Small Enterprises and Entrepreneurship Development: Empirical Evidence, Policy Evaluation and Best Practices

Small Enterprises & Entrepreneurship Development

This book is dedicated to the honour of Professor Carl K. Eicher and Professor Carl Liedholm both of Michigan State University, East Lansing, Michigan, USA, for their steadfast support and promotion of policy-oriented research and training on small and micro enterprises in the developing world.

SMALL ENTERPRISES & ENTREPRENEURSHIP DEVELOPMENT

Empirical Evidence, Policy Evaluation and Best Practices

Edited by

Enyinna Chuta

Foreword by

Adamu Baikie

Published by Amalion Publishing 2014

First published in paperback in 2012

Amalion Publishing

BP 5637 Dakar-Fann

Dakar CP 00004

Senegal

http://www.amalion.net

Copyright © Enyinna Chuta 2014

ISBN 978-2-35926-014-4

ISBN 978-2-35926-026-7 (ebook)

Cover designed by Will McCarty

All rights reserved. No part of this publication may be reproduced, transmitted, or stored in a retrieval system, in any form or by any means, without permission in writing from Amalion Publishing, nor be otherwise circulated in any form of binding, media or cover than that in which it is published.

CONTENTS

Dedication

List of Tables

List of Figures

Contributors

Foreword

Preface

Part I

Chapter 1

The Characteristics and Importance of Small-Scale Industries in Developing Countries

Carl Liedholm and Donald Mead

Chapter 2

Dynamics of Micro and Small Enterprises

Carl Liedholm

Chapter 3

The Informal Sector in Nigeria

William Omotosho Akerele

Part II

Chapter 4

Entrepreneurship and New Venture Creation

Emmanuel S.I. Ejere & Sam B.A. Tende

Chapter 5

A Comparative Overview of Entrepreneurship Development Programmes with Special Lessons for Nigeria

Enyinna Chuta

Chapter 6

Developing Entrepreneurship in West Africa

Sri-Ram Aiyer

Chapter 7

Upgrading the Managerial Processes of Small Entrepreneurs in West Africa

Enyinna Chuta

Part III

Chapter 8

A Review of Policies and Programmes for Micro and Small Enterprises in Nigeria: A Historical Perspective

Enyinna Chuta

Chapter 9

The Micro-Credit Revolution: New Approaches to Financing Micro and Small Enterprises

Ibrahim G. Umaru

Chapter 10

Tax Policy for Small Enterprises in Nigeria

Jonathan Averson Angbas

Chapter 11

Efficient Extension Programme for Small Enterprises Promotion

Enyinna Chuta

Chapter 12

Facilitating Entrepreneurial Competence for the Informal Sector: Insights Into the Cameroon Tertiary Sector

Emmanuel Mbebeb Fomba

Part IV

Chapter 13

The Role of a Feasibility Study in Project Planning and Implementation

Joseph Mamman Ibbih

Chapter 14

Marketing Strategy for the Small Entrepreneur

Elisha C. Anyahuru

Chapter 15

Marketing Information Systems for Small Enterprises

Joseph Mamman Ibbih

Chapter 16

Raw Materials for Small-Scale Enterprises in Nigeria: Sources and Potential Uses

Yusuf Dauda Bulus

Part V

Chapter 17

An Overview of Small- and Medium-Scale Enterprises Financing in Nigeria

Eggon Henry Ahmed & Ajidani Moses Sabo

Chapter 18

Financial Control System

Francis A. Akawu

Chapter 19

Cash Flow Management

Uche Uwaleke

LIST OF TABLES

Table 2.1: Annual MSE New Starts Rate by Initial Size (Africa and Latin America)

Table 2.2: Annual Employment Growth Among Small Enterprises

Table 2.3: Determinants of Enterprises Growth Regression Results from Botswana, Kenya, Lesotho, Malawi, Swaziland, and Zimbabwe

Table 2.4: Patterns of Employment Growth: Percentage change per annum in employment in MSEs:

Table 3.1: Selected States and Towns

Table 4.1: Influence on the Development of Entrepreneurial Ideas and Ambitions at Different Stages of Life

