CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Small and medium-sized enterprises (SMEs), also referred to as small and medium enterprises, are businesses whose workforce falls below specified limits. The abbreviation “PYMES” is used within the European Union and by international organizations such as the World Bank, the United Nations, and the World Trade Organization (WTO). Experts have developed and proposed various definitions to classify SMEs across different economies. These efforts have resulted in different interpretations and understandings of what constitutes an SME. Consequently, the classification and definition of SMEs vary across countries and geographical regions.

In Europe, SMEs are generally classified according to three major categories based on the number of employees: micro-enterprises, which employ up to 10 people; small enterprises, which employ up to 50 people; and medium-sized enterprises, which employ up to 250 people (European Commission, 2013). According to the European definition, micro, small, and medium-sized enterprises comprise businesses that employ fewer than 250 people and have an annual turnover not exceeding €50 million and/or a total balance sheet not exceeding €43 million (Petrakis and Kostis, 2012). However, individual European Union member states have their own definitions of SMEs. For instance, Germany defined SMEs as businesses with up to 255 employees, whereas Belgium used a limit of 100 employees (European Commission, 2013). Consequently, a Belgian company employing 249 people would be subject to the full tax rate in Belgium while potentially remaining eligible for subsidies under a programme carrying the European SME classification.

According to the German economist Hans-Heinrich Bass, empirical research on the middle class and policies aimed at promoting it in West Germany have a long history, dating back to the nineteenth century. By the middle of the twentieth century, most researchers regarded SMEs as an obstacle to greater economic development, and policies relating to SMEs were largely influenced by social policy considerations (Petrakis and Kostis, 2012). However, the liberal school of thought, represented by the founding fathers of the German social market economy, recognized the strengths of SMEs and regarded the middle class as a potential solution to the economic challenges of the mid-twentieth century, including mass unemployment and the abuse of power. This perspective laid the foundation for a non-selective, or functional, industrial policy designed to encourage the development of SMEs (Walczak and Voss, 2010).

In accordance with Section 7 of the Micro, Small and Medium Enterprises Development Act (MSMED) of 2006, the Government of India established criteria for classifying micro, small, and medium enterprises. For enterprises engaged in manufacturing or producing goods listed in the First Schedule of the Industries (Development and Regulation) Act of 1951, a micro-enterprise is defined as one whose investment in machinery and equipment does not exceed twenty-five lakh rupees. A small enterprise is one whose investment in machinery and equipment exceeds twenty-five lakh rupees but does not exceed five crore rupees. A medium-sized enterprise is one whose investment in machinery and equipment exceeds five crore rupees but does not exceed ten crore rupees (Erasmus and Strydom, 2013). For enterprises involved in providing or rendering services, a micro-enterprise is one whose investment in equipment does not exceed ten lakh rupees. A small enterprise is one whose investment in equipment exceeds ten lakh rupees but does not exceed two crore rupees, while a medium-sized enterprise is one whose investment in equipment exceeds two crore rupees but does not exceed five crore rupees (Erasmus and Strydom, 2013). Enterprises classified as MSMEs in eligible sectors and meeting the prescribed criteria may qualify for priority-sector lending, which is intended to reduce the cost of doing business. Banks are assigned annual lending targets through the Prime Minister's Task Force to increase credit facilities available to different categories of MSMEs compared with the preceding year.

In the United States, the Small Business Administration establishes criteria for identifying small businesses based on industry, ownership structure, turnover, and number of employees. Under certain circumstances, the employee threshold may reach 1,500, although the upper limit is generally 500 employees. Both the United States and the European Union generally apply the same threshold of fewer than 10 employees when classifying small businesses as micro-enterprises (Erasmus and Strydom, 2013). In Nigeria, the Central Bank of Nigeria classifies small and medium enterprises according to their asset base and workforce. The specified criteria include a capital base ranging from ₦5 million to ₦500 million and a workforce of between 10 and 300 employees.

South Africa's National Small Business Amendment Act No. 26 of 2003 defines micro-enterprises across different sectors, ranging from manufacturing to retail, as businesses employing five people or fewer and recording a turnover of up to ZAR 100,000 (Walczak and Voss, 2010). Very small enterprises employ between 20 and 50 people, while small businesses employ between 21 and 50 people. The upper turnover limit for small businesses ranges from R1 million in the agricultural sector to R13 million in the hotel, catering, and manufacturing industries. In wholesale trade, the maximum turnover limit is R32 million. Medium-sized enterprises generally employ up to 200 people, with the agricultural sector having a lower limit of 100 employees. Their maximum turnover ranges from R5 million in agriculture to R51 million in manufacturing and R64 million in wholesale trade, commercial agencies, and related services. Therefore, a comprehensive definition of an SME in South Africa describes a business with one or more of the following characteristics: fewer than 200 employees, annual turnover below R64 million, capital below R10 million, and direct participation of the owners in management (Walczak and Voss, 2010).

