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EFFECTS OF EXTERNAL BUSINESS ENVIRONMENT ON PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN OYO STATE
1.1 Background to the Study
The role of Small and Medium Enterprises (SMEs) in the national economy cannot be underestimated as they play important role in the global economy (Taiwo, Ayodeji & Yusuf, 2015). SMEs are key players in the economy and the wider eco-system of firms. Enabling them to adopt and thrive in a more open environment and participate more actively in the digital transformation for essential boosting of economic growth and delivering a more inclusive globalisation (Organisation for Economic Co-operation and Development, 2017).
However, in the developed economy particularly the OECD countries, SMEs are the predominant form of enterprise, accounting for approximately 99% of all firms. They provide the main source of employment, accounting for about 70% of jobs on average, and are major contributors to value creation, generating between 50% and 60% of value added on average (OECD, 2016). In emerging economies, SMEs contribute up to 45% of total employment and 33% of GDP. SMEs contribute more than half of employment and GDP in most countries irrespective of income levels when taking the contribution of businesses into account (International Finance Corporation 2010).
Furthermore, according to Ruchkina, Melnichuk, Frumina and Mentel, (2017), SMEs constitute an important part in economic development of any given country and contribute considerably to regional economic development by creating new jobs, providing investment opportunities and forming the economic capital and potential required for sustainable economic growth.
In developing economy such as Nigeria, SMEs are widely acknowledged as the key engine of economic development (Small and Medium Development Agency of Nigeria, 2013). Because of this realization, a central issue dominating policy debates around the world and Africa has been to induce economic growth through the growth of SMEs. Most people in developing countries must support themselves and their families (Ball, Geringer, Minor& McNett 2010).
Thus, understanding economic growth is essential to understand the economic challenges facing a country and how resources should be managed to maintain sustainable development at regional, national and international levels (Wiik, 2017). The contribution of the SMEs sector to the Nigerian economy is essential for the accomplishment of the broader development objectives such as poverty relief, spreading of employment opportunities and increasing indigenous ownership of resources in the economy (Chidoko, Makuyana, Matungamire& Bemani 2011). Furthermore, SMEs facilitates the growth and development of human and capital resources towards general economic development and the rural sector in particular (Chinweuba & Sunday, 2015).
Small and Medium Scale Enterprises (SMEs) contribute about half of Nigerian GDP and accounts for over 25 per cent of employment in the country (Small and Medium Development Agency of Nigeria, 2013). There are 17 million SMEs in Nigeria, employing 60 million persons and contributes about 48 per cent to the nation’s Gross Domestic Product in nominal terms (Small and Medium Development Agency of Nigeria, 2013). This sector is responsible for most of the advances in new products and process and provides most of the employment opportunities, as a central indicator of the overall operation of an economic system (Enterprise Baseline Survey 2012).
There are various definitions as to what constitutes SMEs. Small and Medium Development Agency of Nigeria (SMEDAN) definition adopts a classification based on dual standards,
employment and assets (excluding land and buildings). Small Enterprises are those enterprises whose total assets (excluding land and building) are above Five Million Naira but not exceeding Fifty Million Naira with a total workforce of above ten, but not exceeding forty-nine employees. Medium Enterprises are those enterprises with total assets (excluding land and building) are above Fifty Million Naira, but not exceeding Five Hundred Million Naira with a total work force of between 50 and 199 employees. For this study, SMEDAN definition of SMEs was adopted. SMEs is regarded as enterprises whose total assets (excluding land and building) are above Five Million Naira, but not exceeding Five Hundred Million Naira, with a total work force of between 10 and 199 employees. However, SMEs play a significant role to the growth and development of a country.
Baloyi (2010) opined that despite the existence of SMEs, their performance has become a thing of concern as SMEs in the country still continue to weaken (not all SMEs are experiencing growth).Douglas, Micah and Tom (2014) opined that 90% of the business start-ups do not operate beyond the third anniversary due to lack of environmental factors. More so, there are other SMEs that have stagnated at the survivalist stage which may be due to poor performance (Bidzakin, 2009).
