How SMEs in Nigeria, others can be drivers of growth – UNCTAD

Small and Medium-sized Enterprises (SMEs) are seen as important players in the global market, despite facing increased competition for large projects and a growing focus on regional markets.

A recent report by the United Nations Conference on Trade and Development (UNCTAD) said SMEs have a pivotal role in achieving sustainable development and can significantly contribute to cross-border economic growth, innovation, and job creation.

“In developed economies, notably in Japan and the Republic of Korea and in Europe, SMEs have been active international investors, especially in the period ranging from the 1990s until the financial crisis of 2008,” the report said.

It said while inward Foreign Direct Investments by SMEs is important, promoting outward FDI in developing countries can also bring development benefits, helping them grow, improve productivity and strengthen their resilience to external shocks.

“For knowledge-intensive enterprises, FDI can bring significant learning benefits, accelerating the technological catch-up of developing countries. This contributes to developing a dynamic and competitive private sector, key to economic growth.

“Facilitating inward FDI by SMEs has positive effects on the recipient economy, including increasing local employment because SMEs are less footloose, rely more on local suppliers and partners, and are less likely to crowd out local firms,” it added.

According to UNCTAD, despite being crucial for economic development, small businesses often encounter obstacles such as limited access to capital markets and reliance on internal financial sources for growth.

“Yet, their participation in overseas investment has historically been limited by various challenges, including financial constraints, information gaps and regulatory complexities,” it said.

The international organisation noted that SMEs face distinct obstacles in overseas investment, including financial and information constraints, regulatory complexities, and a lack of tailored support from investment promotion institutions.

“SMEs often face challenges accessing finance due to limited collateral, leading to reluctance from finance institutions to lend or impose high-interest rates.”

Many of Nigeria’s small businesses have been struggling to survive in recent years owing to the fallout of the COVID-19 pandemic and the Russia-Ukraine war.

Small business operators have been grappling with a combination of issues, including poor power supply, rising borrowing costs, soaring inflation, restrictive economic policies, foreign exchange volatility, and tax multiplicity.

According to the Small and Medium Scale Enterprises Development Agency of Nigeria in Nigeria, 80 percent of SMEs fail before their fifth anniversary due to harsh economic environments, lack of access to capital, and poor business practices, which have stunted the growth and transition of micro-businesses.

“Numerous variables currently influence Nigeria’s economic climate and as a result, it is unfavourable and risky for foreign investments,” it said.

The latest Nigeria Labour Force Survey by THE National Bureau of Statistics shows that the proportion of self-employed Nigerians declined to 87.3 percent in the third quarter of 2023, down from 88.0 percent in the previous quarter, while wage employment increased to 12.7 percent from 12.0 percent.

Despite the challenges, the UNCTAD report noted that SMEs are essential contributors to economic development globally, offering opportunities for growth, diversification, and resilience in global markets.

It recommends that governments and investment promotion institutions should prioritise supporting SME investment due to its potential benefits for local development.

SME investment, being less footloose and relying more on local suppliers and partners, can be particularly beneficial for development.

“There are good reasons for governments and investment promotion institutions to pay more attention to supporting SME investment. SME investment can be most beneficial for development because it is less footloose, relies more on local suppliers and partners, and is less likely to crowd out local firms,” the report said.