By DR Muda Yusuf
WED, SEPT 20 2023-theGBJournal |Micro, Small and Medium Enterprises [MSMEs] play critical roles in the economic growth of all economies globally. They play even more important roles in the developing economies. In the Nigerian economy, the MSMEs deliver value as catalyst to the economy in several other ways:
-They promote competitiveness and entrepreneurship across sectors and the entire economy. They enhance efficiency, innovation and aggregate productivity growth.
-They contribute a lot more to job creation more than large enterprises. They are largely more labour intensive and contribute immensely to poverty reduction.
-They are effective vehicles for the promotion of economic inclusion.
-Compared to large enterprises, MSMEs tend to use less capital per worker and have the capacity to use capital more productively.
-MSMEs promote entrepreneurial development and accelerate the use of local law materials.
-They are instrumental to the mobilization and utilization of small savings for investment. Some of these funds tend to exist outside the banking system.
-They have high propensity to save and to invest even with less income levels.
-They provide important linkages with large enterprises and offer a platform for subcontracting.
-They utilize a great deal of indigenous resources, consistent with the objective of backward integration.
-They generally have greater technological adaptability.
The role of MSMEs fits perfectly into the eight-point agenda espoused by President Bola Tinubu which includes, among others, food security; poverty eradication; economic growth, job creation; and inclusion.
Five of the eight-point agenda rests squarely within the MSME space. What this implies is that for the Tinubu administration to accomplish the eight-point agenda, the government must leverage and strengthen the MSMEs in the economy, across all sectors of the economy.
Some statistical insights
According to the Small and Medium Enterprises Agency of Nigeria [SMEDAN], we had 39.65 million MSMEs, in Nigeria as at 2020. 96.9% of these MSMEs are micro enterprises; 3.1% are small and medium enterprises.
The highest number of these enterprises are in Lagos. The key sectors to which they belong are agriculture, 38.4%; Trade, 33.3%; other services, 9.8%; Manufacturing, 4.2%.
The SMEDAN survey further revealed that 96.2% of the MSMEs are sole proprietors, while partnerships constitute a mere 3.3%. The survey revealed that the biggest challenges of the small businesses were high energy cost, high electricity tariffs, multiple taxation, access to finance and high cost of funds.
Lately the drastic depreciation of the naira has become a major factor impeding the growth of the small businesses. The same is true of the grave impact of insecurity on small holder farmers across the country.
The Labour Force Survey Report of the National Bureau of Statistics stated that 92.6% of employment in the first quarter of 2023 was in the informal sector.
Policy implications of these data OF
The foregoing statistics has a number of implications for policy as follows:
The best channel for an accelerated job creation is through the MSMEs. If for instance only 50% of them could create just one job each, that would generate about 20 million jobs.
The employment multiplier of investments in small businesses is very high. This is also an effective poverty reduction strategy for governments at all levels.
What the data also shows is that policy makers need to robustly engage small businesses across all sectors in order to determine the appropriate policy interventions for the promotion of economic growth through the MSMEs pathways.
The demands of the small businesses vary across sectors which is why sector specific engagements are very critical to unlock the job creation opportunities in the small business space. Such engagements would also be very useful for policy feedbacks that could be used for policy reviews and finetuning.
The sectoral distribution data is also very valuable for policy. It is useful for proportional intervention to promote the growth of small businesses and accelerate job creation. The disaggregated data is useful for effective policy targeting.
It is further evident from the data that the prospects for accelerated job creation are much higher in the MSME space, especially in agriculture and services sector of the economy.
This is not to diminish the importance of small-scale manufacturing in employment generation. But the truth is that the vulnerabilities of the manufacturing sector are much higher.
The data also highlighted the major bottlenecks to the productivity and growth of the small businesses. These include access to capital, power supply, energy cos, multiple taxation, regulatory compliance costs and many more.
Again, these are good pointers for policy makers to shape their intervention measures to boost the growth of small business and create more jobs.
The labour data published by the National Bureau of Statistics [NBS] revealed that over 90 percent of jobs in the economy are created in the informal sector in the first quarter of 2023.
