This study set out to find the impact of MSMEs on employment generation in the Nigerian economy. The study employed data sourced from the World Bank Enterprise survey of 2013 and used non- parametric analysis of the locally-weighted scatterplot smoothing (LOWESS) method to find whether small businesses are net creators or destroyers of jobs. The essence of this research is to ascertain whether MSMEs are actually fulfilling the significant role ascribed to them by the literature in terms of employment generation. This is to ensure a proper understanding of the importance of MSMEs in employment generation.
There were two analyses in this study. The first looked at the number of employees in firms between the fiscal years 2012 and 2009, and the result shows that all categories of firms with the exception of large size enterprises were net job creator, with large enterprises performing abysmally during the period. The second analysis looked at the number of employees between the fiscal year each firm started operation and the 2012 fiscal year. It found that all categories of firm size enterprises were net creator of jobs, with micro enterprise recording over 120% increase in job. This confirms without doubt that small businesses have the tendencies to create more jobs than large firms. The two analyses follow the same trend with micro firms out performing all the other firms in terms of net job creation. This is followed closely by small size firms, then medium size and lagging behind is the
large size firms. In a real sense, all the past analyses were actually right. The problem however, with previous analyses indicating that small businesses were a net destroyer of jobs was that, they considered only the manufacturing sector in which small firms did not have a comparative advantage. Secondly, they were not looking at the broader picture with respect to the rate at which small businesses sprung up. According to SMEDAN (2013) report analysis, the number of micro- enterprises in the country went up by 53.34% between 2010 and 2013. Therefore, we can admit that given the needed support, small businesses, despite their high rate of closure, will be able to do a good job in reducing the unemployment rate in the economy.
Using a simple computational difference on the data obtained from the World Bank Enterprise Survey, small businesses performed better than large firms with regard to employment generation in Nigeria. This confirms Birch’s (1979) claim that small businesses are the most important source of employment generation, and specifically in Nigerian.
In the light of the findings emanating from this research, the following policy implications are imperative. Governments and other relevant stakeholders in developing countries such as Nigeria dealing with issues of high unemployment should consider MSME support and development as a necessary condition in their effort to reduce unemployment. Secondly, policymakers in developing countries such as Nigeria should provide the necessary infrastructure for MSME development through the creation of innovation hubs and clusters to enhance MSMEs’ ability to generate more employment.
CHAPTER FOUR
MSMEs’ PRODUCTIVITY IN NIGERIA
4.0 INTRODUCTIONThis section examines MSMEs’ contribution to output growth rate in the Nigerian economy, using the World Bank enterprise survey data for Nigeria. The link between MSMEs’ output and economic growth stems from its ability to boost competition and entrepreneurship, which in turn have spill-over effects for innovation, aggregate productivity, and efficiency in an economy (Beck et al., 2005). However, factors that determine MSMEs’ output shares, output composition, market orientation and location (Tambunan, 2008) are constrained in Nigeria. These factors are natural and technical endowments, favourable business environment, level of infrastructural development and government support (such as the provision of necessary information on business opportunities, capacity training, monitoring and mentoring, and loan guarantee schemes). In Nigeria, there is a huge infrastructural gap, inadequate institutional support and unsupportive credit environment, resulting in low investment commitment to bring start-up and young firms up to a commercial scale. These factors, coupled with scarce entrepreneurship, is crippling the output expansion of MSMEs in Nigeria. This study therefore seeks to examine the impact of MSMEs on output growth.
There is consensus in the literature that MSMEs generally contribute to the output of the economy (Beck, Demirgüç-Kunt, & Levine, 2003; IFC, 2013a; Decker et al., 2014; ILO, 2015). The question, therefore, is, to what extent are MSMEs contributing to economic growth, specifically in Nigeria? From the supply angle, output growth in MSMEs can be identified from three sources: increase in the number of establishments (taking into consideration the fact that the number of employees and output of the existing firms held constant), the increase in number of employees (with the number of firms and labour productivity held constant), and increase in output or productivity, which can be termed efficiency (holding constant the number of firms and employees in each firm), or a combination of the three factors. This study was basically limited to the increase in the output or productivity, due to the nature of the data used.
IFC (2013a) found that the increase in employment for microenterprise firms outweighs the increase in productivity, and that microenterprise firms have the least productivity growth rate among all types of firm sizes. IFC’s result affirms that the result is tenable across all sectors of the economy as well as across regions and country income groups. However, ILO (2015) is of the opinion that small firms exhibit this trend of lower productivity in the manufacturing and services sector only, while ascertaining that young (1-5 years old) small firms have the highest growth rates. IFC concluded that, on average, larger enterprises are more productive than the small businesses because they benefit from economies of scale and invest more in machinery and skilled development. They also display tendencies to develop new products and make use of outsourcing that tends to increase
workers’ productivity (they tend to be more innovative). African Development Bank’s (AfDB, 2010) report also confirms that microenterprise firms are the least productive of all sizes of firm. There is a need, therefore, to ascertain which applies in the Nigerian economy.
Modern theories on MSMEs (Pro-SMEs policy thesis and flexible specialisation theory) specify that MSMEs play two important roles simultaneously: economic growth acceleration through an increase in their output, and poverty reduction through job creation and income generation effects. There are also the indirect effects of growth-linkage on employment, consumption and investment that positively impact economic growth.
Therefore, MSMEs firms are highly heterogeneous, hence there cannot be one single trend pattern of explanation for their contribution to output. Also, in developing countries such as Nigeria, where MSMEs are often characterised by the high presence of informal microenterprises and few small and medium-sized enterprises, there is need to empirically investigate the contribution of MSMEs to output growth. This will enable a proper segmentation of the heterogeneous MSMEs into those which will be good for income stabilisation policy, employment creation and productivity increase, for the purpose of a suitable intervention. It is in this light that this study examines the relationship between MSMEs output productivity growth rate in Nigeria.