equivalent value. From Table 1 above, the Anderson darling normality test shows that all the
variables are normally distributed.
Table 2 Summary of Statistics
BP EXR INF
Mean 892809.6045 16926.3332 16.2920
Std. Dev. 5506889.5727 434439.763 18.37780
Eigenvalue 3.698 4.876 5.092
Sum Squares 9.571E+12 4.332E+11 5329.054
Skewness 1.006457 0.582448 0.7077854
Kurtosis 2.600265 2.002345 2.361849
Probability 0.983300 0.987520 0.004840
Observations 46 46 46
From Table 2 above, the average value of the explanatory variables were obtained by
dividing the sum total value of the series by the number of observations. The average (mean)
of Business performance, Exchange rate, Interest rate and Inflation rate, government tax
revenue and un-employment rate are 892809.6045, 16926.3332, and, 16.2920 respectively.
On the other hand, Standard Deviation measures the dispersion in the series. Standard
deviation measures spread or dispersion in the series. From table above the standard deviation
for exchange rate, interest rate, inflation rate, government tax revenue and unemployment are
5506889.5727, 434439.763, 5.2892, and 18, 37780, 10.18764 and 20.009876. Eigen value
shows the factorability values of exchange rate, interest rate, inflation rate, and government
tax revenue and unemployment as 3.698, 4.876, 3.335, 5.092, 4.987 and 5.5632., respectively.
Skewness measures the degree of asymmetry of distribution of the series around its mean.
The skewness of a normal distribution is zero. Positive skewness implies that the distribution
has a long right tail and negative skewness implies that the distribution has a long tail to the
left. From the above table, exchange rate and inflation rate have positive skewness and they
have relatively long right rails whereas interest rate, government tax revenue and
unemployment have negative skewness, hence have long left tails.
Kurtosis measures the flatness of the distribution of the series. If the kurtosis is greater
than three, the distribution is said to be peaked or leptokurtic as compared to the normal
distribution which is flat or platykurtic relative to others.
Table 3 Correlation Results
BP EXR INF
BP 1.0000 -0.6757 - 0.5243
EXR -0.6757 1.0000 -0.1007
INF -0.5243 -0.1007 1.0000
Observations 46 46 46
Correlation is significant at 0.05 level.
The correlation analysis in Table 3 showed that all the explanatory variables have negative
signs and it implies that changes in exchange rate, interest rate, inflation rate, government tax
revenue and unemployment will significantly result to proportionate decline on the business
performance of small scale enterprises in Nigeria. From table three, any proportionate change
in either of the explanatory variables has corresponding negative effect on the performance of
the enterprises.
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 672 [email protected]
Tests for Autocorrelation (Durbin-Watson)
Table 4 Test of Autocorrelation
Null Hypotheses Decision Comparison
No positive Autocorrelation Reject 0<d<dl
No positive Autocorrelation No decision dl<d<du
No Negative
Autocorrelation
Reject 4-dl<du-4
No Negative
Autocorrelation
No decision 4-du<d<4-dl
No Autocorrelation Do not reject Dl<du<d*
Where: D = Durbin-Watson
Dl = Upper limit of Durbin Watson
Du = Lower limit of Durbin Watson
Dl = 1.728
Du = 1.810
D* = 2.064
N = 46, and K = 7.
Table 4 shows the result of Durbin-Watson which is used to detect the presence of auto-
correlation. Since, the upper and lower limits of Durbin-Watson, at 5% level of significance,
46 observations, K = 7, the critical Table value of Durbin Watson is 1.854 with three
explanatory variables. The study compared the computed value of D* (2.064) with the critical
value at 5% significant level. This implies that there is no evidence of positive first order
correlation. Therefore, since 1.728 < 1.810 < 2.064, the null hypothesis is accepted.
Co-integration Test
Co-integration is affirmed characteristics or property of time series variables. A situation
where two or more series are respectively co-opted as part of the series where some linear
combination of the variables have succinctly infinitesimal order if integration, therefore the
series are affirmed to co-integrated. This perhaps involves examining the presence of co-
integration between the series of the same order of integration through a careful entrenchment
of co-integration equation. It is imperative to note that when co-integration relationship is
present, it therefore suggests that economic environmental factors and performance of small
scale enterprises share relatively common trend and long-run equilibrium as clearly asserted
by Aliyu, 2001. The employment of Johansen co-integration approach was absolutely
necessary in an attempt to ascertain if notable long-run relationship exists between the
economic environmental factors and performance of small scale enterprises in Nigeria.
