economic factors and small scale businesses ......environmental factors (inflation rate and exchange...

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International Journal of Management (IJM) Volume 11, Issue 10, October 2020, pp. 665-677, Article ID: IJM_11_10_063

Available online at http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=10

ISSN Print: 0976-6502 and ISSN Online: 0976-6510

DOI: 10.34218/IJM.11.10.2020.063

© IAEME Publication Scopus Indexed

ECONOMIC FACTORS AND SMALL SCALE

BUSINESSES PERFORMANCE: THE CASE OF

NIGERIA

OBOREH, Justina, PhD

Department of Business Administration & Marketing

Delta State University, Abraka, Nigeria

ASOGWA, Ogochukwu PhD

Department of Business Administration

Nnamdi Azikiwe University, Awka, Nigeria

OBI, Martha

Delta State University, Abraka, Nigeria

ABSTRACT

The paper investigates implications of economic factors on the recital of small

scale enterprises in Nigeria using inflation rate and exchange rate as major economic

factors. The study used ex-post factor design of which secondary data were obtained

from Central Bank of Nigeria (CBN) statistical bulletin. Ordinary Least Square (OLS)

formed the basis for the estimations. The study found a significant negative

correlation between high inflation rate and performance of small scale enterprises

and significant negative relationship between high exchange rate and performance of

small scale enterprises. From the findings, the study concludes that economic

environmental factors (inflation rate and exchange rate) have a significant negative

effect on the performance of small scale enterprises in Nigeria.

JEL: M19,N15,012,Q58

Key words: Small scale, business, economic, inflation, exchange rate

Cite this Article: OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha,

Economic Factors and Small Scale Businesses Performance: The Case of Nigeria,

International Journal of Management, 11(10), 2020, pp. 665-677.

http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=10

1. INTRODUCTION

Small-Scale businesses previously have been identified by the three tiers of government as an

essential instrument for economic development in both developed and under-developed

economies of the world. This is premised on the fact that small scale businesses all over the

Economic Factors and Small Scale Businesses Performance: The Case of Nigeria


world are known to have a significant effect on the economy as it provides job creation,

bridging the gap between the science and the markets, technology, etc. Historically, the

recognition of the pertinent role of small scale businesses according to Odeyemi (2003) is a

bedrock that drive and sustain economic growth to the fore.

The 1970 development plan of Nigeria, as observed by Ihua (2004) succinctly identified

the imperativeness of Nigerian economy to be stabilized and self reliant by entrenching

industrialization policy and entrepreneurship development. The three tiers of government and

economic policy experts identified small scale businesses as a sector that needed government

attention by providing a conducive environment that thrive their operations (Abiodun, 2011).

The aforementioned was necessitated following government predispose desire to stabilize the

economy as a measure of meeting up with its commitment to the development plan and

indigenization policy.

Conversely, Odeyemi (2003) observed that 70% of industrial employment and over 50%

of Gross Domestic Product (GDP) were a direct product of small scale businesses. In view of

the aforementioned, the federal government before now promulgated and enshrines several

regulatory framework aimed to guide the operations of small scale businesses in Nigeria

(Alawe, 2004). This regulatory framework of operations as observed by Alawe (2004)

includes Nigeria Enterprise Promotion Act. No.3 of 1977, Patient right and Design Act. No 60

0f 1979, Industrial Promotion Act. of 1979, Customs Duties, Dumped and Subsided goods

Act no. 9 of 1959, respectively.

In recognition of the pertinent role of small scale enterprises on the economy, made

Nigerian government to establish and entrench the following establishments to assist small

scale enterprises in the country (Paul, 2010). These establishments among others includes:

Bank of Industry (BOI) established in 2000, Small and Medium Industries Development

Agency of Nigeria (SMIDAN), Nigerian Agricultural Cooperative and Development Bank

(NACRDB) established in 2000, Macro Finance Bank in 2005 (George, 2000). Others include

Family Support Programme (FSP), Family Economic Advancement Programme (FEAP) and

Obasanjo’s programme on National Poverty Eradication Programme (NAPEP) in 2001, (Paul,

2010). The abovementioned programmes were designed to see that the banking industry

contribute towards the effort of the government in stimulating economic growth, through fund

mobilization, and small scale business promotion. The establishment of the aforementioned

programmes was line with the presupposition of Schumpeter (1934) who argued that

economic recession could be stimulated, when the government of any country provides a

sustainable framework that drives small and medium scale enterprises. The foregoing is

however, premised on the ground that through creative and innovating idea, small scale

businesses conceive idea that result to invention of new products and services to increase

productivity, which perhaps create jobs, and wealth for a nation.

