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1.1               Background to the Study



The business environment globally is perceived to influence the performance of enterprises. The external business environment consists of extraneous factors that are beyond the controlandcannotbemanipulatedbythebusinessenterprisemanagement.Thebusinessenterprise is obliged to be cognizant with its operating environment in order to heighten its performance. Furthermore, the environment and business enterprises are in a mutually interdependent interaction. This is because an enterprise exists in the world of threats, resources, limits, and opportunities. Small and medium enterprises in Nigeria, several factors influence their performance and tend to make their operating environment unsafe for investment and unfriendly. Thus, there is need for knowledge of these factors and how they influence an enterprise performance.

Small and medium enterprises (SMEs) and entrepreneurship development have become a progressively more imperative component of economic development (Karpak & Topcu, 2010). Both SMEs and entrepreneurship development have been internationally acknowledged as instrumentsforrealizingeconomicgrowthanddevelopmentaswellasbringingaboutemployment opportunities (Benjamin & Rebecca, 2009). To buttress this, Karpak and Topcu (2010) asserted that the absence of vibrant small and medium enterprises in any economy in the world makes its development not achievable. According to Tamara and Riste (2015), SMEs are one of the major keyelementsofeconomicdevelopment.SMEsareacknowledgedasthedrivingforceofhighrate of employment, improved standard of living, production of value-added product and services and generally the creator of strong economies (Agboli & Ukaegbu,2006).

Thebusinessenvironmentisconsideredasbeingcentraltoeconomicactivitiesandgrowth worldwide (Agboli & Ukaegbu, 2006). Akinbogun (2008) explains that there is a close and unremittinginteractionamidanorganizationanditsenvironment.Therefore,SMEsdonotoperate in isolation but within a given environment which might shape their performance, survival and profitability (Kennerley & Nelly, 2003). In order for SMEs to grow, there is a need for them tobe able to adapt as external challenges arises (Lixin,2010).


For a business to realize its objective, it depends greatly on the ability of the enterprise to accomplish its key performance indicator in a sustainable manner (Simerly & Mingfang, 2000; Wan & Yiu, 2009). The capability of the enterprise itself is determined by factors which includes the method in which the management of the enterprise makes plan, implements the formulated plan and directs the business enterprises’ activities and also how the management handles the impact of the external environment (Kwagala, 2011). Factors such as infrastructural inadequacy, unstable political climate, policy inconsistencies and others which are beyond the enterprise management control may affect business operation and performance (Anga, 2014).

AccordingtoAdejumo(2001),thecontemporarybusinessenterprisemanagerfunctionsin a dynamic environment. The alteration within a business operating environment has been unpredictable and rapid (Fatai, 2011). To this end, Bayode and Adebola (2012) posited that consumers have been demonstrating multifarious behaviours in both local andinternational markets. Competitive pressure as it is the most striking change has made competitors apply different strategies to adjust to the unpredictable nature of the business enterprise environment (Bayode & Adebola,2012).

The business environment is very crucial to the success or failure of business. According to the work of Dionco-Adetayo and Adetayo (2003), a healthy business cannot survive in an unstable environment. Oluremi and Gbenga (2011) posit that business takes its inputs resources (ideas, information, finance, raw materials, and labour) from the business environment and sends its outputs to the environment. The business environment, therefore, is the basis of formulating company objectives, mission statement, policies, strategies, and tactics (Tijani, 2004). Ibidunni and Ogundele (2013) classified the nature of the business environment as stable, dynamic, and unstable and this habitually assists a business enterprise in selecting suitable strategies. Adeoye (2012) opines that for the business to deal with the business environment dynamic nature and the fast changing operating environment there is a necessity to develop and put into practice suitable strategies that would preserve its operation and as well bring about the preferred result.