However, co-integration test delineates in absolute test ratio, which includes trace test and
maximum Eigen value test respectively. To establish co-integration, the two approaches must
be greater than the Mackinnon critical value at a chosen level of significance. Hence, this
study adopted Johansen co-integration test.
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 673 [email protected]
Table 5 Co-integrating Test
4 Cointegrating Equation(s): Log likelihood -1031.518
Normalized cointegrating coefficients (standard error in parentheses)
SMES EXR INFL
1.000000 0.000000 0.000000
0.000000 1.000000 0.000000
0.000000 0.000000 0.000000
0.000000 0.000000 1.000000
Adjustment coefficients (standard error in parentheses)
D(SMES) -0.681941 8.03E-07 -0.002999 0.000434 -9.681941
(0.27897) (3.7E-07) (0.03725) (0.01184) (0.27897)
D(EXR) -246579.8 -0.300313 -8180.304 1217.221 -246579.8
(157470.) (0.20983) (21026.7) (6684.35) (157470.)
D(INFL) 2.588534 -3.72E-06 1.949067 -0.803653 2.588534
(4.86064) (6.5E-06) (0.64903) (0.20633) (4.86064)
Table 5 above shows the co-integration results of the stated model. From the result in
Table 5, it shows that there is a long run relationship between the economic environmental
factors of EXR, and INFR, in measuring the performance of small scale enterprises in
Nigeria. From observation, it is clear that the explanatory variables in Table 5 co-integrate at
5% level of significance. The model with log1 was chosen with the linear deterministic test
assumption. The variables have a reliable long-run relationship and this was shown by the
values for all the explanatory variables of EXR, and INFR respectively.
Error Correction Model
The introduction of error correction model is to explore the short-run implications of
exchange rate and interest rate on performance of small scale enterprises in Nigeria. The
imperativeness of error correction model is determine if the short-run dynamics are relatively
influences by the estimated long-run equilibrium conditions that are the co-integrating
vectors.
5. ANALYSIS AND INTERPRETATION OF RESULTS
Table 6 Macro-economic Coefficients of Small Scale Enterprises
Dependent variable: BP
Method: Least Squares
Sample: 1970-2018
No of observations 46
Variable Coefficient St.Error Beta t-Statistics Prob.
(Constant) 1.645167 1956.5 .8413 .0500
XEXR -5851.47 5171.4 .0205 1135 0000
XINFR -.6405 .0770 -0624 .3608 . 0000
R = . 084302
R-Squared 0.78672
Durbin Watson 2.06465
F-Statistics 29.90467
Prob.(Statistics) .0000
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 674 [email protected]
BP = 1.645167-5851.47XEXR - 6405XINFR (3)
Table 6 above shows the regression results of the explanatory variables obtained via
Ordinary Least Square (OLS) estimation within the period under investigation. The predictor
variables of XEXR, and XINFR, represent exchange rate and inflation rate that interact in the
environment of small scale enterprises in Nigeria. The result showed the coefficient of the
constant term of 1.645167 and shows where the economic environmental factors intercept the
Y axis and statistically insignificant at 5%level of significance. This implies holding these
explanatory variables constant, the business performance will increase by 2%. The possible
increase is due to extraneous factors outside the modeled economic environment of small
scale enterprises. Also, F-Statistics (29.90467) showed the joint effect of the explanatory
variables on the stated model.
The result of exchange rate on business performance of small scale enterprises has equally
shown a negative (-.5851.47) and it’s statistically significant at 5% level of significance. This
implies that unit percent increase on the exchange rate will bring simultaneous decrease in
business performance by 59% significantly.
Furthermore, the coefficient of inflation rate on business performance of small scale
enterprises has a negative sign (-.6405) and it’s statistically significant at 5% level of
significance. This result revealed a negative relationship between interest rate and business
performance. This negative sign indicates that a unit increase in interest rate will lead to a
significant decrease by 64% on business performance of small scale enterprises in Nigeria.
Test of Hypothesis One
H01: Inflation rate does not significantly affect the performance of small scale enterprises in
Nigeria
Based on the result in Table 6 above, the computed p-value (0.000) is less than the α level
of 0.05 (0.000<0.05), the study rejects the null hypothesis that Inflation rate does not affect
the performance of small scale enterprises in Nigeria and accept its alternate, that high
inflation rate affects the performance of small scale enterprises in Nigeria. Adjudging from
the regression results in Table 6, high inflation rate has a negative effect on the performance
of these enterprises. Therefore, high inflation rate affects the performance of small scale
business performance in Nigeria.