In Nigeria, the 2009 MSME bill established two general criteria for defining SMEs: the number of people or employees and the annual turnover of the business. In the case of manufacturing enterprises, the definition also considers investment in machinery and equipment, as well as registered capital. Micro-enterprises are defined as businesses employing no more than 10 people; small enterprises employ between 11 and 50 people; and medium-sized enterprises employ between 50 and 100 people. Given the variations in these definitions, it is essential to study SMEs within their respective geographical and environmental contexts. Nevertheless, SMEs across the world share certain common characteristics. They are more numerous than large enterprises and collectively employ a substantial number of people. They are also recognized for their contribution to innovation and competition across several sectors of the economy (Petrakis and Kostis, 2012).

The development of small and medium enterprises is widely regarded as a major driver of economic growth, particularly within the framework of economic thought known as the innovation economy. According to research conducted by the Global Entrepreneurship Monitor (GEM), approximately 63% of the world's population is represented in an environment where about 300 million people attempt to establish approximately 150 million businesses. Of these, around one-third progress to the business-starting stage, resulting in approximately 50 million new business establishments annually, or about 137,000 daily. Since business birth and death rates are approximately equal, it is estimated that a similar number of active businesses, approximately 120,000, cease trading each day (Mason, 2014; Paul D. Reynolds, 2013).

At the national level, the National Bureau of Statistics of Nigeria reported that three out of every five businesses fail within their first three years of operation (NBS, 2017). This statistic indicates that only two out of every five businesses survive beyond this period. Among the surviving businesses, one may eventually grow from a micro or small enterprise into a medium-sized enterprise. The major challenges responsible for the high failure rate of newly established businesses include inadequate capitalization, limited education, poor infrastructure, and restricted access to information. Despite these difficulties, some businesses have succeeded by adapting to prevailing circumstances and developing innovative approaches to overcome such challenges through measures including market expansion and the introduction of new technologies.

The term information technology, in its modern sense, first appeared in 1958 in an article published in the Harvard Business Review. The authors, Harold J. Leavitt and Thomas L. Whisler, observed that the emerging technology did not have a universally established name and proposed the term “Information Technology” (IT). Since then, information technology has developed considerably and influenced several sectors of the economy, contributing to the emergence of knowledge-based economies driven by the production, dissemination, and utilization of knowledge and information (OECD, 2016).

The influence of information and communication technologies in the information age has resulted in numerous developments across society and the economy. These include computer networks, mobile networks, and internet technologies, as well as mobile devices that have transformed human attitudes, work practices, and the benefits derived from work. It has been estimated that the global capacity to store information increased from approximately 539 MB per person in 1986 to more than 30 GB per person in 2007, representing an increase of roughly 60 times. Similarly, computing capacity increased by more than 60% over the preceding three decades (Martin Hilbert, 2011). These figures indicate that information and communication technology plays a significant role in contemporary society by providing essential services to different sectors of the economy, including those in which numerous SMEs operate.

The rapid adoption of IT across various sectors of society, alongside the continuous reduction in communication costs, has contributed to greater integration among markets in different parts of the world and increased business interest in adopting IT (Erasmus and Strydom, 2013). The expansion of IT-related technologies has been monitored by the International Telecommunication Union (ITU) using several indicators. These include the number of internet users, personal computers, operational fixed telephone lines, mobile subscribers and, to a lesser extent, television receivers, cable television subscribers, and household satellite dishes.

Historically, the diffusion of IT has occurred through the digital distribution of information. This development has helped distinguish early adopters of IT from competitors who have not yet implemented such technologies. Consequently, businesses that adopt IT ahead of their competitors have gained certain advantages (Walczak and Voss, 2010). In developing countries, the effects of IT adoption are particularly noticeable in areas where the technology has become widespread, especially among the middle class and in urban environments, compared with areas that have not yet been significantly exposed to its benefits and risks. Government incentives and support from other stakeholders have also contributed to this process.

The positive influence of IT is associated with the effective integration of technology into business operations, a process that involves several supporting factors. These include improved internet penetration, the availability of qualified IT personnel, and the development of relevant local digital content. When these factors are adequately addressed, they can influence the performance of SMEs, which play an important role in economic development (Erasmus and Strydom, 2013).

1.2 Problem Statement

Researchers in information technology have provided empirical evidence that investment in IT improves business productivity, managerial capabilities, and competitive advantage (Griffith, 1999). Studies conducted in industrialized countries have also confirmed that, when supported by adequate infrastructure, IT can serve as a driver of socioeconomic development. Examples of developed economies in which substantial investment in IT has been associated with significant economic contributions include increases in gross domestic product (GDP) of 7.8% in the United States, 8.0% in the United Kingdom, 8.3% in Singapore, and 8.4% in Australia (Camel, Rateb and El-Tawil, 2013).