Table 9.1: The SEWA Bank as of March 1995

Table 10.1: Tax Rates and Types of Payments

Table 10.2: Rates of Capital Allowances

Table 10.3: Income Tax Rates for Individuals

Table 10.4: Messrs Gossip Nigeria Plc. Operating Results

Table 10.5: Computation of Adjusted Profit

Table 10.6: Calculating Tax for Individual

Table 10.7: Computation of Capital Gains Tax

Table 12.1: Evolution of Student Enrolment in Cameroon Universities

Table 12.2: Levels of Education and Unemployment Rates

Table 15.1: Beniseed Food Uses

Table 15.2: Beniseed Industrial and Pharmaceutical Uses

Table 15.3: Beniseed Ethnobotanical Uses

Table 15.4: Mineral Resources Available in Nasarawa State

Table 17.1: Investment and Employment Ceilings by Country

Table 18.1: Examples of Essential Ingredients for Feedback Control and Preventive Control Systems

Table 19.2a: Balance Sheet as of 31 December 2002

Table 19.2b: Profit and Loss Account for the Year

Table 19.3a: Cash Flow Statement for the Year (Indirect Method)

Table 19.3b: Cash Flow Statement for the Year Ended (direct method)

Table 19.4: Cash Budget for the First Three Years

Table 19.5: Cash Budget for the Second Half (Jul—Dec)

LIST OF FIGURES

Figure 4.1: The Components of Enterprise Culture

Figure 9.1: The Use and Sources of Funds for Small Enterprises

Figure 11.1: Integrated and Small Enterprise Extension/Consultancy Services

Figure 12.1: University-wide Entrepreneurial Education

CONTRIBUTORS

Eggon Henry Ahmed, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

Sri-Ram Aiyer is a consultant to various international organisations including The World Bank.

Francis A. Akawu, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

William Omotosho Akerele, Immediate Past Director, Human Resources Development Centre, Nigerian Institute for Social and Economic Research (NISER), Ibadan and Consultant to the International Labour Organisation (ILO) on informal sector studies.

Jonathan Averson Angbas, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

Elisha Anyahuru, Professor of Finance, Banking and Accountancy, Federal University of Technology, Yola; Gongola State Trainer (1987), NYSC-CMD Entrepreneurship Development Training Programme.

Yusuf Dauda Bulus, Former Head, Economics Department, Nasarawa State University, Keffi, Nigeria and Consultant to organisations such as the Central Bank of Nigeria (CBN), the Economic Community of West African States (ECOWAS) and the Swedish International Development Agency (SIDA).

Enyinna Chuta, Professor of Economics and currently the Deputy Vice Chancellor, Nasarawa State University, Keffi, Nigeria. He has a doctorate in economics from Michigan State University, USA. He has published several books, including Employment and Growth in Small-Scale Industry (St Martins Press and Macmillan Press, 1985) with Carl Liedholm; Critical Evaluation of Rural Industrialization Policies and Programmes in Developing Countries (ILO, 1984), with S.V Sethuraman; and Cottage Industries and Handicrafts: Some Guidelines for Employment Promotion (ILO, 1982), with M. Allal.

Emmanuel S.I. Ejere, Lecturer, Department of Public Administration, Na-sarawa Sate University, Keffi, Nigeria.

Emmanuel Mbebeb Fomba, Lecturer, Psychology Unit, University of Dschang, Cameroon.

Carl Liedholm, Professor of Economics, Michigan State University, East Lansing and Director, Small Enterprises Development Project, USA. He is a consultant on small enterprises for several international organisations including The World Bank and the United States Agency for International Development (USAID).

Joseph Mamman Ibbih, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

Donald Mead, Professor of Agricultural Economics, Michigan State University, East Lansing, USA and consultant on small enterprises development for several international organisations.

Ajidani Moses Sabo, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

Sam B.A. Tende, Lecturer, Department of Business Administration, Nasarawa State University, Keffi, Nigeria.

Ibrahim G. Umaru, Lecturer, Department of Economics, Nasarawa State University, Keffi, Nigeria.

Uche Uwaleke, Lecturer, Department of Accountancy, Nasarawa State University, Keffi, Nigeria.

FOREWORD

With the ever increasing numbers of college and university graduates from Nigeria’s tertiary institutions and the declining prospects for jobs in the public sector, the importance of creating self-employment has become crucial. It is therefore no wonder that the federal government has embarked on various job training and skill development programmes through the establishment of the National Directorate of Employment (NDE), Small and Medium Enterprises Development Agency, Nigeria (SMEDAN) and the National Poverty Eradication Programme (NAPEP).