Test of Hypothesis Two
H02: Exchange rate does not significantly affect the performance of small scale enterprises in
Nigeria.
From Table 6 above, the flagged p-value (0.000) is less than the α level of 0.05
(0.000<0.05), the study therefore rejects the null hypothesis that high exchange rate does not
affect the performance of small scale enterprises in Nigeria, and accept its alternate that high
exchange rate affects the performance of small scale enterprises in Nigeria. The regression
results provided empirical evidence that increasing rate of exchange rate has a negative effect
on the performance of these enterprises. Thus, high exchange rate affects the performance of
small scale operations in Nigeria.
6. DISCUSSION OF FINDINGS
The results on the test of hypothesis one as presented in Table 6 showed that high inflation
rate does significantly affect the performance of small scale enterprises in Nigeria. This was
shown by the estimated value of the coefficient of -.6405, which implies that a unit increase in
inflation rate will bring about a significant decrease of 64% on the performance of small scale
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 675 [email protected]
enterprises in Nigeria. Aside from the estimated coefficient, the result showed the p-value of
0.000 which was lesser than α level of significance (0.05), which resulted to the acceptance of
the alternate hypothesis and rejection of the null hypothesis. The negative effect of high
inflation on the performance of small scale enterprises as shown in Table 5, have a significant
negative effect on their purchasing power because they incur relatively high cost in the
procurement of raw materials and such, leads to increase in per unit cost of producing
domestic products in Nigeria. The problem of consistent decline on purchasing power of
individuals resulting from inflationary regime also affect customer patronage on products of
small scale enterprises and when customer patronage on produced, it has a negative effect on
the profitability of these firms.
The empirical evidence points to the fact that high inflation rate have negative effect on
the performance of small scale operations in Nigeria. This finding is consistent with the
findings of Muoka and Frankly (2013) were both found that high inflation rate affects the
operations of small scale enterprises in Nigeria. In addition, this finding is further supported
by Adomolu (2014) whose study revealed that high inflation rate exerts considerable
influence on the performance of small scale enterprises.
More so, the result on the test of hypothesis two as presented in Table 6 shows that high
exchange rate does significantly affect the performance of small scale enterprises in Nigeria.
This was evidenced given the estimated value of the exchange rate coefficient of -.5851.47 as
shown in Table 6. The exchange rate coefficient has negative sign. This implies that per unit
increase on the exchange rate, result to a proportionate decrease by 59% significantly on the
performance of small scale enterprise in Nigeria. Furthermore, the regression result also
shown that p-value (0.000) was lesser than α level of significance 0.05, which led to the
acceptance of alternate hypothesis and the rejection of null hypothesis. This result was
supported by the findings of Adeoye (2012) who found that continuous hike in exchange rate
has negative effects on the survival of small scale enterprises in Nigeria.
Also, the negative effect of high exchange rate on small scale enterprises spawns as most
of them incur considerably high cost to import raw materials needed for the production of
domestic products, as a result, there operations were affected, which led to collapse of some
business enterprises in Nigeria.
7. CONCLUSION
From the findings, the study concludes that economic environmental factors have a significant
negative effect on the performance of small scale enterprises in Nigeria. The implication of
this negative relationship of these economic environmental factors provided empirical
evidence that high inflation and high exchange rate predict the operations of small scale
enterprises in Nigeria. The negative correlation among modeled variables points to the need
for the federal government to pay adequate attention to issues relating to economic
environmental factors taking cognizance of the imperative role of small scale enterprises in
nation’s economic development.
Small scale enterprises play a pivotal role in economic development of any nation,
therefore the stabilization of these macro economic variables such as inflation rate, exchange
rate, would drive the performance of small scale enterprises.
RECOMMENDATION
The implication of the findings is that continuous increase in the economic environmental
factors would result to significant decrease on the performance of small scale enterprises in
Nigeria and therefore recommended that the federal government should come up with
economic policy and regulatory framework that will maintain fixed exchange rate, and low
Economic Factors and Small Scale Businesses Performance: The Case of Nigeria
http://www.iaeme.com/IJM/index.asp 676 [email protected]
inflation rate. Low inflation rate would improve on the purchasing power of small scale
enterprises, in terms of business diversification, developing existing business capacity.
Stabilizing these economic variables would drive the operations of small scale enterprises, as
they will innovate, create and invent new products and services to stimulate productivity and
create resource-based economy.