More so, Shane (2014) argues that economic environment is referred to as the totality of

economic factors, such as employment, income, inflation, interest rates, productivity,

government tax revenue, government policy and exchange rate that influence the activities of

small scale business performance. Shane (2014) observes that small scale business

performance thrive in a suitable economy. Economic environment of small scale businesses to

a large extent determines the success or failure of business enterprises in the country

(Emefiele, 2012). Shane (2014) opines that an economy is considered stable when there is

constant output, fix government tax revenue, economic growth, exchange rate, interest rate,

gross domestic product and low inflation. The derivative of having a suitable economy

includes increased productivity, improved efficiencies, and low unemployment (Sid, 2000).

Giving the conceptions of small scale business and the plethora of government interventions,

OBOREH, Justina., ASOGWA, Ogochukwu and OBI, Martha


a study of the relationship between the government interventions and the performance of

small scale enterprises becomes necessary.

Unfavorable economic environments are in most cases orchestrated by the arbitrary

increase or fluctuation of exchange rate, interest rate, and inflation rate on Nigeria economy

has continue to frustrate Small scale enterprise (Salihu, 2015).

Statistical Bulletin (2018) has succinctly shown the proportionate increase on inflation

rate from 1970 to 2018 as: 0.23% to 26%, respectively. Most small scale enterprises incur

relatively high cost in the procurement of raw materials as a result of inflation. High inflation

rate to a large extent affects the operations of small scale business. Following the costs

incurred by small scale enterprises due to high inflation rate, has led to increase in per unit

cost of producing domestic products in Nigeria. The degree at which high inflation rate affects

the performance of small scale enterprises is yet to be established, hence, this study. The main

objective of the paper is to find out the implications of economic surroundings on the

performance of small scale businesses in Nigeria. The paper seeks to determine the effect of

inflation rate on the performance of small scale enterprises in Nigeria and also to examine the

effect of exchange rate on the performance of small scale enterprises in Nigeria.

In order to achieve the objective of the paper, the following hypotheses were formulated:

Ho1: Inflation rate does not significantly affect the performance of small scale enterprises in

Nigeria.

H02: Exchange rate does not significantly affect the performance of small scale enterprises

in Nigeria.

The study is significant to the extent that it will help business owners most especially

small scale enterprise in ensuring the survival and sustaining their business/enterprise.

2. LITERATURE

Hings (2011) perceives economic environment as those economic factors, such as inflation

rate, interest rate, exchange rate, government tax revenue, unemployment rate etc which have

considerable effect on the performance of small scale business. Omobolanle (2009) observes

that the success and failure of small scale enterprises increasingly depend on the economic

environment (open system) for all the needed inputs. Thus, economic environment

engendered considerable influence on the performance of small scale businesses. In other

words, economic ecology consists of those economic measures that directly or indirectly

influence the performance of small scale businesses in Nigeria, it include inflation rate,

exchange rate, interest rate, government tax revenue, etc. Asiedu (2002) affirms that

“economic stability is the attainment of price stability, low inflation, fixed exchange rate,

interest rate and maintaining full employment on the economy”. Asiedu (2002) also observes

that small scale enterprises do not only thrive in stable economy but achieve operational

efficiency in terms of service delivery to the people.

Economic ecology or environment according to Gabriel (2006) is referred to “as those

economic variables such as inflation rate, exchange rate and others that interact within the

environment of small scale business operations”. Issues relating to economic environmental

problems affecting the operations of small scale enterprises have elicited several

presuppositions especially in a developing country like Nigeria, where the economy is in

recession, regarding how to stimulate the economy, selling of national assets etc, (Olaniyi,

2015). Yet, the concerns are continually being exacerbated by the ever evolving challenges to,

and conspicuous changes in the fundamentals on which the matrixes of the economic

environment are predicted. The resulting flux in the business environment continues to



pressurize small scale enterprises towards superior performance, especially by being proactive

rather than reactive in responding to the environment ( Nwekpa and Ewans, 2015).