This underscores the need for policy makers to develop a comprehensive framework for the integration of the informal sector into the mainstream of the economic policy process.
If the government must promote economic inclusion, the mainstreaming of the informal sector should be accorded a bigger priority than it is presently the case.
There is need for deliberate policy to support and protect the informal economy given their strategic contribution to the economy, especially with regards to job creation and economic inclusion.
De-Industrialization worries among SMEs
There is a need to stem the tide of deindustrialization in the Nigerian economy. Following the collapse of many manufacturing firms [most of them are SMEs], many factory premises around the country have been taken over for activities order than manufacturing.
Many factory premises have been converted to event centers, supermarkets, worship centers, warehouses for imported finished goods, restaurants, viewing centres, cinemas etc.
Many of our industrial estates have become a shadow of what they used to be. Evidence of all of these can be found in industrial estates located in Ilupeju, Ogba, Ikeja, Sango-Ota, Agbara and many other parts of the country both in the eastern or northern part of the country the story is not different.
It is therefore imperative to take urgent steps to stem the tide of deindustrialization if we must curb the growing unemployment and the increasing import dependence of our economy. Some of the factors responsible for this deindustrialization include the following:
-The influx of cheap and substandard products into the country which creates unfair competition for our domestically produced goods.
-The crisis in our foreign exchange market which has elevated the volatility in the exchange rate and which has worsened the illiquidity in the foreign exchange.
-The epileptic power situation.
-The high cost of energy especially diesel and gas.
-The phenomenon of multiple taxation imposed by the three tiers of government.
-The challenge of multiple taxation and excessive drive for revenue by agencies of government which imposes a huge burden on our manufacturing industry, especially those who are in the MSME category.
-There is poor domestic patronage of what is produced locally.
-Paucity of basic industries to support our manufacturing enterprises. Such basic industries include the iron and steel industry and the petrochemical industry.
-Policy inconsistency
-Weak infrastructural base – power, transportation, Apapa traffic issues, railway system, and the ports
-High cost of fund, absence of long-term funds, challenges of access to credit by
MSMEs as well as other firms in the sector, because of perception of manufacturing is very risky in the economy. Except for intervention funds, especially from the Bank of Industry (BoI), the cost of fund in the Nigerian economy has been well over 25% for small businesses. It is difficult to achieve a competitive manufacturing investment with this kind of fund.
The tenure of fund is also very short, most time a maximum of one year. It is difficult to do any serious manufacturing investment with a tenure of fund of just one year or less.
The Small Businesses account for over 50% of the GDP but have access to only 1% of the Bank credit to private sector. This demonstrates the enormity of the funding challenges that are faced by small businesses.
The manufacturing sector also suffer from the challenges of weak institutions. This makes regulation ineffective – faking and counterfeiting, smuggling, under invoicing etc.
Research and Development (R &D) does not attract sufficient investments needed to promote industrialization.
A major challenge to industrialization is the low industrial space and absence of innovation. Many industries have the challenge of getting qualified labour for their businesses.
The curriculum of many tertiary institutions is not dynamic and most often, not aligned to the needs of industries, which is very dynamic. Therefore, the static curriculum cannot meet the needs of a dynamic setting.
Way Forward
The systemic issues of infrastructure should be addressed as a matter of utmost priority. Immediate focus should be on electricity supply and logistics. Unless we have these two critical infrastructures in place, it will be very difficult to ensure a competitive industrial sector and to make possible the transformation of the sector.
-We should fix the foreign exchange liquidity and currency depreciation issues.
-MSMEs with annual turnover of N50 million and below should be exempted from corporate tax and VAT. This is in addition to tackling the problem of multiple taxes and levies on small businesses both by state and non-state actors.
-Structural issues on infrastructure should be addressed to improve productivity and competitiveness of manufacturing firms.
-We should address concerns about unfair competition from imported finished goods.
-We should address regulatory and institutional problems affecting MSMES
-Challenges of Access to credit, cost of credit and tenure of funds should be addressed.
