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How SMEs can navigate the difficult business environment in Nigeria
Uyo Plaza in Uyo, the state capital of Akwa Ibom Photo credit: Emmanuel David Ekpenyong
Small and medium enterprises (SMEs) are the bedrock of economic development in any country. The reason is simple. SMEs are the largest employers of labour, and therefore the driver of an inclusive development of a country. Like Justin Trudeau, Canadian Prime Minister said recently, “When small businesses succeed, we grow our economy, create jobs, and strengthen the middle class”. In fact, it is said that growth driven largely by big corporations does not always result in inclusive development. This is why a country with a high GDP growth rate still has a large part of their population still living in poverty.
Setting up and running a business is a difficult proposition, but it is even more difficult to run a business in a place like Nigeria, with very challenging business environment. It has been established that institutional environment places a limit to some extent, on the performance of a business, all things being equal. This means that the better the business environment, the better the performance of business in that area and vice versa.
Nigeria has been ranked consistently near the bottom of the league in terms of ease of doing business by the World Bank, ranking 145 out of 190 countries in 2018, even though there has been modest progress in the last few years.
Key challenges with the Nigerian business environment
There are many challenges facing businesses in Nigeria, particularly SMEs.
A key one is the difficulty in enforcing contract between parties, and this is due to the nation’s inefficient legal system. Business operations involve lots of agreement between several stakeholders and if you cannot enforce contract where the need arises, then it is very difficult to run a business. It takes a fairly long time to get judgment in an event where you have to go to the court to enforce contracts with third parties. This is particularly difficult for SMEs who may not have the resources and the time to go through such a tedious process. it tends to deter people who would have loved to start or own a business. Business operations involve lots of agreement between several stakeholders and if you cannot enforce contract where the need arises, then it is very difficult to run a business.
Limited access to capital is another major constraint facing SMEs. Most businesses require access to funds from time to time to expand their business; meet short term fund demand and to take advantage of emerging business opportunities. The limited funds that are available through financial services companies come at a very unsustainable rate and unrealistic short tenure. This makes it very difficult for SMEs, who also faces liability of smallness and lack credit worthiness to access fund. SMEs are sometimes pushed to seek for funding from very unorthodox sources who in turn charge them even more exorbitant interest rates.
Volatile regulatory environment makes it difficult for business to plan effectively. Businesses require a reasonable level of certainty around regulations concerning their business operations. For example, there should be predictability around taxes that businesses are expected to pay. A situation where federal, state and local governments wake up and push through taxes and levies in a bid to shore up their internal revenue generation does not augur well for small business owners. It must be said that this situation is worse in some states than others.
Impacts of the challenging business environment.
The combined effect of these challenges on SME performance is significant.
The cost of running a business (transaction cost) is increased generally, as it could cost significantly higher to operate in a business environment with some of the difficulties outlined above. The higher cost of securing funds, multiple taxations, and high cost of enforcing contracts all add up, leading to higher cost of running a business, and this will ultimately affect revenue and profitability.
It is also very difficult for SMEs operating in a difficult environment to be innovative; the limited innovation is due to the absence of quality information and human resources needed for innovation. Even where information is available, research suggests that it is difficult to extract maximum value from them in a difficult operating environment. Innovation is crucial for business survival and high performance, particularly in a competitive marketplace. Innovation is a source for new products or services which can bring additional revenue to the firm. Innovation in firm processes can also lead to reduced cost of operation, which ultimately impacts the business performance positively.
Whereas big corporates, particularly multinational enterprises, are able to manage the difficult business environment, it is very difficult for SMEs to do so. Some of the strategies adopted by big corporates include internalization of functions and services that would have been provided by the state, such as sourcing for capital and specialist human resources from their head office or other subsidiaries when the need arises.
Big corporates can also seek to influence government policies by making such policy change, a condition for further investment in the country. These and other strategies adopted by big corporates require a lot of capital and influence which SMEs does not possess.
Options open for SMEs to cope with the difficult business environment include the use of networking. When SMEs act as a group in the form of an association, they are able to exert significant influence close to that of a big company if done correctly. Such influence can then be used to advocate and influence government policies, for instance, in their favor. A good example is the Pillar of Association in Rivers state. This association is made up of trade or business associations operating in the state. They have over time been able, to negotiate taxes and permits with Rivers state government successfully. In the process, their members pay only legitimate taxes, and sometimes, the taxes are discounted for their members. Such discounts also benefit the Rivers state government, as the association is then able to ensure that all their members pay the agreed taxes, leading to very high internally generated revenue with a minimum cost of collection.
The association also defends her members against touts who might want to extort businesses operating in the state. They (Pillar of Association) have taken organizations to court in defense of their members in the past. This is really commendable. Such practices do not only protect her members, but deters others who might want to take advantage of her members in the future.
Currently, the association is in discussion with financial institutions with a view to structuring loans at reasonable rates, with good tenure and minimal requirements.
This kind of association exists in most part of the country. SME business managers should consider joining the credible ones as a way of managing some of the challenges in the Nigeria business environment.
Deliberate individual networking can also be undertaken by business leaders in a way that ensures that they have personal access to key decision makers in relevant private and public organizations. Such access can be exploited legitimately to mitigate some of the adverse effect of the harsh operation environment.
Another way SMEs can deal with the challenges of the difficult operating environment is through the use of consulting services. The use of credible consultancy services conveys credibility on a small business which can then be leveraged to secure resources, such as loan from financial institutions. Lack of credibility is a major challenge for SMEs and it is exacerbated in a place with a poor institutional environment.
An SME can also acquire credible information and know-how from reputable consultancies which can then be used to drive innovation in their company. Such innovation, as mentioned earlier, can help improve revenue for the firm.
About the author:
Emmanuel David Ekpenyong is is a PhD researcher at the Nijmegen School of Management, Radbound University (in The Netherlands). He holds an EMBA from HEC Paris. Emmanuel’s research interest focuses on strategies adopted by SMEs to exploit and or ‘navigate’ institutional voids in emerging markets. He is also the founder of Bizintelng, a firm providing advisory services to SMEs in Nigeria.
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