The reality and relevance of the pressure emanating from the economic environment

underscore the imperativeness of small scale enterprises to buoy up their efforts by taking

abreast of the prevailing economic indices for decision making (Gabriel, 2006). Small scale

businesses are better off especially when they consciously appreciate their environment,

taking into cognizance those economic factors that interplay in the environment in so far as

the going concern of the business is of paramount (Friday, 2000). The foregoing is apparently

consistent with Udu and Udu (2015) who maintained that business environment presents

divergent opportunities and threats to the operations of the small scale enterprises. As a result,

small scale businesses that have in-depth knowledge of their strength, weakness, opportunity

and threat (SWOT) in the environment have the operational dexterity to turn their weakness

into strength, and threat into business opportunities in order to remain creative and innovative

in business. Udu and Udu (2015) notes that failure of any small scale enterprise in creating a

sustainable framework of confluence between SWOT and the various elements of the

environment craves for business failure. The following are some of the economic

environmental factors that interact within the environment of small scale enterprises, inflation

rate, exchange rate, interest rate, government tax revenue, government policy etc.

Economic factors have a direct impact on the potential attractiveness of various strategies

and consumption patterns in the economy and have significant and unequal effects on

organization in different industries and in different locations. Economic variables such as

fiscal and monetary policies of the government, inflation, interest rates and foreign exchange

rates. These variables influence the demand for goods and services and hence the growth of

new SMEs (Ehlers and Lazenby, 2007).

Inflation causes the persistent increase in general price levels in an economy over time.

Inflation effectively reduces the purchasing power of a country’s currency. Low or medium

levels of inflation in a country can have a positive effect on the business sector, in that it can

act as an incentive to production. High levels of inflation however can harm company’s

profitability by affecting the cost of inputs as well as reducing final demand for its output

(Meyers, 2001). The inflation rate which refers to the change in the general level of prices in

the economy over a given period of time have a significant effect in the purchasing power of

money and the cost of production mostly in the manufacturing sector. The effects of inflation

are viewed in two perspectives: effect on the aggregate demand and effect on the cost of

production. During period of high inflation consumers with fixed income have a low

purchasing power due to the reduced value of money hence reduced demand for products.

Equally inflation increases the cost production hence reducing profitability (Osoro & Ogeto,

2014). Pandey (2009) argues that if capital markets were perfect the investments of equal risk

should offer equal return in different countries. This is due to the process arbitrage that will

see movement of funds from one country to another continuously until equilibrium is

achieved.

An exchange rate is the ratio at which one currency is exchanged for another; it is the

value of one country’s currency in relation to another currency. Exchange rates are

determined in the foreign exchange market, which is opened to a wide range of different types

of buyers and sellers, The performance of small scale enterprises heretofore has not received

much attention especially from macroeconomic point of view in Nigeria (Blume, 1978). Yet,

most of the studies conspicuously have shown the direct influence of macroeconomic

variables on the performance of small scale enterprises within the context of their interactions

on business environment (Arthur and Hope, 2013). Ani and Nwandu (2007) contend that most

of the small scale operators could possibly take advantage of exchange rate volatility in

https://en.wikipedia.org/wiki/Foreign_exchange_market



making pertinent decisions that can drive their businesses. However, the fluctuations of both

the real and nominal exchange rate regime in Nigeria came to the fore following the collapse

of the Bretton Woods system of fixed exchange rate (Adeoye, 2012). The magnitude of its

volatility became of great concern to small and medium enterprises due to its potentiality of

influencing their performance in the wake of 2007 and 2008 financial crises.

3. THEORETICAL FRAMEWORK

The paper is anchored on the Keynesian Economic Theory which was propounded by Keynes

(1936). This theory believes that small scale enterprises play a vital role in the economic

development of a country. Keynes (1936) inferred that government can reverse economic

instability through efficient economic policies. The theory asserts that government intervenes

on the economic environment by its economic policies to allow effective allocation of

resources, regulation of markets, as well as enabling business environment that can make

small scale enterprises flourish.