-We should focus on labor-intensive industries to enhance job creation and promote economic inclusion.
-We need to ensure that there is adequate investment in core industries such as Iron and steel and Petrochemical to facilitate backward integration.
-We should take full advantage of the large Nigerian market to scale up our industrial capacity utilization.
-We should ensure the full and effective implementation of Executive Order 003 on patronage of locally produced goods.
-We should address the escalating energy cost – diesel, gas and aviation fuel. There should be generous tax cuts on energy and power solutions and products to moderate energy costs.
-We need to support the small businesses with business development skills as well as technical skills. These are some of the things that the government needs to do to support the growth of MSMEs in our drive towards Industrialization.
-Government should have a pool of experts to offer business advisory services to our MSMEs free of charge, physically and virtually. There should be initiative to promote sub-contracting.
-Large enterprises and foreign companies alike should be encouraged to sub contract aspects of their operations and activities to the indigenous small and medium enterprises, where feasible. This would foster linkages and promote inclusiveness in our Industrialization process.
Deepening Linkages between MSMEs and Large Enterprises:
Linkages between large and small enterprises impacts positively on industrialization. It also facilitates the building of an inclusive industrial ecosystem.
Some of the channels of these linkages include: subcontracting, licensing, joint ventures, strategic alliance, consortium and a wide range of vertical linkages. These linkages are very critical to industrialization and economic growth, especially in developing economies.
The imperative of SME clusters
Development of MSMEs clusters is very critical for the growth of small businesses. The idea is to promote the concentration of related industries in a particular geographical location. The cluster strategy offers the following value proposition:
-It strengthens localization economies. Concentration of industries could result in significant cost savings.
-It increases productivity through specialized inputs, access to information, synergies, access to public goods, including infrastructure.
-It enhances the effectiveness of government intervention efforts to support small scale industries. There is better targeting of such government support. Such interventions could be from the federal, state, or local governments.
-Strong clusters have the capacity to attract bigger domestic and foreign investors.
-It allows for more efficient division of labour and different firms have different competencies and because they are in close proximity it facilitates and enhances a much more efficient production process.
-It facilitates the process of integration of MSMEs with large industries.
-It promotes production efficiency as it enables firms to share risks, costs and access to market.
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-enables MSMEs to share resources which tends to reduce cost.
It is therefore important that the government encourages more investment in SME clusters and such cluster models should be incorporated into the country’s economic policy.
Role of technology in MSME development
There are three major components of technology that we need to prioritize for adoption in accelerating industrialization, especially among the MSMEs. The first is technology application to production.
This is related to digital production, digital manufacturing, or smart industrialization.
The second and perhaps most important to many MSMEs is the technology application to marketing. This is in realm of digital marketing which is creating a lot of transformation in the marketing space for small businesses.
Many MSMEs have leveraged the digital marketing platforms and the outcomes have been quite amazing, especially the social media platforms.
Thirdly, there is the use of technology in the administration, management and general business processes. This makes processes smarter and efficient and cost effective.
All these three components help to enhance and improve the competitiveness and resilience of small businesses.
Therefore, if we must ensure the sustainability of our businesses, whether in real sector or in the service sector; we need to embrace technology in all aspects of our operations.
The adoption of technology by MSMEs makes business more productive, more efficient and more cost effective.
Conclusion
The foregoing has clearly demonstrated the fact that if we must promote economic growth and inclusion, we must bring the MSMEs on board.
The government needs to put in place the support infrastructure to facilitate the growth of MSMEs. We should also not leave the informal sector behind.
We should have strategies to de-risk manufacturing enterprise and ensure their sustainability, promote linkages between the large and small enterprises and entrench the concept of clusters for small scale industries.
We need to promote technology adoption by our MSMEs. Any business that is not embracing technology is at the risk of extinction. We cannot emphasize this point enough; we need to adopt technology in our production processes. We need to adopt technology in our business processes to make our processes a lot more efficient and cost effective.
Muda Yusuf is the director/ceo Centre for the Promotion of Private Enterprise [CPPE]
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