The business environment of an enterprise consists of the internal and external environmental factors affecting the performance of business enterprises. The environmental factors according to Alkali and Isa (2012) consist of all the factors or variables, both inside and outside the business. In order for small businesses to accomplish their objectives and goals, they have to brace both their internal and external environment. The external environment of an


enterprise was first acknowledged by open systems theorists who observed that an organization operate not in self – contained isolated units but in continuous and inevitable interaction with the large system within which they operate (Pearce & Robinson, 2011). It is this surrounding system that these theorists identified as the external environment, captioning it as that which consists of such factors that affect a business enterprise from outside a srivalry, consumer behaviour,supplier behaviour, macroeconomics, government policy and global dynamics (Alkali and Isa, 2012; Pearce&Robinson,2007).Based on the rationale of this postulation, Bastedo(2004)asserted that theexternalenvironmenthasaninfluenceonthemannerinwhichbusinessorganizationperforms and that the nature of the influence is depending on how its impact is managed.


1.2               Statement of the Problem

In Nigeria, SMEs have not performed commendably well as they have not adequately played the expected significant role in the economic growth of the nation (Taiwo & Falohun, 2016). Also, there is inadequacy in the performance of the SMEs role in influencing apprentice training so as to speed up employment creation as well as to alleviate poverty so as to promote Nigerian economic development and growth (Osotimehin, Jegede, Akinlabi & Olajide, 2012). Also, Muktar, Gambo, and Mukhtar (2015) posited that there is a high preference among consumers for imported goods and the country engages in more of importation than exportation. Okpara (2011) identified factors such as insufficient financial support, corruption, poor management, poor infrastructure, poor managerial skills, and low demand for products and services as the factors which brings about low performance in the SME sector.

Theentrepreneurialimplicationoftheexternalbusinessenvironmentalfactorsasreflected in small and medium enterprises may be expressed by looking at the rate at which SMEs are folding up as a result of lack of appropriate capital, market research, over bearing regulatory environment, poor policy implementation, poor infrastructural facilities, insecurity, unstable interest rate and short tenure of loans. These factors put together, have led to increasing cost of production and undermine profit making potential of SMEs situated in Nigeria (Obiwuru, Oluwalaiye & Okwu, 2011; Oghojafo, Dakra & Sulamon, 2011; Olugbenga & Ifeanacho,2011).

Thebusinessenvironmentisincreasinglybecomingcomplexandbusinessesmustbecome accustomed to this change posed by the complexity of the environment which requires the organisation’s new perceptive to be more competitive, but many organizations have not beenable tocomplementtheirinternalbusinessenvironmentwiththeexternalbusinessenvironmentthereby


resulting in organizational deficit making them largely unproductive on the long run (Kurtulus, 2012).Also,apositiveconnectionhasbeenrecognizedamongoperatingenvironmentandbusiness growth in developed countries (Harris & Gibson, 2006; Sauser, 2005). However, far lessresearch hasbeendoneontheassociationamidbusinessoperatingenvironmentandSME’sbusinessgrowth generallyindevelopingcountriesandparticularlyinNigeria,althoughYusuf(2014)hasattempted associating hostile operating environment as killing SMEs inNigeria.

The government and institutions to support entrepreneurship development and the SME sector growth have been found lacking as some of the SMEs in Nigeria have not adequately enjoyedthesesupportinitiatives(Tijani-Alawe,2004).Also,theeffectofgovernmentactivitiesin termsofthelevelofinterference,taxation,costinghasledtothedearthofmanyorganisations(Oni & Daniya, 2012). The study of Anthony (2015) has provided a substantial evidence that organisations are witnessing major structural changes, such as technological evolution, globalizationandincreasedregulation,whichcontributestoaconsiderableincreaseincompetition among them and makes the need for understanding of the effect of external environment on businesssuccessneedstobeexploredtohaveahighercompetitivepositionsoastogiveimproved performance to the ailingorganizations.

Smallandmediumbusinessesarecombatedwiththechallengesofhightaxrates,multiple taxations, intricate tax regulations and deficiency in proper enlightenment about tax relatedissues (Ocheni & Gemade, 2015), the cumulating effect of this include the high rate of poverty and increase in the cost of production. Accordingly, if a large proportion of SME costs are devoted to paying tax, they will be forced to transfer the tax burden onto the consumer, and as a result, this will ultimately make their goods and services uncompetitive, which tends to have a negative impactontheirperformanceandgrowth(Isaac,2015).ThemajorityoftheSMEsareconcentrated in the service, manufacturing and commercial sectors. Therefore sales revenue is the lifeblood of such enterprises and they can only maintain sales at a high level by minimizing their operational costs (Fisman & Svensson,2007).

