Intro and Bibliography

Chapter One
Introduction
1.1

Background of the study1

This thesis investigates the impact of economic liberalisation on the development and
performance of manufacturing Small and Medium Sized Enterprises (SMEs) in Nigeria; in
this specific context, the effects of trade and financial market liberalisation on the
development, performance and survival of manufacturing SMEs. The Nigerian government
has, since independence in 1960, implemented various economic policies, such as the Import
Substitution Industrialisation (ISI) Strategy, the Structural Adjustment Programme (SAP)
trade and financial market liberalisation (Adenikinju and Chete, 2002; Mesike, Giroh and
Owie, 2008). All these policies were implemented by the Nigerian government in an attempt
to develop the country and make it economically and politically self-sufficient (Agboli and
Ukaegbu, 2006).
The ISI policy was meant to develop the industrial potentials of Nigeria, but some analysts
believed that the programme achieved very minimal success. It was believed that the ISI
policy was plagued with problems ranging from policy inconsistencies and lack of
commitment on the part of the government and its agencies, to initiate and conclusively
implement economic programmes (Ikpeze, Soludo and Elekwa, 2004; Agboli and Ukaegbu,
2006; Ayadi, Adegbite and Ayadi, 2008). The lack of commitment and inconsistencies were
linked to the inability of the government to prudently and judiciously manage the revenue
proceeds from the sale of primary products with public governance immediately after
independence towards sustainable economic development of the country (Akyüz and Gore,
2001).
Nigeria’s gross domestic product (GDP) per capita was put at $300 per annum in 1998 and in
2007, was estimated at $1,169. The country is classified among less developed countries
1

Some extract of this chapter is already in print as journal articles. See Obokoh (2008e); Obokoh, Ehiobuche, and

Madueke (2009).


(LDC) of Sub Saharan Africa (SSA) under the tariff order of 2005 (IMF, 1999; UNSD, 2009).
According to the World development report of 1997, LDCs are countries that their level of
economic and social developments are lower than that of the advanced capitalist West due to
their low industrial base and dependence on primary product export.
Nigeria is a major exporter of crude oil and producer of primary products such as cocoa,
rubber, cotton, and groundnut. It relies heavily on revenue from the sale of crude oil and the
primary products (Mesike, Giroh and Owie, 2008). In the late 1970s and early 1980s, the
Nigerian economy faced a serious balance of payment crisis, following the fall in the
international market price for primary products, including crude oil (Mosley, 1992; Akinlo,
1996). The subsequent fall in revenue, due to the drop in demand for primary products in the
international market, resulted in balance of payment problems. This prompted the Nigerian
government to embark on a fundamental economic reform process called SAP based on the
recommendation of International Monetary Fund (IMF) and the World Bank (WB) (Okome,
1999).
The SAP prepared the ground for the complete liberalisation of the Nigerian economy, with
the aim of creating a competitive business environment for manufacturing SMEs and
Multinational Corporations (MNCs) (Onyeonoru, 2003). It was envisaged that economic
liberalisation would give SMEs the chance to exploit the domestic market and also explore
international market opportunities occasioned by the liberalised business environment
(Dawson, 1994; Vachani, 1994). In so doing, SMEs would then have an unhindered
opportunity to contribute meaningfully to the economic development of Nigeria and help
reduce the reliance on primary products (Agboli and Ukaegbu, 2006; Obokoh, 2008c).
It has been argued that SMEs are an effective instrument for economic growth and
development in Developed and Less Developed Countries (Beyene, 2002; Nitani, 2005). This
is because SMEs contribute significantly to the Gross Domestic Product (GDP) and produce
substantial amounts of locally consumed products (ECA, 2000; Wattanapruttipaisan, 2003;
Tagoe, Nyarko and Anuwa-Amarh, 2005; Saleh and Ndubisi, 2006). According to Mojmir

(2000), SMEs play an important role in the economic growth of any country including