Performance is the ability of an organization to achieve objectives such as high profit, quality product; large market share, good financial outcomes and survival at pre-determined time using relevant strategy for action. Thus, performance can also be employed to consider how an organization is performing in terms of market share, volume of products, customer’s demand, loyalty and investment.(Obiwuru, Okwu, Akpa and Nwankwere, 2011) Business enterprise performance according to Oghojafor, Olamitunji, and Sulaimon (2011) is how a manager effectively and efficiently utilizes the organisation’s resources so as to achieve the organisational goals and satisfy the stakeholders. However, Neringa and Justina (2014) performance of enterprise as service quality that denotes the discrepancy among customer’s anticipations and opinions about quality of services provided. Furthermore, enterprise performance means how the growth potential exhibited by the SMEs contributed substantially to job creation, thereby improving the economic status of the business enterprise as opine by (Adesanya, 2014).
Performance does not take place in a vacuum but, within certain environment which has challenges and opportunities (Walter, Clynes, Tang, Marmostein, Mellor, & Berger, 2008). Environmental forces create challenges and opportunities for the organization (Pearce & Robinson, 2007). Nevertheless, managers/owners must respond and adjust to alterations in their surroundings so as to be able to recognize the challenges and opportunity that lies ahead of them in their business environment in order to perform efficiently.
Business environment is marked by different dynamic features such as global competition, information technology, quality service revolution and corporate social responsibility which compel managers to rethink and reshape their approach to various operational responsibilities. Due to this paradigm switch, new firms are emerging that are more responsive to their external environment (Luthans, 2007). Furthermore, Ibidunni and Ogundele (2013) classified the nature of the business environment as stable, dynamic and unstable and this habitually assists a business enterprise in selecting suitable strategies. Pearce and Robinson (2011), an enterprise external environment was first recognized by open systems theorists who observed that organizations operate not as self-contained isolated units but in continuous and inevitable interaction with the large system surrounding them and within which they exist. The external environment is that system which consists of factors that affect business enterprises from outside such as economic, socio-cultural and technology and these environmental factors are beyond the control of the enterprises (Alkali & Abu, 2012; Pearce & Robinson, 2011).
Economic environment according to Omobolanle (2009) refers to those economic factors, such as inflation rate, exchange rate, unemployment rate among others which have overbearing effect on the performance of small scale business. Omobolanle (2009) further observed that small scale businesses depend on the economic environment for all the needed inputs. Therefore, economic environment influences the operations of small scale businesses. In order words, economic environment consists of those economic factors that directly or indirectly affect the operations of small scale businesses in Nigeria. These economic factors help owners and managers to measure the strength and weakness of their business enterprises in order to perform adequately.
Wetherly and Otter (2011) described the socio-cultural environment as factor consisting of everything that is not incorporated within the economy or political system.According to Wetherly& Otter, socio-cultural context is fixed up of collection of activities, and the relationships people engage in their personal and private lives which include population features, age, ethnicity, religion, values, attitude, lifestyles and associates. These environmental patterns of behavior lead to the foundation of various cultural values in different societies, some of which determine the decision to create new business. Socio-cultural environment is important because, it determines the product, service and the level of conduct that the society is likely to get. It allows a cordial relationship between management, workers and their customers.
Technology forces refer to the rate of scientific change and fastest growth of technology that have potentially wide-ranging effects on society (Gamble 2014). According to McNamara and Watson (2005), technology can be defined as the aggregate of means such as knowledge,
methods, materials, and instruments used to achieve practical results in order for the enterprise to establish work methods, work pattern and information structures. Technological factor have rendered some SMEs not competitive and not able to meet the needs of customers. However, entrepreneurs in Small and Medium Enterprise need to recognize the nature of technology change, and the need to go with the flow to have competitive advantage in order to improve change or implement new technology process to meet customer want and needs.
According to Agbolade, 2014; Ridwan& Ina, 2015 have identified variables which are related to external business environment prominent among which include economic environment, socio-cultural environment, and technology environment. For SMEs to perform efficiently, an effective way of managing external environment components are present and functioning and these components operate together in an integrated manner. Most studies on business environment and SMEs performance have focused their attention on the developed or advanced countries, but only few have look at the developing countries (Olarewaju & Elegunde 2012; Adeoye & Elegunde 2012 and Agbolade 2014).
Yet according to Gamble (2014), SMEs owners still find it difficult to know the right environment to operate even with the effort of the government to create an enabling environment for businesses in the country. Thus, this study set out to investigate factors that impact external business environment on how the SMEs will perform effectively.
1.2 Statement of the Problem