Keynes (1936) assumes that small scale enterprises strive in an environment where there

are policies that maintain fixed interest rate, exchange rate and inflation rate that could have

propulsive effect on the operations of small scale enterprises. The ability of the small scale

enterprises to understand its environment of operations taking cognizance of the dynamism in

the business environment will not only make them proactive to the changing environment but

make pertinent decisions that enhance their performance. The following are the assumptions

of the theory:

The theory assumes that small scale enterprises operate in environment orchestrated

by the interplay of various elements of the environment. Therefore, small scale

operators should take abreast of its economic environment, though external to them,

but help them to be proactive in their operations.

The theory also assumes that small scale enterprises drive in stable economic

environment where there are fixed exchange rate, interest rate, inflation rate etc.

Keynesian economic theory, which this paper hinges on take a modern approach on how

to improve the performance of small scale business enterprises through entrepreneurial

innovation in a stable economic environment. Applying the Keynesian economic theory in the

investigation of the research problem offer direction in examining the factors of economic

environment which are critical to the success of SMEs and also focusing on entrepreneurs as

change agents.

4. METHODOLOGY

The paper is a survey research design. Secondary time series data covering 1970 to 2018 were

sourced from the Central Bank of Nigeria and the National Bureau of Statistics.

4.1. Model Specification

The study employed multiple regression models and applied Anderson Darling Normality test

on the chosen variables. Test for Autocorrelation (Durbin-Watson), Co-integration test, Unit

root test and Error Correction Model were also used.

The paper however is quantitative in nature and tends to build mathematical models that

captured the relationship between the studied variables under investigation. The analytical

procedure includes multiple regression model, the co-integration test, and normality test. The

multiple regression models estimated the effects of economic environment on the corporate

performance of small scale enterprises in Nigeria. The study adopted Euler’s theorem on

Business performance (BP). Theoretically, the statistical/economic relationship according to



Euler’s (1987) states that: BP =f(X1, X2, … Xn). These explanatory variables represent the

parameters of economic environment that interact within the environment of small scale

enterprise.

4.2. Model Specification and Justification

The paper build a mathematical models that captured the relationship between the studied

variables under investigation.

For simplification, if the economic variable components are represented as X1, and X2, for

inflation rate, and exchange rate respectively. It is pertinent to note that these are economic

prevailing parameters, whose values would be deduced from Central Bank of Nigeria. Based

on the aggregative nature of the aforementioned, X1, and X2, respectively, was used to

decompose values of these parameters. Thus, it is expressed as:

BP = X1 + X2 (1)

Generally, Equation 1 is addictive. In order to use Equation 1 to predict the

implications of X1 on BP, X2 on BP and the sum of X1, and X2, on Business Performance

(BP), X1, i =1,2, becomes a function of inflation rate, exchange rate, respectively. Therefore,

the general function becomes:

BPbiz = f(INF, EXT, ) (2)

Where: BP is business performance, INF is inflation rate, and EXT is exchange rate.

Estimating Equation 2 should basically require the introduction of stochastic error

term in order to minimize the variance of the scores. Therefore, Equation 2 may specifically

be rewritten as:

BPbiz=β0 + β1INF1 + β2EXR2 (3)

Where:

BP = Business Performance

INF. = Inflation rate

EXR. = Exchange rate

β0 = Intercept

β1-2 = Parameters to be estimated

μ1 = stochastic error term

4.3. Normality Test

Table 1 Result of Anderson Darling Normality Test on the variables

Variables Skewness AD(Probability) Normality

Distribution

BP 0.753410 3.113967(0.023415) Yes

INFL 0.667649 3.064387(0.343256) Yes

EXR 0.038713 2.988361(0.194328) Yes

The normality test in Table 1 showed the Anderson Darling Normality test on all the

variables in ascertaining the degree, they could affect the results. Normality tests are

employed in an attempt to determine if a data is well-modeled by a normal distribution. The

efficiency and effectiveness of the result in terms of consistency is succinctly related to the

normality distribution of the error terms. Anderson normality test utilizes mean, standard

deviation, skewness, probability etc., in consonance with the minimum and maximum values

to engender the normality distribution that could be compared proportionately with the



equivalent value. From Table 1 above, the Anderson darling normality test shows that all the

variables are normally distributed.