2


industrialised countries because they account for more than half of a country’s output and
employment (Hussain, Matlay and Scott, 2008). In the same vein, Udechukwu (2003) asserts
that the development of SMEs is an essential element in the growth strategy of most
economies, which holds particular significance for developing countries like Nigeria. SMEs
are a vital part of any market economy because they are represented in all major branches of
manufacturing and service sectors (Obokoh, 2008c). This is in addition to their role in job
creation for the unemployed, provision of goods and services within and across national
boundaries of countries (Saleh and Ndubisi 2006; Woldie, Leighton and Adesua, 2008).
Due to their small size, SMEs are flexible and are more able to adapt to changes within the
market environment than large firms (Mazzarol, 2000; Udechukwu, 2003; Aryeetey, 2005).
However, the small size of SMEs and their small capital base also constitutes an obstacle to
their access to funds for their operations (Obokoh, 2008d). It is expected that SMEs, with
ready and willing entrepreneurs, can succeed in an increasingly competitive world, especially
if there are enabling and supportive government policies (Biggs, 2007). In this vein, Berry
(2002) asserts that the flexibility of SMEs operations persuades business analysts to believe in
their strategic role towards future industrial growth of developing nations. Despite this
flexibility, SMEs are also exposed to external environmental risks such as government policies
and competition from MNCs (Watson and Everett, 1999; Abonyi, 2003). Some of these
environmental factors often hinder SMEs from gaining the necessary international exposure
for achieving large scale production for the efficient utilisation of resources (Mambula, 2004).
Given favourable policy environment and support, it is believed that SMEs can achieve an
efficient production process that would enable them to compete successfully in the global
market (Briggs, 2007). Therefore, government policies should be directed towards improving
the economic environment in which SMEs operate (Fredland and Morris, 1976; Everett and
Watson, 1998). There is now a re-newed emphasis on the development of SMEs especially in

LDCs (ECA 2001). This is in view of LDCs governments’ formulation of policies that would
create the enabling environment for the establishment and the operation of SMEs (Agboli and
Ukaegbu, 2006).

3


The re-newed emphasis by various Governments in LDCs on SMEs development can be
linked to the current global trend of economic liberalisation and the need to bridge the
development gap, that hitherto existed between LDCs and industrialised countries through
private sector participation (Akinlo, 1996). The realisation of the need to encourage private
sector (SMEs) participation in economic activities was borne from the balance of payment
crisis of the 1980s. This is because the private sector that would have provided the needed
substitutes for domestic consumption was not well developed owing to defaults in earlier
policies.
1.2

Statement of Research Problems

Prior to the liberalisation process in Nigeria, manufacturing SMEs were characterised by small
capital base which constituted an obstacle to access to funds for their operations and
expansion. This resulted in low productivity value-added to economic growth and Gross
Domestic Product (GDP) (Dawson, 1994; Ekpenyong, 2002; Mambula, 2002).
The effect of SMEs low productivity, absence of a strong private sector (SMEs) and the
dismal performance of the manufacturing sector to sustained economic growth in Nigeria
became evident in the early 1980s, following the fall in the international market price for
crude oil. The revenue from crude oil sales accruing to the government dropped drastically,
which led to a balance of payment deficit and the government’s inability to meet up with
import bills (Adenikiju and Chete, 2002). The recognition of the vital role of the private sector
and manufacturing SMEs necessitated the need for economic reform that culminated in the

liberalisation of trade and financial market by the Nigerian government (Mosley, 1992;
Adenikinju and Chete, 2002).
The liberalisation of the financial market was aimed at creating avenues for easy and cheap
access to finance for SMEs. It was widely believed that the Nigerian financial market was
highly repressed by the government’s regulation of the interest rates through the Central Bank
of Nigeria (Akinlo and Odusola, 2003). In order to make the liberalisation of the financial
market effective, the government removed the restriction on exchange rate movement to allow
free flow of investible funds into and out of the country and also make market forces

4


determine the Naira exchange rate (Obadan, 2006a). The liberalisation of the financial market
that resulted in the deregulation of interest rates and exchange rates had two basic purposes.
The first was to maintain a positive real interest rate in order to encourage savings which
would make funds available and accessible to SMEs. The second purpose was to devalue the
Naira exchange rate to make the import of finished goods more expensive and less attractive
to Nigerians (Ikhide and Yinusa, 1998). It was also envisaged that this would provide the
needed opportunity for SMEs development through the utilisation of local raw material and
intermediate inputs for production (Dawson, 1994).
On the other hand, trade liberalisation resulted in the abolition of import license, tariffs, and
removal of import and export restrictions.