Several studies have examined the relationship between IT and organizational performance. A study conducted by an information service provider, as reported by Pulley and Braunstein (2014), identified a connection between IT and greater economies of scale. Another study by Diewert and Smith (2014) presented an interesting case involving a major Canadian retailer. Based on the retailer's accounting framework, the company recorded an extraordinary quarterly productivity growth rate of 9.4% for six consecutive quarters, beginning in the second quarter of 1988. The researchers argued that these substantial productivity improvements were made possible by the computer revolution, which enabled businesses to monitor the purchasing and selling of inventory items closely and utilize advanced computer software to minimize inventory costs.

However, the findings of previous studies have not been entirely consistent. Loveman (2011) found no evidence of increased returns from IT investment, while Weill (1990) reported that transactional IT positively influenced business performance, whereas strategic IT, or information technology, did not demonstrate the same effect. Similarly, Pourmirza (2016) found that IT personnel contributed significantly to organizational performance, but IT capital did not produce a significant effect.

Against this background, the present study seeks to conduct a quantitative investigation into the impact of information technology on small and medium enterprises in Nigeria. It aims to develop viable models for explaining how IT influences the determinants of SME performance in developing countries, using Nigeria as a case study. Small and medium enterprises face challenges arising from the globalization of production and changes in the relative importance of different determinants of business performance. Accordingly, this study emphasizes the importance of IT in SMEs by examining the relationship between business performance and several IT-related factors, namely the types of IT available in SMEs, the utilization of IT, the cost of IT, awareness of IT, and organizational leadership in IT.

1.3 Objectives of the Study

The main objective of this study is to conduct a quantitative investigation into the impact of information technology on small and medium enterprises in Nigeria. The study will be guided by the following specific objectives:

1. To examine the different types of information technology and determine how they influence the performance of small and medium enterprises in Nigeria.

2. To investigate how the utilization of information technology affects the performance of small and medium enterprises in Nigeria.

3. To assess the influence of awareness of information technology on the performance of small and medium enterprises in Nigeria.

4. To determine the extent to which the cost of information technology influences the performance of small and medium enterprises in Nigeria.

5. To establish the extent to which organizational leadership in information technology influences the performance of small and medium enterprises in Nigeria.

1.4 Research Questions

The study will be guided by the following research questions:

1. What are the different types of information technology, and how do they influence the performance of small and medium enterprises in Nigeria?

2. How does the utilization of information technology affect the performance of small and medium enterprises in Nigeria?

3. How does the level of awareness of information technology influence the performance of small and medium enterprises in Nigeria?

4. To what extent does the cost of information technology influence the performance of small and medium enterprises in Nigeria?

5. To what extent does organizational leadership in information technology influence the performance of small and medium enterprises in Nigeria?

1.5 Significance of the Study

The findings of this study are expected to be significant in providing business owners and scholars with relevant information about the influence of information technology on small and medium enterprises and the implications of IT adoption for business performance.

Furthermore, the study will be useful to businesses by providing guidance on issues such as the types of IT to adopt, how these technologies should be utilized, and the performance outcomes that SMEs may expect. By providing qualitative and quantitative information about IT and SMEs, the study is intended to support the growth of small and medium enterprises and the information and communication technology sector, while helping businesses address challenges arising from emerging trends in IT. This contribution is linked to the qualitative nature of the study.

The findings may also be applied in the formulation of IT policies and strategic decision-making processes. Business owners, entrepreneurs, and policymakers may use the outcomes to align information technology adoption and utilization with the performance objectives of SMEs.

1.6 Scope of the Study

This study examines the impact of information technology on small and medium enterprises in Nigeria, particularly businesses that have adopted IT or have been exposed to IT. The geographical scope of the study is Nigeria, while the nature of the research is described as qualitative.

The variables covered in the study include the different types of information technology and their influence on SME performance; the effect of IT utilization on the performance of small and medium enterprises; the influence of IT awareness on SME performance; the extent to which the cost of information technology affects SME performance; and the influence of organizational leadership in information technology on the performance of small and medium enterprises in Nigeria.

1.7 Definitions of Terms

Information Technology (IT): Information technology refers to an entire industry that utilizes computers, networking systems, software, and other equipment to manage information. It also encompasses the strategic direction of IT, including its formulation, implementation, evaluation, and management.

Performance: Performance refers to the extent to which a small or medium enterprise achieves its intended objectives. It also involves evaluating how effectively an SME accomplishes its purpose. Business performance results from the way an organization is managed to create value for its customers and other stakeholders. It can be assessed in financial and competitive terms and may be reflected in business growth.

Types of Information Technology: This refers to the classification of information technologies into different categories, including hardware and software, as well as business applications such as payroll systems and Enterprise Resource Planning (ERP) systems. It may also be classified according to business models or applications, including e-learning and e-commerce.