Table 2 Summary of Statistics

BP EXR INF

Mean 892809.6045 16926.3332 16.2920

Std. Dev. 5506889.5727 434439.763 18.37780

Eigenvalue 3.698 4.876 5.092

Sum Squares 9.571E+12 4.332E+11 5329.054

Skewness 1.006457 0.582448 0.7077854

Kurtosis 2.600265 2.002345 2.361849

Probability 0.983300 0.987520 0.004840

Observations 46 46 46

From Table 2 above, the average value of the explanatory variables were obtained by

dividing the sum total value of the series by the number of observations. The average (mean)

of Business performance, Exchange rate, Interest rate and Inflation rate, government tax

revenue and un-employment rate are 892809.6045, 16926.3332, and, 16.2920 respectively.

On the other hand, Standard Deviation measures the dispersion in the series. Standard

deviation measures spread or dispersion in the series. From table above the standard deviation

for exchange rate, interest rate, inflation rate, government tax revenue and unemployment are

5506889.5727, 434439.763, 5.2892, and 18, 37780, 10.18764 and 20.009876. Eigen value

shows the factorability values of exchange rate, interest rate, inflation rate, and government

tax revenue and unemployment as 3.698, 4.876, 3.335, 5.092, 4.987 and 5.5632., respectively.

Skewness measures the degree of asymmetry of distribution of the series around its mean.

The skewness of a normal distribution is zero. Positive skewness implies that the distribution

has a long right tail and negative skewness implies that the distribution has a long tail to the

left. From the above table, exchange rate and inflation rate have positive skewness and they

have relatively long right rails whereas interest rate, government tax revenue and

unemployment have negative skewness, hence have long left tails.

Kurtosis measures the flatness of the distribution of the series. If the kurtosis is greater

than three, the distribution is said to be peaked or leptokurtic as compared to the normal

distribution which is flat or platykurtic relative to others.

Table 3 Correlation Results

BP EXR INF

BP 1.0000 -0.6757 - 0.5243

EXR -0.6757 1.0000 -0.1007

INF -0.5243 -0.1007 1.0000

Observations 46 46 46

Correlation is significant at 0.05 level.

The correlation analysis in Table 3 showed that all the explanatory variables have negative

signs and it implies that changes in exchange rate, interest rate, inflation rate, government tax

revenue and unemployment will significantly result to proportionate decline on the business

performance of small scale enterprises in Nigeria. From table three, any proportionate change

in either of the explanatory variables has corresponding negative effect on the performance of

the enterprises.



Tests for Autocorrelation (Durbin-Watson)

Table 4 Test of Autocorrelation

Null Hypotheses Decision Comparison

No positive Autocorrelation Reject 0<d<dl

No positive Autocorrelation No decision dl<d<du

No Negative

Autocorrelation

Reject 4-dl<du-4

No Negative

Autocorrelation

No decision 4-du<d<4-dl

No Autocorrelation Do not reject Dl<du<d*

Where: D = Durbin-Watson

Dl = Upper limit of Durbin Watson

Du = Lower limit of Durbin Watson

Dl = 1.728

Du = 1.810

D* = 2.064

N = 46, and K = 7.

Table 4 shows the result of Durbin-Watson which is used to detect the presence of auto-

correlation. Since, the upper and lower limits of Durbin-Watson, at 5% level of significance,

46 observations, K = 7, the critical Table value of Durbin Watson is 1.854 with three

explanatory variables. The study compared the computed value of D* (2.064) with the critical

value at 5% significant level. This implies that there is no evidence of positive first order

correlation. Therefore, since 1.728 < 1.810 < 2.064, the null hypothesis is accepted.

Co-integration Test

Co-integration is affirmed characteristics or property of time series variables. A situation

where two or more series are respectively co-opted as part of the series where some linear

combination of the variables have succinctly infinitesimal order if integration, therefore the

series are affirmed to co-integrated. This perhaps involves examining the presence of co-

integration between the series of the same order of integration through a careful entrenchment

of co-integration equation. It is imperative to note that when co-integration relationship is

present, it therefore suggests that economic environmental factors and performance of small

scale enterprises share relatively common trend and long-run equilibrium as clearly asserted

by Aliyu, 2001. The employment of Johansen co-integration approach was absolutely

necessary in an attempt to ascertain if notable long-run relationship exists between the

economic environmental factors and performance of small scale enterprises in Nigeria.