The liberalised trade was intended to create

competition in the domestic goods market for the production and distribution of consumables,
especially with the free import of finished goods. In addition, it was envisaged that the
competition brought about by liberalised trade would help reduce the rent seeking ability of
large manufacturing firms and eliminate the inefficient ones (Söderbom and Teal, 2002;
Akinlo, 2006). The liberalised trade was also meant to promote the development and

utilisation of indigenous technology; generate employment and encourage the export of
manufactured goods by SMEs.
However, the SAP policy that prompted the reform process anchored on the neoliberal policy
of the Washington Consensus precluded the government from direct participation in economic
activities. This then confined the government to a supervisory role in order to allow market
forces to determine the allocation of scarce resources. The SAP policy also required the
government to cut down on public expenditure and the removal of subsidies on petroleum and
other items (Mosley, 1992). The reduction in public expenditure then resulted in serious cases
of non-performance of public infrastructure owing to poor budgetary outlays towards their
expansion and rehabilitation (Lee and Anas, 1992; Agboli and Ukaegbu, 2006). The bottom
line of the economic reform in Nigeria was to create a conducive and competitive business
environment for the development of private sector, especially manufacturing SMEs.

5


Financial market liberalization enabled the government to pursue positive real interest rates, as
a means of inducing local savings and attracting foreign funds from abroad (Ikhide and
Alawode, 2002, Obokoh, 2009). On the other hand, the devaluation of the Naira was aimed at
discouraging the import of finished goods. While the deregulation of the foreign exchange
market, allowed the Naira to float against other major currencies. It was envisaged that this
would facilitate easy access to foreign exchange for the importation of needed raw material
and intermediate goods. Despite the perceived advantages of these actions, the outcome
created obstacles to SMEs competitive performance in Nigeria. These policies have put SMEs
in a position where they have to struggle for survival and have even led to the failure of some
SMEs against the expectation of exporting their finished products, as was promised by the
liberalization policy. In addition, the absence of functioning public infrastructure and the low
level of technological development in Nigeria constituted a serious obstacle to SMEs
competitiveness.
In this thesis it is argued that these problems militate against the performance and

development of SMEs. It also gave an insight as to why government programmes designed for
the development of manufacturing SMEs have failed to achieve their desired objectives
(Mambula, 2002) under an economic liberalisation policy in Nigeria.
1.3

Research question

In view of the perceived benefits of economic liberalisation by the Nigerian government and
the opinions of the proponents of liberalisation, the main research question of this thesis is;
what is the impact of economic liberalisation on manufacturing SMEs in Nigeria? The answer
to this question would enable this study to assess the desirability, or otherwise, of economic
(trade and financial market) liberalisation that commenced in 1987. The following sub
questions would assist in answering the main research question and also help in assessing the
impact of economic liberalisation policy on the development, performance and survival of
SMEs in Nigeria:
(i)

What is the effect of interest rate liberalisation on SMEs performance and is there any link
with the shut down decision of SMEs?

6


(ii)

What is the effect of exchange rate deregulation on SMEs performance and does it have
any link with the failures of SMEs in Nigeria?

(iii)

To what extent has the liberalisation of the financial market solved the problems of access
to finance for SMEs?

(iv)

To what extent has trade liberalisation facilitated the export of manufactured goods by
SMEs?

(v)

To what extent has the state of infrastructure in Nigeria hindered the performance and
competitiveness of SMEs in the liberalised economy?

(vi)

What are the constraints of SMEs after economic liberalisation and how have these
constraints hindered their performance?

(vii)

To what extent has the government development programmes designed to boost SMEs
performance achieved their desired goals under a liberalised economic environment?

1.4

Objectives of the study

This study sets out to examine empirically the impact of economic liberalisation on
manufacturing SMEs in Nigeria and how it has affected their profits, turnover and cost of
operation. The specific objectives of this study therefore are to:

(i)

Examine the effects of interest rate deregulation on the performance of manufacturing
SMEs and to establish if there is link with the shut down decision of SMEs.

(ii)

Analyse the effects of exchange rate deregulation on manufacturing SMEs and if it has any
link with the failures of SMEs.

(iii)

Investigate the impact of financial market liberalisation on the problem of access to finance
for manufacturing SMEs and if it has solved the problem of access to finance for SMEs.

(iv)

Examine whether the removal of trade restrictions improved manufacturing SMEs
opportunities in the international market or facilitated the export of their finished goods.

(v)

Examine the effects of the state of infrastructure on the performance and competitiveness
of SMEs in a liberalised economy of Nigeria.

(vi)

Highlight the constraints of SMEs after economic (trade and financial liberalisation) and
how these constraints impact on their performance in Nigeria.

(vii)

Investigate the reasons why programmes designed by the government to boost
manufacturing SMEs performance are yet to fully achieve their desired objectives.

The performance of SMEs in this study would be measured in terms of cost of operations
(production cost), sales/ turnover and profits.