REFERENCES
[1] Abiodu, F. (2011). The Contributions of Small Scale Enterprises to Nigerian Economy. Lagos:
Tope publication.
[2] Adeoye, A. O. (2012). Impact of External Business Environment on Organizational
Performance in the food and beverage Industry in Nigeria. British journal of arts and social
science, 6(7)647-659.
[3] Alawe, T. (2004). Entrepreneurship Processes and Small Business Management, Industrial
science centre, Owoyemi House, Abeokuta Road Sango Otta, Ogun State, Nigeria.
[4] Ani, A.C., and Nwandu, K.C.(2007). Youth Unemployment: Entrepreneurship Development
Programme as an intervention mechanism. African journal of business management. 4(6):831-
835.
[5] Asiedu, K. (2002). Entrepreneurship and Leadership; Nigeria and the Imperative for Youth
Entrepreneurial Development. Universal journal of education and general studies 2 (3)55-70.
[6] Central Bank of Nigeria, (2016), Statistical Bulletin, Golden Jubilee Edition, Abuja: Central
Bank of Nigeria.
[7] Central Bank of Nigeria, (2016). Monetary and Credit Policy Guidelines for 2016 Fiscal Year,
(Monetary Policy Circular No.21), 353
[8] Emenike, N. (2012). Foreign assistance and economic growth. American review, 45 (5) 901-
104.
[9] Federal Government Small Scale Industry Development Plan (1980). The role of
Entrepreneurship in Nation’s Economic Development. Lagos: Tosin publications.
[10] Friday, G. (2000). Impact of Small and Medium Scale Enterprises on Economic Development
in Nigeria. Journal of Business Studies, 4(3) 125-123.
[11] Gabriel, R. (2006). The Effect of Economic Environment on Businesses in Nigeria. A Book of
Discuss. Ogun state: Adeyemi publications.
[12] George, M.K. (2005). Unemployment in Nigeria: Economic Analysis of Scope, Trends and
Policy Issues in Nigeria. Journal of Economics and Social Sciences, 13(2):127-132.
[13] Ihua, H.E. (2004). Reform Policies, Manufacturing Entrepreneurial Activity and Economic
Growth: Empirical and Qualitative Observations on Nigeria. National Centre for Technology
Management (Federal Ministry of Science and Technology) Obafemi Awolowo University,
Ile-Ife, Nigeria. P.201-218.
[14] Keynes, J.M. (1936), The General theory of employment, Interest and Money. New-York:
Mcmilliam Press.
[15] Myers, S.C. (2001). Capital Structure – American Economic Association. Journal of
Economic Perspectives, 15(2), 81-102
[16] National Development Programme (1970). The Federal Government Development
Programme Bulletin. Lagos: Government Press.
[17] Nwekpa, K.C. & Ewans, C. (2015). Implication of Economic Factors on Small Scale Business
Performance in Nigeria, 1970-2013, International Journal of Research in Business
Management, 3(10), 23-30
[18] Odeyemi, W.O. (2003). Empirical analysis of agricultural growth and unemployment in
Nigeria. African Journal of Agricultural Research, 3(7):465-468.
OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha
http://www.iaeme.com/IJM/index.asp 677 [email protected]
[19] Olaniyi, H. (2015). Effects of tax revenue and economic development in Nigeria. Journal of
Interdisciplinary Studies,.1(2) 204-210.
[20] Omobolanle O. S. (2009). The role of small scale industries in Nigeria Economy. Niger State
College of Education, Mina. Hajia Publications.
[21] Osoro, C. & Ogeto, W. (2014). Macroeconomic fluctuations effects on the financial
performance of listed manufacturing firms in Kenya. International journal of social sciences,
12, 34-89
[22] Pandy, M.I. (2009). Financial Management. Publishing house PVT ltd., New Delhi
[23] Paul, H. (2010). Small and medium scale enterprises in Nigeria. Lagos: Chris publications.
[24] Salihu, A. (2015), Effect of Environmental Factors on small Scale Business Performance in
Kano and Sokoto State. Paper presented at Ahmadu bello University, Zaria.
[25] Schumpeter, H. (1934), Economic Development on Innovations. New Delhi: Eaglewood Press.
[26] Shane, M. (2014), Analysis of Economic Factors on Small Scale Business. Delhi: Araz
Publication.
[27] Sid, A.R. (2000), Development of Economics, 2nd
Edition, New Delhi: Eaglewood press.
[28] Udu, A. A. & Udu, G. O. C. (2008), Entrepreneurship. Enugu: Rhyce Kerex Publishers. p.264