CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Governments around the world have given growing attention to small and medium-scale industries, and this has made the sector a focus of research, especially in developing countries. Small and medium enterprises (SMEs) are widely regarded as important for the generation of output and jobs, for encouraging private ownership and entrepreneurial skills, for spreading industry beyond the major cities, and for diversifying the productive base of an economy. They are also seen as holding the key to future expansion of the industrial sector, which is why they have a place in the national development strategies of many countries, including Nigeria’s National Economic Empowerment and Development Strategy (NEEDS), which linked SMEs to wealth creation, poverty reduction and employment generation.

In Nigeria the sector is very large. The national survey of micro, small and medium enterprises conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS) counted about 39.65 million micro, small and medium enterprises (MSMEs) in 2020, of which about 97% were nano or micro enterprises. The survey estimated that MSMEs contributed about 46.3% of GDP but only about 6.2% of exports (NBS & SMEDAN, 2021; PwC, 2024). Researchers have investigated the contribution of SMEs to economic growth with mixed results. Some studies, covering periods from 1986 to 2016 and from 1999 to 2023, found a positive and significant relationship between SME activity and growth in output (Edokobi & Dimgba, 2025; “Impact of small and medium scale enterprises on economic growth,” n.d.). A study covering 1999 to 2020 found that the number of SMEs had a significant effect on growth, while commercial bank credit to SMEs and SME employment generation did not (“Do small and medium enterprises spur economic growth?” 2023). Others found little or no significant influence of SME asset base and capitalisation on growth (Ogunsanwo & Fatogun, 2022), or no strong effect of SME credit on growth (Onyeiwu et al., 2021). This mixed evidence is one reason why the relationship between small and medium-scale industries and the Nigerian economy needs to be tested again over a defined period.

SMEs in Nigeria also face many obstacles. The NBS/SMEDAN survey found that the main areas where MSMEs need support are electricity, finance, taxation and security (as reported in PwC, 2024). A 2024 survey of MSME operators likewise identified inadequate access to finance, poor electricity and the multiplicity of taxes as leading constraints (PwC, 2024). Banks often regard lending to small firms as risky, and much of the loanable funds in the economy go to other uses, so many SMEs do not obtain the capital that they need to start, survive and expand.

Government has set up programmes and institutions over the years to address these constraints. They include industrial estates, the National Directorate of Employment (NDE), the Nigerian Bank for Commerce and Industry (NBCI), the National Economic Reconstruction Fund (NERFUND), the Nigerian Industrial Development Bank (NIDB, since merged with other agencies into the Bank of Industry), the Nigerian Export–Import Bank (NEXIM), and SMEDAN, the agency set up to coordinate the development of the small business sector. These formal credit schemes have not been able to fully resolve the problem of SMEs’ access to credit (Ogunsanwo & Fatogun, 2022). Nigeria’s larger manufacturers produce food and beverages, textiles, soaps and detergents, footwear, wood products, motor vehicle parts and chemicals, while small and medium-scale manufacturing includes activities such as leather work, poultry and wood carving. Smaller industries are often organised as craft guilds in which skills are passed down within families.

Given this background, the question that arises is whether small and medium-scale industries can contribute significantly to economic growth in Nigeria when they are not adequately funded and supported. This study examines that question for the period 1986–2010.

1.2 Statement of the Problem

Recent surveys show that small and medium-scale enterprises face serious constraints, particularly access to finance, unreliable power supply, heavy and multiple taxation and insecurity, and that their share of GDP fell by 3.5 percentage points between 2017 and 2020 even as their number declined by nearly two million (NBS & SMEDAN, 2021; PwC, 2024). Many large firms have reduced borrowing because of high interest rates and short loan tenors, while banks are reluctant to lend to SMEs because they see them as risky, so loanable funds do not always go to the real sector.

If SMEs are expected to help drive economic growth, the evidence needs to show whether they do so. The literature does not give a consistent answer: some studies find a positive effect and others find a weak or insignificant one (Edokobi & Dimgba, 2025; Ogunsanwo & Fatogun, 2022; Onyeiwu et al., 2021). Because Nigeria’s economic goals include growth and the expansion of small firms, the question arises: will small and medium-scale industries contribute significantly to economic growth in Nigeria when they are not properly funded? This study investigates that question.