There is now a growing awareness in Nigeria of the need to introduce entrepreneurship as a basic skill-acquisition subject in the school curriculum. In 2004, the National Universities Commission (NUC) emphasized that the Integration of entrepreneurship studies into general education will prepare the youth to be responsible, enterprising individuals who will become job-makers and not just job-takers. The NUC went even further to outline possible ventures and foundation courses (with course contents) and called on educational institutions to integrate entrepreneurship education into their academic and vocational programmes.

If the colleges of education, polytechnics and universities are to orient their academic programmes so that they now address the nagging problems of unemployment among youth, standard texts will have to be written for incorporation into the nations educational curriculum. Such texts must equally be available to students after graduation to enable them to efficiently manage their business. It is against this background that the work by Professor Chuta and his colleagues constitutes a significant effort at a time when textbooks are scarcely available.

It is noticeable that the text provides both theoretical, empirical and practical aspects of small enterprises management, thus rendering it most suitable for academic programmes in higher institutions of learning. Experiences of other developing countries have been drawn upon to provide guidelines for the development of small businesses in Nigeria. Moreover the roles of major international organizations such as the ILO, UNIDO, USAID, SIDO, GTZ and others have been cited to highlight major strategies of entrepreneurship development in the South. Such illustrations are useful for Nigerian institutions of learning, government agencies, parastatals and non-government organizations whose efforts contribute to the elimination of unemployment among youths in Nigeria.

There is no doubt that the volume constitutes one of the leading material in the field of small business administration and compares favourably with similar texts in other developing and advanced countries. Private and public agencies whose functions cover micro and small enterprise development will find the book most invaluable. Needless to mention, the book is recommended as a standard text for courses in entrepreneurship and small business management.

Adamu Baikie, CON

Professor and Vice Chancellor

Nasarawa State University

Keffi, Nigeria

PREFACE

In most developing countries, micro and small-scale enterprises provide the bulk of industrial sector employment, constitute important sources of income, serve as a vehicle for stemming the rural-urban migratory trends and ensure an equitable distribution of income. It is in recognition of these basic facts that the federal government of Nigeria has recently intensified efforts aimed at promoting gainful self-employment in both rural and urban areas. The action of the Nigerian government is also a positive effort to ensure self-reliant technological development since small enterprises are a reliable avenue for developing and diffusing appropriate technologies. This book not only serves to buttress the Nigerian government’s stand on the issues involved but also provides standard text materials for entrepreneurship development and small enterprise promotion, purely from the academic standpoint.

The book is arranged in five parts and nineteen chapters. In Part I, both static and dynamic empirical evidence on the importance of small enterprises and the informal sector in the development process are presented. More importantly, such evidence is provided across countries in the developing world, including Nigeria, buttressing the role of SME within macro-economic contexts as well as highlighting important policy implications.

In Part II, entitled Entrepreneurship Development and Practice, the role of entrepreneurs in new venture creation is highlighted, various approaches worldwide in entrepreneurship development are reviewed and lessons for Nigeria are espoused. Cautionary notes are provided with respect to transfer of entrepreneurship development models in West Africa. Furthermore, major weaknesses of small entrepreneurs in the West African sub-region are highlighted.

Part III contains five chapters focusing on the policy and programme environment. A critical evaluation of policies and programmes for promoting SMEs in Nigeria is presented. The current trend of the micro-finance revolution in the South for developing SMEs is discussed at length and international best practices needed for the promotion of small and micro enterprises are treated. Chapter 12 on Cameroon raises the question of how to train entrepreneurs within academic institutions without a re-emphasis on white-collar mentality. This part also raises the issue of appropriate pedagogy.

The focus of Part IV is on planning and marketing strategies for small enterprises development. The problem of raw material sourcing for small enterprises development is extensively reviewed. Issues of finance sources for enterprise promotions and financial control are discussed in Part V

The role of non-governmental and international multilateral organizations and national agencies has clearly dominated public conception of the efforts made at promoting small and micro enterprises in the South. But it is not often realized that academia have often provided the ideas in the form of benchmark information needed for designing the operational projects and even monitoring and evaluating promotional efforts. This volume is an attempt to bring to the limelight the historical interest of academia in SME and entrepreneurship development.

One must reiterate that this volume is not a training manual. We have already made references to institutions such as the German Agency for Technical Cooperation (GTZ) and the International Centre for Entrepreneurship and Career Development (ICECD) in Gujarat, India who have specialized in the hands-on training of entrepreneurs throughout the world and have produced training manuals for developing entrepreneurship among youths and women, in particular.

