CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The contributions of Small and Medium Enterprises (SMEs) to economic growth and development of nations have been widely acknowledged and well documented by researchers and policy makers globally ( Kalpande, Gupta and Dandekar, 2010; Shastri, Tripathi, and Ali, 2011; Martey et al., 2013). Countries all over the world constituting the developed and developing ones have moved away from the former approach to economic growth and development which focuses on Large Scale Enterprises (LSEs) to SMEs which are considered as contributing higher to their economic wellbeing. According to the National Enterprise Development Programme (NEDEP) Release 1.0 in 2011, SMEs contribute 40-55% of the world”s Gross Domestic Product (GDP) and 50-80% of the world”s employment. 

Sanni (2009) argued that SMEs are the best scale of businesses for developing economies. Nigeria, being among the developing countries had also change its focus in the last three decades as successive governments have shown much interest in enhancing the development and growth of SMEs. Perhaps since the adoption of the Structural Adjustment Program (SAP) in 1986, there has been a shift from the former capital intensive method which was based on LSEs to SMEs which are labour intensive, rely heavily on local raw materials and require small capital for operation. The SAP enabled the sector to be a key focus in the country which in turn resulted in the rising profile of increased number of SMEs largely due to the favourable policies it had developed. Thus, the ability to manage small business provides a useful and reliable economic foundation for a nation.

However, the shift of emphasis was as a result of the realization that, prior to the adoption of SAP, economic development strategies aimed at attracting LSEs were either not successful or successful only at great cost. Therefore, creating a conducive environment for SMEs will enhance their job creation role and may produce more jobs than trying to lure one or two LSEs. The hope is that small enterprises may grow into medium and eventually large enterprises, which may spawn perhaps hundreds of jobs and become industry leaders of tomorrow. NEDEP (2011) revealed that SMEs in Nigeria provides 75% of the total employment which is higher than the global average of 50%. It also shows that there are over 17 million SMEs in Nigeria employing over 30 million people. This is supported by Terungwa (2012) who posited that SMEs form most part of the business activities in developing countries because they are labour intensive, rely heavily on the use of local materials and require small capital to operate when compared to LSEs. 

Cognisance of the enormous roles SMEs play in the economy, successive governments have adopted different mechanisms aimed at entrenching the sector into the main stream of the Nigerian Economy. The government had accorded and gave priority to them through the introduction of different policies, incentives, subsidies, programs and agencies aimed at providing a favourable environment for businesses to flourish. Some of these establishments include: National Economic Reconstruction

Fund (NERFUND) in 1990, National Poverty Eradication Programme (NAPEP) in

1996, Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) in

2003, Micro Finance Institutions (MFI) in 2005 and Small and Medium Industries

Equity Investment Scheme (SMIEIS) in 2006. Other recent ones include Youth Enterprise with Innovation in Nigeria (YOU WIN), Train to Work (TRATOW)

initiative and so forth. The cardinal points of all these development initiatives were to accelerate the pace of industrialization, complement LSEs and promote entrepreneurship among the populace.

Despite all government interventions and supportive mechanisms, SMEs fail to grow from micro to small and small to medium and eventually large enterprise as it will be expected. A 182 page Nigerian Bureau of Statistics/Small and Medium Enterprise Development Agency of Nigeria (NBS/SMEDAN) 2012 National SMEs collaborative study  revealed that  there are 17, 284,671 SMEs in Nigeria. The breakdown shows that micro businesses constitute about 17,261,753 or 99.87%, the small enterprises accounted for about 21,264 or 0.12% while the medium scale enterprises is about 1,654 or 0.01%. NEDEP also revealed that Micro enterprises contribute 60-75% of the Nigerian employment, small enterprises contribute 20% and Medium enterprises contribute 5-10%.  Given the fact that micro enterprises constitute 99.87% of the total SMEs operating in the country; this explains that SMEs in Nigeria are characterized by low performance and therefore are unable to grow from one scale of business to another (SMEDAN, 2012). Also, in an international conference on SMEs, Oyelaran

(2010) posited that SMEs contribute approximately 1% of the country”s GDP compared to 40% in Asia and 50% in the USA. This implies that there are some forces behind their low performance in Nigeria.

According to Fatoki (2011), problems encountered by small businesses are numerous and can be described among others as being environmental, financial or managerial.  In a study on why businesses fail, West and Wood (1972) found out that 90% of all business failure result from lack of entrepreneurial expertise. Charles and Babatunde (2012) also identified incompetence as the most fundamental factor causing poor performance of SMEs. The effective utilization of the substantial financial resources provided under the schemes might have been constrained by such factors as lack of entrepreneurial skills. 

Van der Laan, Driessen and Zwart (2010) asserted that the most important asset of a business is a competent manager. They developed an instrument called Entrepreneurial Scan (E-Scan) which will be used to measure entrepreneurial competence. They argued that an examination of the skills of an entrepreneur should focus on four components, thus; wanting, being, capable to and knowledge. Wanting component refers to the motives behind engaging in entrepreneurship. Being is the attributes or characteristics possessed by an entrepreneur. Capable refers to the capability of the entrepreneur and knowledge is the entrepreneur”s educational level and experience. E-Scan was found to be reliable and valid and of great value to entrepreneurs.

