The authors of this blog have written often about the important role that small and medium enterprises (SMEs) play in economic development around the world. While high-growth SMEs produce a large number of jobs in the economy, slow-growing SMEs do not. What differentiates environments supporting high-growth SMEs from those with low-growth SMEs and how can we promote the creation of more high-growth SMEs?
In a study published in the International Journal of Management Studies, researchers from Babcock University and University of Lagos in Nigeria looked at the effect of SMEs on the Nigerian economy. The study found that SMEs in Nigeria have not been increasing employment or substantially contributing to the country’s GDP due to their lack of growth.
What factors cause an SME to be low-growth instead of high-growth? Despite various policies and initiatives created by the Nigerian government to spur growth, the report suggests that SMEs stagnate because of the following factors:
- Inadequate institutional support
- A lack of business partnership culture
- Poor infrastructure
- Low access to financial capital
- Limited development of human capital
- Inadequate adoption of technology
The report’s findings are further supported by the World Economic Forum’s ranking of the country in terms of multiple global competitiveness factors, presented in the graph below:
|Government Institutions %||29||25||53||56||106|
|Quality of Overall Infrastructure %||7||18||72||47||120|
|Health and Primary Education||34||19||100||50||126|
|Goods Market Efficiency||8||19||47||51||56|
|Financial Market Sophistication||9||5||34||109||54|
Overall, it appears that regional conditions have a dramatic effect on whether or not SMEs will evolve into high-growth firms that produce jobs.
Given an unfavorable environment, what can be done to overcome barriers and build high-growth SMEs? The study concludes that external finance and infrastructure capacity building can greatly improve SMEs growth rate. They list a number of suggestions that are applicable to countries and cities struggling to improve economic development.
Their primary recommendations are to develop:
- Stable channels through which SMEs can access capital
- Programs to improve access to financial, human, and technological capital
- Hubs of growth to support infrastructure for entrepreneurial growth
To read the full report, please click here.
Contributed by Emily Luepker.