The present volume is academic material that focuses on the development of SMEs and entrepreneurship with particular reference to Nigeria, West Africa and the developing world in general. With current emphasis on incorporating entrepreneurship development into the curricula of higher educational institutions, there is an urgent need to produce ideas on development and policy strategies that can be used in tandem with the training materials. The Cameroon study raises the issue of appropriate pedagogy for raising entrepreneurs in the academic system.

Policy and project development must be based on information relating to any problem area. However, Nigeria is notorious for having a broad information lacuna on SMEs and the informal sector’as is the case for most African countries. As empirical information in Chapter 2 vividly portrays, promotional efforts need to be focused on target groups for poverty alleviation and employment as short-term measure and growth objectives as long-term measure. For any meaningful intervention to be undertaken, the various characteristics of SMEs will need to be clearly understood, particularly in the macro-economic setting, and problem areas identified. The present volume is therefore not a substitute for any training manual but rather a complementary educational material for training young graduates as successful entrepreneurs.

As academics, we have provided materials dealing with relevant information on SMEs and approaches to entrepreneurship development and practices with associated problems mostly in developing countries, a critical evaluation of policy framework, and structures for planning marketing and financing of SMEs. The compendium of development strategies and empirical information is now being brought to the doorsteps of fresh graduates, policy makers and trainers of future entrepreneurs. An attempt has been made in Part II of this volume dealing with entrepreneurship development and practice to highlight the strengths and weakness of various approaches simply to complement and reinforce more practical training efforts.

This book will be most invaluable to universities, polytechnics and colleges that already have or that intend to introduce small enterprises development, management and entrepreneurship training as part of their educational curricula. Policy makers, programme designers and field workers in the various ministries, non-governmental, and development-oriented agencies or commercial banks whose promotional efforts are targeted at micro, small, and medium enterprises will find that this book provides enough information for the development of all kinds of small enterprises.

The book has been written with clarity and simplicity of language to enable students, teachers and businessmen with average mathematical backgrounds to understand and use the text materials. Although the book focuses on Nigeria and the West African region, the international experience of some contributors has been drawn upon to broaden the scope of material. Important literature that could have remained hidden in foreign books and journals is now placed at the disposal of Nigerian and West African readers.

Enyinna Chuta

Professor and Deputy Vice Chancellor

Nasarawa State University

Keffi, Nigeria

I

THE STATICS AND DYNAMICS OF SMALL AND MICRO ENTERPRISES

CHAPTER 1

THE CHARACTERISTICS AND IMPORTANCE OF SMALL-SCALE INDUSTRIES IN DEVELOPING COUNTRIES¹

CARL LIEDHOLM AND DONALD MEAD

Introduction

This chapter presents a descriptive profile of small-scale manufacturing enterprises in some developing countries. Specific aspects to be scrutinized include the magnitude, composition, location and size distribution of these activities. The anatomy of the two primary inputs, capital and labour, is also examined.

Overall Magnitude and Importance

How important are small-scale industries in developing countries? A marshalling of available evidence indicates that small-scale firms are a significant and frequently dominant component of the industrial sector. In thirteen of fourteen countries, small-scale firms account for more than 50 percent of total industrial employment. For these countries, a mean of 71 percent of all industrial employment was generated by small enterprises.

Most of the employment was concentrated at the smallest end of the size spectrum. Approximately, two-thirds of the manufacturing enterprises in these fourteen countries employed fewer than 10 percent of total industrial force. The paucity of firms in the 10–49 employee range should also be noted. Indeed, on average, firms of this size generated less than 10 percent of industrial employment.

The relative importance of small-scale enterprises, however, is partly related to the country’s overall level of per capita income. Such firms are particularly prominent in lower income countries, playing a relatively smaller role in countries with higher incomes. Small-scale enterprises, for example, accounted for 64 percent of industrial employment in those countries with lower than US$1,000 per capita income, but generated only 42 percent of such employment in those countries where per capita income exceeds $1,000.

Small firms also account for a significant portion of the value added generated by the manufacturing sector. For seven countries with available data, a mean of 37 percent of manufacturing value added came from small-scale firms. Although the small firms’ relative value added contributions were less than their relative employment shares, their effect on the economy was, nevertheless, still substantial. Indeed, the contribution of small enterprises ranged from 2.9 to 8.2 percent of total Gross Domestic Product.