Entrepreneurial Skills can be defined as the combination of the ownermanagers” identifiable characteristics, skills and motives that are vital in managing a business. Entrepreneurial Characteristics are the psychological attributes that an entrepreneur can be identified with and are vital to the management of a business. Entrepreneurial Skills means knowledge in practice. It refers to the practical application of knowledge in performing managerial function. Entrepreneurial motives is the inner force that drives an entrepreneur to engage in entrepreneurship and accomplish his goal.

Given the myriad of challenges faced by SMEs, the benefits of having a competent entrepreneur cannot be overemphasized. Ogechukwu (2011) posits that SMEs success largely depend on a competent entrepreneur. The question here is thus, can improvement in entrepreneurial skills leads to higher performance of SMEs in Abia State? 

1.2     STATEMENT OF THE PROBLEM 

Given the fact that SMEs constitute majority of businesses operating in the country, their low performance call for this research to be undertaken. Oyelaran (2010) posited that SMEs contribute approximately 1% of the country”s GDP compared to 40% in Asia and 50% in the USA. Previous studies on issues, challenges and prospects of SMEs such as Charles and Babatunde (2012) and Agwu, (2014) identified inskills among entrepreneurs as the major cause of low performance of SMEs. While the performance of SMEs has been an area of policy and academic debate, (Talik, Laguna, Wawrzenczyk-kulik, Talik, and Wiacek, 2012) argued that studies on skills largely focused on large organizations while less attention has been given to SMEs. 

In spite of the fact that entrepreneurial skills were generally assumed to be positively related to SMEs performance, there are some evidences that this assumption is not always true. Previous studies aimed at establishing the direction of relationship between skills and performance reported inconsistent results.

While (Julius, 2011; Fatoki, 2014) reported positive relationship, (Oo, 2007; Sanda, 2011) reported negative relationship. For example, Sanda (2011) found that despite high competence level exhibited by executives of small businesses, it appeared not to have positive impact on their performance. What conclusion can therefore be drawn from these inconsistencies? In line with the inconsistencies, Mitchelmore and Rowley

(2010) in a literature review on entrepreneurial skills suggested the need for further rigorous research on the relationship between entrepreneurial skills and entrepreneurial performance and business success. Thus, this study focuses on clearly investigating the effect of entrepreneurial skills on the performance of SMEs.

Again, previous researches on entrepreneurial skills and performance concentrate on only two broad issues; entrepreneurial skills (Cooney, 2013; Kinyua, 2014) and entrepreneurial characteristics (Ogunleye, 2012; Sarkowa, 2013) while little attention has been given to entrepreneurial motives and its effect on performance. Only two studies attempted testing this relationship include; Waita (2013) in Kenya looked at the relationship between entrepreneurial motivation of his employees and how that affect business performance and Liebregts (2013) in Netherlands looked at how entrepreneurial motives affect business performance through some mediating factors, while no available literature was found to have test a direct relationship between entrepreneurial motives and SMEs performance. This therefore calls for a research to clearly investigate a direct relationship between the variables.

Although, Van der Laan, Driessen and Zwart (2010) developed an entrepreneurial competency tool which comprises of entrepreneurial motives, capabilities, knowledge and characteristics, they have not in any way determine the predictive validity of the factors. Therefore, they suggested a study that will empirically test the extent to which the factors predict business success. They also suggested that other factors need to be considered to assess their prediction on business success. One study on entrepreneurial motives by Robichaud, Cachon and Haq (2010) conducted across

Mexico, Canada and U.S.A established that the degree of motivation exhibited as well as the linkages to business performance appears to vary across country context.  Thus, this study intends to test the effect of entrepreneurial motives, characteristics and skills on the performance of SMEs in Nigeria.

Associated with the aforementioned issue of low performance, Abia State SMEDAN Office revealed that government had provided loan for the establishment of new businesses and expansion of existing ones which are considered economically viable for the economic development of the state. In the year 2014, the government had under the National Directorate for Employment (NDE) given loan to 1,400 SMEs owners operating within the state. Also in August 7, 2014, the government signed a 2 billion Naira entrepreneurial development fund partnership agreement with Bank of

Agriculture (BOA) and Bank of Industry (BOI) where the government provided 1billion Naira while the other institutions provided 500 million Naira each at 8% interest rate. As at the said date, the Managing Director of BOI, Rasheed Olaoluwa asserted that a total loan portfolio of N23.6 billion had been disbursed to SMEs operating in Abia State (cited in Guardian newspaper, 2014). 

In a personal interview with the Manager, Abia State SMEDAN Office revealed that the funds could not be retrieved because many newly established ventures were closed down and the already established ones have not experienced any meaningful expansion as a result of lack of necessary skills on the side of the entrepreneurs. He added that the risk of nonpayment of the loan had however discouraged many financial institutions especially the commercial banks from continuing some of these schemes. It is against this background that the researcher finds it timely to investigate the true picture of this claim by determining the effect of entrepreneurial skills on the performance of SMEs in Abia State. 