ItisobservedthateventhoughNigeriahasimprovedthesituationofitstelecommunication infrastructure other infrastructural deficiencies such as poor transportation networks (air, roads, rails, and ports), insufficient energy supply are some of the chief constraints to organizational performanceofSMEsandasaconsequence,theproblemofsub-standardqualityofgoodsand


services, increase in cost of production and prices of commodities and consequently, closure of the enterprise arises (Agenor & Neanielis, 2006).

Insecurity discourages business investment especially in the SME sector as it makes business investment uninviting to investors (Adegoke, 2013). Okonkwo and Obidike (2016) posted that the condition of insecurity in Nigeria accelerates the cost of operating a business incurred either in the course of taking defense against business uncertainty and risks or through loss of goods and properties. These expenses may have a detrimental impact on business development.


1.3               Objective of the Study

The main objective of the study is to examine the effect of the external business environment on the entrepreneurial performance of SME sector in Lagos State. The specific objectives are to:

  • examine the effect of infrastructural facilities on Lagos State SMEs’ servicequality;
  • evaluatetheeffectofgovernmenttaxationpolicyonsalesrevenueofSMEsinLagosState;
  • determine the influence of government/institutional support on job creation in LagosState SME sector and
  • assess the effect of insecurity on SMEs market growth in LagosState.


1.4               Research Questions

The following questions were answered in this study;

  • What is the effect of infrastructural facilities on Lagos State SMEs’ servicequality?
  • What effect does government taxation policy have on sales revenue of SMEs in Lagos State?
  • How do government/institutional support influence job creation in Lagos State SME sector?
  • What is the effect of insecurity on SMEs market growth in LagosState?


1.5               Hypotheses

The following hypothesis were tested at 0.05 level of significance

Ho1:       There is no significant effect of infrastructural facilities on Lagos State SMEs’ service quality.


Ho2:       There is no significant effect of government taxation policies on sales revenue of SMEsin Lagos State.

Ho3:     There is no significant influence of government/institutional support on job creation in Lagos State SMEsector.

Ho4:     There is no significant effect of insecurity on SMEs market growth in LagosState.


1.6               Scope of theStudy

The study focused on external business environment and SMEs performance. The study area covered the SMEs operating in Lagos State, because most of the registered SMEs in Nigeria are located in Lagos and also given that Lagos State is considered the economic nerve centre of Nigeria (Olabisi, Olagbemi & Atere, 2011). Moreover, Lagos State, in particular, has been a hub for the different categories of service provider enterprises such as hotels, eateries, fast food and restaurants, retail and wholesale stores, supermarkets, electronic accessories, among others, as small and medium scale enterprises. The SMEs for the study must be registered with the Small Medium Enterprises Development Association of Nigeria (SMEDAN) and must have also operatedforfiveyears.Choosingthosewhohaveoperatedforfiveyearsenabledtheresearcherto measure their performance and effectiveness. The owners of the businesses and also managers of the registered SMEs in Lagos State served as the target population for the study. The population size is 4,535. The sample size for the study was four hundred and seventy-eight (478). A multi- stage sampling technique was used, the first stage employed the stratified sampling method, proportionate sampling technique was used in the second stage, and simple random sampling technique was used at the thirdstage.


1.7               Significance of theStudy

The study is of great relevance to the following areas as detailed below:


1.7.1    ManagementPractice

Knowledge acquired from this study would enable the entrepreneurs to be cognizant with how critical the environmental factors are and also how to effectively manage the factors in order toenhanceentrepreneursperformancetowardsthesoleaimofachievingtheirtargetperformance. Itwouldhelpthebusinessestobecomemoresensitivetotheuncontrollablefactorsthatareexternal


to their environment which impinges on their business performance; how these factors can be effectively managed and top opportunities for enhanced productivity and profitability.


1.7.2    Industry

This study would have substantial benefits for SMEs as it would expose the owners and managersoftheenterprisestotheprinciplesthatareneededtobeknownandpracticedpurposively toeffectivelyandefficientlymanagetheirbusinessesandunderstandtheiroperatingenvironment.


1.7.3    Government

ThisstudywouldbeusefultothegovernmentintheformulationofpoliciestowardsSMEs development in Nigeria. It would also help the government in identifying the importance ofsmall and medium enterprise sector in the achievement of economic development and national growth in Nigeria.