Composition

Small-scale industrial activities tend to be concentrated in the production of ‘light’ consumer goods. Three industry groups with two-digit International Standard Industrial Classification (ISIC) — (31) food/beverages, (32) textile/ wearing apparel, and (33) wood products — account, on average, for over 77 percent of small enterprise employment in the ten countries reviewed. Among these groups, clothing (primarily tailoring) predominates in most countries. With the conspicuous exception of Zambia, it accounts for no less than one-fifth and frequently greater than half of all small enterprise employment. Furniture and wood crafts tend to dominate within the wood category, while baking, beer brewing (in the rural areas of many African countries such as Zambia, Burkina Faso, and Botswana) and agricultural processing are frequently important within the general food group. Other small enterprise activities typically found with regularity are car, bicycle and electrical repair, blacksmithing, and light engineering.

Only rarely are small enterprises found to be engaged in the ‘heavy’, basic industries such as chemicals, paper, cement, and basic metal products.

Location

Where are most of the small industries located? A surprising yet important finding is that in most countries the vast majority are located in rural areas. Moreover, employment in small rural manufacturing industries typically exceeds that generated by all urban manufacturing firms. In ten of the thirteen countries reviewed, the rural areas accounted for more than half of total manufacturing employment. For all thirteen countries, 63 percent of the manufacturing employment, on average, was generated in rural areas.

Even these figures understate the relative importance of rural industries in some of these countries. The typical rural enterprises do not have postal boxes and are widely dispersed. Moreover, they are often invisible, since much enterprise activity takes place within the farm compound and can be seen only by those who penetrate the privacy of the household. Consequently, official establishment censuses often overlook the smallest rural firms. Indeed, comparison of village-by-village enterprise censuses conducted by Michigan State University (MSU) and local scholars with official censuses shows that the latter, not infrequently, undercounted the number of enterprises by a factor of two or more (Stallmann 1983; Chuta and Liedholm 1985; Ahmed et al. 1978).

Size

The overwhelming bulk of these firms are extremely small. Indeed, in five of the seven countries reviewed, over half of the small enterprises are one-person firms. Moreover, 85 percent or more of the firms in all of these countries employed fewer than six persons. In most countries, the number of small firms employing 6–9 or 10–50 persons is quite modest. Such findings indicate that most small firms in developing countries are tiny indeed.

Composition of Employment

Proprietors and family workers account, on average, for over 50 percent of small enterprises employment. This figure reflects the predominant role played by the very small enterprises, particularly the one-person firms.

The relative significance of apprenticeship labour, on the other hand, varies widely. Apprentices are particularly important in West Africa and Haiti (with its West African roots), where they account for a major share of small enterprise employment (Haggblade 1979). In these countries, the informal apprenticeship system, in which a young person serves a proprietor or master for given period to learn a craft or trade, plays a key role in skill formation. The duration of apprenticeship varies markedly by type of enterprises, lasting, for example, in Sierra Leone (Chuta and Liedholm 1985) from one year in gara tie-dyeing to four years in metal working. Approximately half the masters charged a learning fee, which in Sierra Leone averaged $27 in 1975, while others provided their apprentices with room, board, and sometimes a modest wage payment.

In other parts of the world, including East Africa, apprentices are much less important components of small enterprises employment. In some instances, in-firm training may occur, but those involved may not formally be called apprentices.

Hired workers typically form the smallest segment of small enterprises employment in most developing countries. These workers are frequently found in the more modern type of enterprises that operate on a somewhat larger scale, such as bricks and tiles, baking, repairs and metalworking. They are typically paid weekly or monthly, based on hours worked, although piecework payment is not uncommon. Although the wages paid to hired workers in small manufacturing vary quite widely, their average real wage is often on the order of half that paid to comparable hired workers in large-scale enterprises. A good portion of this gap is due to policy interventions such as minimum wage and mandated fringe benefits that apply primarily to the larger firms; the ubiquitous smaller firms are usually either formally exempt or escape through non-enforcement. Indeed, small enterprise surveys conducted by MSU and host country scholars indicate that few small enterprises felt they were directly affected by such legislation. The available evidence indicates that the wages for hired labour in small industry are relatively undistorted and generally reflect the underlying forces of supply and demand (Haggblade, Liedholm, and Mead 1986).

Magnitude of Employment

The preceding discussions, based on the number of workers, may give an exaggerated picture of the employment magnitudes if that labour is also engaged in other activities or is idle during parts of the year. Even determining the number of part-time workers can be misleading, however, because such figures fail to reflect the extent of the activity. The