1.3      RESEARCH QUESTIONS

In view of the research problem outlined above, the following research questions were addressed in the course of the research:

i.          To what extent does entrepreneurial skills affect the performance of SMEs in Abia state?

ii.         To what extent does entrepreneurial characteristics affect the performance of SMEs in

Abia state? iii. To what extent does entrepreneurial motives affect the performance of SMEs in

Abia state?

1.4          OBJECTIVE OF THE STUDY

Generally, the research seeks to determine the effect of entrepreneurial skills on the performance of SMEs in Abia State. Specifically, the study is designed to achieve the following objectives:

i.          To determine the effect of entrepreneurial skills on the performance of SMEs in

Abia State. ii. To determine the effect of entrepreneurial characteristics on the performance of SMEs in Abia State. iii. To determine the effect of entrepreneurial motives on the performance of SMEs in

Abia State.

1.5        STATEMENT OF HYPOTHESES 

The following research hypotheses have been formulated for the purpose of validation during the course of this study;

H01: Entrepreneurial skills have no significant effect on the performance of SMEs in Abia State.

H02: Entrepreneurial characteristics have no significant effect on the performance of SMEs in Abia State.

H03: Entrepreneurial motives have no significant effect on the performance of SMEs in Abia State.

1.6    SCOPE OF THE STUDY

The study covered SMEs registered with SMEDAN in Abia state as at the year 2015. They consist of businesses across different sectors including; manufacturing, distribution, wholesale, retail and service. The state was chosen because it is ranked as the 4th with high concentration of SMEs after Lagos, Kano and Oyo (SMEDAN, 2012). The choice of this SMEs group was necessitated by the fact that they are well organized and registered, they have full time employees and they can provide the researcher with adequate information required for this study. The independent variables of the study are Entrepreneurial motives, Entrepreneurial skills and Entrepreneurial characteristics. While the dependent variable is SMEs performance measured by customer satisfaction, growth in sales and growth in profit within the last

3 years.

1.7 SIGNIFICANCE OF THE STUDY

Countries all over the world have realized the enormous contribution of SMEs to their economic wellbeing, and are therefore establishing different schemes to support their growth and development. Given the low performance and the premature death of SMEs in Abia state, the study brings to the fore the effect of entrepreneurial skills on business performance in the state. This study is therefore significant to the following categories:

1.7.1 MANAGERIAL CONTRIBUTION

The findings of this research will be of benefits to the individual owners/managers of SMEs who may lay their hands on this work. It will clarify the extent of the effect entrepreneurial skills have on their business performance. Thus, encourage the managers/entrepreneurs to acquire the necessary skills for proper management and better performance.

The study will also be beneficial to the Abia state government that is aimed at making the state a better place for businesses. Through the explanation on the level of SMEs performance predicted by entrepreneurial skills, it will guide them in restructuring their pattern and level of supports given to SMEs operating in the state.

The study will also be beneficial to federal government bodies such as CBN, SMEDAN, BOI and BOA who are in charge of the formulation and the

implementation of federal government policies regarding SMEs.  It explains to them the level of SMEs problem that is as a result of entrepreneurial skills so as to determine the level and pattern of their support when it comes to policy formulation and implementation. Thus, it guides them on the formulation of policies on SMEs.

This study will also serve as a guide to international agencies such as United Nations Industrial Development Organisation (UNIDO), United Kingdom Department for

International Development (DFID), Organisation for Economic Co-operation and Development (OECD), World Bank and other agencies that are known for providing financial support to SMEs as part of their efforts towards seeing that the world is a better place. It will be made clear to them the relevance of capacity development training rather than focusing on only financing.

1.7.2 CONTRIBUTION TO KNOWLEDGE

The research has provided empirical evidence on the extent and pattern of relationship through the combination of entrepreneurial characteristics, skills and motives under a single model. It is our belief that the study has added to literatures on entrepreneurial skills. This is because no study to the best of the knowledge of the researcher has investigated the effect of entrepreneurial skills on SMEs performance using the 3 components. In the light of this, students and researchers would find it instructive. 

However, to expand the frontier of existing knowledge, the study has empirically tested the direct effect of entrepreneurial motives as an independent variable on the performance of SMEs in Abia State. This is given by the paucity of studies on that, as well as the study of Robichaud, Cachon and Haq (2010) who established that the degree of entrepreneurial motives and its linkages to performance vary across countries. Since no previous study to the best of the knowledge of the researcher has empirically tested this relationship in the Nigeria context, this study is therefore useful. It has also provided empirical evidence on the relationship between the variables as it is very crucial because confidence intervals, corrected estimates and measure of variability in correlations across studies provide strong evidence about the strength and consistency of the relationship between variables.

1.8 LIMITATIONS OF THE STUDY

Every research work must have its short comings; this research work however is not an exemption. In the course of this research work the following limitations were observed:

Firstly, the f