1.3 Objectives of the Study

The aim of the study is to examine the importance of small and medium-scale industries to the Nigerian economy, and how they use available local raw materials and resources, with a view to achieving gradual formalisation and progress towards national industrialisation. The specific objectives are to:

1. determine the impact of small and medium-scale industries on economic growth in Nigeria; and
2. examine the effect of small and medium-scale industries on the Nigerian economy, including the constraints that limit their contribution.

1.4 Statement of Hypothesis

For the purpose of the study, the following hypothesis was developed.

H0: Small and medium-scale industries are not a catalyst for economic development and growth in Nigeria.

H1: Small and medium-scale industries are a catalyst for economic development and growth in Nigeria.

1.5 Significance of the Study

The study seeks to establish the extent to which small and medium-scale industries have contributed to growth and development, and to show the benefits that can be derived from them. It will help to test the widespread belief that small and medium-scale industries can bring about economic growth and development in Nigeria, given the mixed findings of earlier studies (Edokobi & Dimgba, 2025; Ogunsanwo & Fatogun, 2022). The results may be useful to policymakers, to SMEDAN and financial institutions that design SME support, to entrepreneurs, and to students and researchers.

1.6 Scope and Limitations of the Study

The study covers the roles and contributions of small and medium-scale industries to the Nigerian economy from 1986 to 2010. This period was chosen to find out whether small and medium-scale industries have had any significant impact on the economy. The study does not consider large-scale industries.

The researcher encountered some limitations, which included difficulty in obtaining information from appropriate sources, time constraints, transportation costs, lack of funds and irregular power supply. Despite these limitations, the researcher has tried to produce a sound piece of work containing reliable information.

1.7 Definition of Terms

Small and medium-scale industries: Businesses that operate below the size thresholds set by government for employment and asset base, and that engage in production, processing or service activities. In Nigeria such enterprises are classified under the broader group of micro, small and medium enterprises (MSMEs) (NBS & SMEDAN, 2021).

Economic growth: A sustained increase in the output of goods and services in an economy, usually measured by the growth rate of gross domestic product (GDP).

SMEDAN: The Small and Medium Enterprises Development Agency of Nigeria, the government agency that coordinates the development of the small and medium business sector.

References

Do small and medium enterprises spur economic growth? Evidence from Nigeria (1999–2020). (2023). International Journal of Research and Innovation in Social Science, 7(9), 801–811. https://ideas.repec.org/a/bcp/journl/v7y2023i9p801-811.html

Edokobi, T. D., & Dimgba, C. (2025). Macroeconomic contributions of small and medium enterprises to economic growth in Nigeria. Journal of the Management Sciences, 62(1), 332–345. https://journals.unizik.edu.ng/jfms/article/view/6944

Impact of small and medium scale enterprises on economic growth: Evidence from Nigeria. (n.d.). Global Journal of Economics and Business, 4(2), 236–244. https://doi.org/10.12816/0047942

National Bureau of Statistics & Small and Medium Enterprises Development Agency of Nigeria. (2021). National survey of micro, small and medium enterprises (MSMEs) 2020. NBS/SMEDAN.

Ogunsanwo, A. O., & Fatogun, O. I. (2022). Small and medium enterprises (SMEs) development and economic growth in Nigeria. International Journal of Women in Technical Education and Employment, 3(2), 193–202. https://eprints.federalpolyilaro.edu.ng/2365

Onyeiwu, C., Muoneke, O. B., & Nkoyo, U. (2021). Financing of small and medium scale enterprises and its growth impact in Nigeria. The Journal of Entrepreneurial Finance, 22(2). https://doi.org/10.57229/2373-1761.1385

PwC Nigeria. (2024). PwC MSME survey 2024. https://www.pwc.com/ng/en/assets/pdf/msme-survey-report-july-2024.pdf