7


1.5

Hypothesis of the study

The following null and their alternate hypothesis were formulated based on the literature that
high interest rates affect working capital and output of firms which invariably also affect
profits (Wijnbergen, 1985). It has also been argued that SMEs are more sensitive to interest
rates shocks compared to big businesses because of their small resources (Vickery, 2008).
This is on the backdrop of inadequate infrastructure in Nigeria which earlier research indicates
affect the performance of SMEs due to their resorting to self provision of the needed
infrastructure (Lee and Anas, 1992). These three hypotheses would be tested to find out
whether they hold true for SMEs operating in Nigeria:
(i)

(Ho) There is no significant relationship between high interest rates and operational cost of
SMEs after financial market liberalization.
(Hi) There is significant relationship between high interest rates and operational cost of
SMEs after financial market liberalization.

(ii)

(Ho) There is no significant relationship between high interest rates and SMEs profit
levels.

(Hi) There is significant relationship between high interest rates and SMEs profit levels.
(iii)

(Ho) There is no significant relationship between the state of infrastructure and the
operational costs of SMEs.

(Hi) There is significant relationship between the state of infrastructure and the operational
costs of SMEs.

1.6

Motivation and Justification for the study

This study is motivated by the fact that all the studies on economic globalization and
liberalization in developing countries, including Nigeria, have dwelt on narrow issues of the
effects of either financial market liberalisation or trade liberalisation. Issues discussed in those
studies revolved around the problems of access to finance by SMEs and the positive effects of
market determined interest rates. On the other hand, studies on trade liberalisation dwelt on
problems of raw materials constraints affecting SMEs and the need for the removal of all trade
restriction that encourages competition among manufacturing firms in Nigeria (see for
example Mambula, 1997; Adenikinju and Chete, 2002; Ekpenyong, 2002; Mambula, 2002;
Iyanda, 2003; Onyeonoru, 2003; Udechukwu, 2003; Aryeetey, 2005; Tagoe et al, 2005). None

8

of these studies have so far investigated how the performance of manufacturing SMEs in
Nigeria has been affected by the combined effects of trade and financial market liberalisation
in view of the poor state of infrastructure in Nigeria. That is, how the high interest rates, the
depreciation of the Naira and the removal of trade restrictions as a result of economic
liberalisation policy have affected SMEs in view of the poor state of infrastructure. This study
attempts to bridge the gap in literature with respect to these economic variables which it
believes has led to the failures of most manufacturing SMEs in Nigeria.
It has been suggested that a private sector-SMEs led economy would contribute positively
towards the realisation of the United Nations millennium development goal of the global
partnership for economic development, through the eradication of poverty, hunger and job
creation in Nigeria and other SSA countries (Nwankwo and Richards, 2004). Based on the
recognition of the importance of manufacturing SMEs’ abilities to diversify the Nigerian
economy and their potentials to contribute towards the attainment of the millennium
development goals further justify the need to study how the economic liberalisation policy has
affected the performance and survival of SMEs in Nigeria.
Besides, liberalisation has been a contentious issue that has resulted in different views from
scholars due to the methodological approach applied in their studies (Sachs and Warners,
1995; Rodriguez and Rodrik, 2000; Stiglitz, 2002a, b). This study then sets out to present a
different methodological approach in the study of the effects of the economic liberalisation on
the development and performance of manufacturing SMEs in response to the call by Soludo’s
(2003) and Winters’s (2004) for a different methodological approach in the study of the
impact of liberalisation in an economy.
The different methodological approach and the use of ROI to investigate the combined effects
of trade and financial market liberalisation on SMEs give this study its uniqueness.
1.7 Methodology
This study used quantitative and qualitative methods of data collection to obtain data from
manufacturing SMEs operating in Lagos State of Nigeria. The data obtained from these

9

primary sources were triangulated with the secondary data from the CBN to ensure validity
and reliability of the primary data. The data were analysed using SPSS 16.0 and the
application of return on investment (ROI) model on the transaction data of the sampled SMEs.
The presentation of results was purely descriptive using tables and graphs.
The mixed methods approach was employed to avoid the controversies trailing the use of
econometric models, because of their inability to cater for some qualitative factors. Some of
the models include, but are not limited to, partial equilibrium model and general equilibrium
model. These models utilize time series and cross-country panel data to demonstrate the
effects of liberalisation on economic variables in developing countries. It has been argued that
there are other qualitative factors such as cultural values, religious norms and people’s
attitudes, that can influence economic growth which cannot be measured by economic growth
models. Furthermore, it has been demonstrated that it is difficult to establish causality between
economic liberalisation and rapid economic growth using models (Albaladejo, 2003; Winters,
2004). That is why this thesis utilized primary data that would be able to draw on people’s
perception of the effects of the policy on their businesses, in addition to using reliable
secondary data from the CBN to measure the impact on the economy in general.
1.8