1.7.4    Society

The study would provide the organisations and society with the knowledge about how to develop skills in the use of concepts, methods, and tools that can be used to transform environmental pressures into positive business opportunities.


1.8               Operationalization ofVariables

Thevariablesforthisstudywereoperationalizedwiththeuseofdiversestatisticaldenotationsand values.

Y = f(X)

X = Independent Variable Y = Dependent Variable



X = External Business Environment Y = SME Performance


Therefore, Y = (y1, y2, y3, y4)

X = (x1,x2,x3,x4)


x1= Infrastructural Facilities x2 = Taxation Policy


x3= Government/Institutional Support x4= Insecurity


y1= Service Quality y2= Sales Revenue y3= Job Creation y4= Market Growth

Functional Relationship

Y =f(X)

y1 = f(x1) y2 = f(x2) y3 = f(x3) y4  =f(x4)

Regression Models

y1  =?0 + β1×1+ µ————————————————— Equatn1

y2= ?0  + β2×2+ µ————————————————— Equatn2

y3= ?0  + β3×3+ µ————————————————— Equatn3

y4= ?0  + β4×4+ µ————————————————— Equatn4



αo=      Intercept of External Business Environment- the average value of the dependent variable when the independent variable is equal tozero.

β =       Regression parameter- measures the coefficient of External Business Environment, each measures the effect of a given change in External Business Environment on SMEs’Performance.

µ=        Errorterm-includedinthemodeltoaccommodatetheinfluenceofothervariablethataffect the dependent variables that are not included in themodel.

1.9               Operational Definition of Terms

Some of the key words as used in this study are operationally defined as follows;


Small and Medium Enterprises: These are organisations which employ the maximum number of 199 employees and total asset of #500,000,000.


Performance: This denotes to the success of SMEs measured in terms of service quality, sales revenue, sustainable development, market growth, job creation, economic development.


Business Environment: This includes the internal and external environmental factors that have an effect on the business operations and performance.


ExternalBusinessEnvironment:Thisentailstoallforcesthatareoutsidethebusinessenterprise whicharebeyondthecontrolofthebusinessenterprise,individual,andtheirmanagementandalso have a bearing on their functioning. The external business environment poses threats to an organisation or offers vast opportunities for potential marketexploitation.


Infrastructural Facilities: This is referred to as the availability of supplies and services that are required to sustain a business enterprise in its day to day activities. These include infrastructural facilities such as communications, electricity, labour, transportation, and water.


Taxation Policy: This is referred to as what taxes government chooses to levy, to whom, and in what amount.


Government/Institutional support: This includes government, authorizes, and institutions whose decisions and support in form of financial and non-financial help, laws and regulation, brings about a lot of changes in the performance of business enterprises.


Insecurity:Thissignifiesmeaningssuchas:anxiety,fear,instability,uncertainty;danger;hazard; absence of safety; and lack ofprotection.


ServiceQuality:Thisisreferredtoashowwellaservicedeliveredtoacustomerconformstothe customer’sexpectation.


Sale Revenue: This is the amount realized from the sale of goods and service in the operation of an enterprise in a specified period of time.


Market Growth: This denotes an increase in sales or size observed within a particular consumer group over a given time frame.


JobCreation:Thisentailsprovidingnewopportunitiesforpaidemployment,especiallyforthose who are without a job.


SME Sectors: This includes the various types of businesses that make up the small and medium enterprises.


Manufacturing Sector: The manufacturing sector includes businesses that engage in the process of converting raw materials into finished goods that meets their customers’ specification.


Agro Allied Sector: The agro allied sector are business enterprises that depend on agriculturefor their raw materials or derive goods or a service from agriculture in a manner that allows them to function productively in terms of production of finished goods that are helpful to animals and humansconsumption.


Agriculture Sector: The agriculture sector of small and medium enterprises includes enterprises thatengageinfarming,production,andmarketingofagriculturalcommoditieswhichmayinclude crops, livestock, seed supply, breeding, ranching, sales and farmmachinery.


Services Sector: The service sector includes all businesses that offer intangible value or goods (such as food services, transport, retail, distribution among others).

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