Scope of the study

This thesis investigates the impact of trade and financial market liberalisation on the
development and performance of manufacturing Small and Medium Sized Enterprises (SMEs)
in Nigeria and focuses on the period between 1980 and 2006. It examines the effects of the
policy on manufacturing SMEs access to credit, productivity performance and also their
competitiveness within the domestic and international markets. Issues related to economic
liberalisation discussed in this thesis focuses on trade (abolition of import license, tariffs, and
removal of import and export restrictions) and financial markets (exchange rate and interest
rate deregulation) liberalisation. This is because the Nigerian government simultaneously

pursued macroeconomic stabilisation and adjustment policies (IMF, 1999) during the period
under study (Akinlo, 1996; Ikhide and Alawode, 2001).
McCulloch, Winters and Cirera (2001) stressed that trade and financial market liberalisation is
linked in developing countries, where macroeconomic stabilisation and adjustment

10


programmes that contain various elements of liberalisation are pursued simultaneously by the
governments. Liberalisation is an unwritten requirement for economic integration; a
conditional lending policy of IMF, which requires a borrowing country’s adherence to
structural adjustment programme (Falvey and Kim, 1992; Aisbett, 2003).
The study focuses on SMEs in the manufacturing sector because of the importance of the
manufacturing sector to economic development in Nigeria. Due to budget and time
constraints, the study was restricted to manufacturing SMEs operating in Lagos State of
Nigeria. The generalisation in this study would be based on the findings of the structured
questionnaire and semi-structured interviews carried out in the State. Lagos State was chosen
for this research because it accounts for the majority of Nigeria’s commercial and financial
activities and has the highest concentration of manufacturing SMEs in the country (Ajayi,
2007).
1.9

Structure of the Study:

This thesis is structured into six chapters. Chapter one gives the general introduction and
background of the study.
Chapter 2 gives a brief background of Nigeria and traces the economic reforms implemented
by the Nigerian government from 1960 to 2006, which has affected SMEs in the
manufacturing sectors with particular focus on the period 1980 to 2006. The definition,
characteristics, problems of manufacturing SMEs and the various schemes designed by the

government for the development of SMEs in Nigeria are considered in the chapter.
Chapter 3 is the literature review that gives an in-depth review of economic liberalization visà-vis trade and financial market liberalization. It reviews the theories underpinning trade and
financial market liberalisation and the link with manufacturing SMEs in Nigeria. This chapter
also provides empirical evidence of different scholars on trade and financial market
liberalisation and lays the methodological foundation for the study.

11


Chapter 4 contains the methodology that describes the research design and the procedure
followed in the collection of data for the study. It also describes the various research
instruments and the method of data analysis.
Chapter 5 contains the presentation and analysis of the results. The study used descriptive
methods of data presentation such as tables and graphs to present the results. This chapter also
contains the discussion of results that seeks to establish if there exist any link between the
theories behind the liberalisation policy and the realities on the ground in Nigeria.
Chapter 6 gives the summary, recommendations and conclusion of the research. It also
contains the contribution of this thesis to knowledge.
1.10

Conclusion

The economy of Nigeria experienced a downturn following the fall in the international market
price for crude oil that subsequently led to balance of payment crisis. The common view then
was that there was a lot of waste because of the government’s spending on the large public
sector. It was recommended by the World Bank/ IMF that the government should cut down on
public sector expenditure through the removal of subsidies and a comprehensive economic
reform. The World Bank/IMF argued that it was the only way to revive Nigeria’s economy
and qualify it for a structural adjustment loan. This resulted in the liberalisation of the
economy, with the aim of making the private sector play a more active role in the economy. It

was envisaged that the liberalisation of the economy would result in efficient allocation of
scarce resources through the interplay of the market forces and make finance more accessible
to SMEs, as a result of the ensuring competition (Dawson, 1994).
The next chapter looks at the stages of reforms process in Nigeria and how it has affected
development of SMEs. It would highlight the problems SMEs faced before and after the
implementation of the liberalization policy. The chapter would also give an insight to the
sources of finance and how the government through CBN provided avenues to improve the
access to finance for SMEs.

12


The student has requested that this
electronic version of the thesis does
not include the main body of the
work - i.e. the chapters and
conclusion. The other sections of the
thesis are available as a research
resource.

13


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