However, co-integration test delineates in absolute test ratio, which includes trace test and

maximum Eigen value test respectively. To establish co-integration, the two approaches must

be greater than the Mackinnon critical value at a chosen level of significance. Hence, this

study adopted Johansen co-integration test.



Table 5 Co-integrating Test

4 Cointegrating Equation(s): Log likelihood -1031.518

Normalized cointegrating coefficients (standard error in parentheses)

SMES EXR INFL

1.000000 0.000000 0.000000

0.000000 1.000000 0.000000

0.000000 0.000000 0.000000

0.000000 0.000000 1.000000

Adjustment coefficients (standard error in parentheses)

D(SMES) -0.681941 8.03E-07 -0.002999 0.000434 -9.681941

(0.27897) (3.7E-07) (0.03725) (0.01184) (0.27897)

D(EXR) -246579.8 -0.300313 -8180.304 1217.221 -246579.8

(157470.) (0.20983) (21026.7) (6684.35) (157470.)

D(INFL) 2.588534 -3.72E-06 1.949067 -0.803653 2.588534

(4.86064) (6.5E-06) (0.64903) (0.20633) (4.86064)

Table 5 above shows the co-integration results of the stated model. From the result in

Table 5, it shows that there is a long run relationship between the economic environmental

factors of EXR, and INFR, in measuring the performance of small scale enterprises in

Nigeria. From observation, it is clear that the explanatory variables in Table 5 co-integrate at

5% level of significance. The model with log1 was chosen with the linear deterministic test

assumption. The variables have a reliable long-run relationship and this was shown by the

values for all the explanatory variables of EXR, and INFR respectively.

Error Correction Model

The introduction of error correction model is to explore the short-run implications of

exchange rate and interest rate on performance of small scale enterprises in Nigeria. The

imperativeness of error correction model is determine if the short-run dynamics are relatively

influences by the estimated long-run equilibrium conditions that are the co-integrating

vectors.

5. ANALYSIS AND INTERPRETATION OF RESULTS

Table 6 Macro-economic Coefficients of Small Scale Enterprises

Dependent variable: BP

Method: Least Squares

Sample: 1970-2018

No of observations 46

Variable Coefficient St.Error Beta t-Statistics Prob.

(Constant) 1.645167 1956.5 .8413 .0500

XEXR -5851.47 5171.4 .0205 1135 0000

XINFR -.6405 .0770 -0624 .3608 . 0000

R = . 084302

R-Squared 0.78672

Durbin Watson 2.06465

F-Statistics 29.90467

Prob.(Statistics) .0000



BP = 1.645167-5851.47XEXR - 6405XINFR (3)

Table 6 above shows the regression results of the explanatory variables obtained via

Ordinary Least Square (OLS) estimation within the period under investigation. The predictor

variables of XEXR, and XINFR, represent exchange rate and inflation rate that interact in the

environment of small scale enterprises in Nigeria. The result showed the coefficient of the

constant term of 1.645167 and shows where the economic environmental factors intercept the

Y axis and statistically insignificant at 5%level of significance. This implies holding these

explanatory variables constant, the business performance will increase by 2%. The possible

increase is due to extraneous factors outside the modeled economic environment of small

scale enterprises. Also, F-Statistics (29.90467) showed the joint effect of the explanatory

variables on the stated model.

The result of exchange rate on business performance of small scale enterprises has equally

shown a negative (-.5851.47) and it’s statistically significant at 5% level of significance. This

implies that unit percent increase on the exchange rate will bring simultaneous decrease in

business performance by 59% significantly.

Furthermore, the coefficient of inflation rate on business performance of small scale

enterprises has a negative sign (-.6405) and it’s statistically significant at 5% level of

significance. This result revealed a negative relationship between interest rate and business

performance. This negative sign indicates that a unit increase in interest rate will lead to a

significant decrease by 64% on business performance of small scale enterprises in Nigeria.

Test of Hypothesis One

H01: Inflation rate does not significantly affect the performance of small scale enterprises in

Nigeria

Based on the result in Table 6 above, the computed p-value (0.000) is less than the α level

of 0.05 (0.000<0.05), the study rejects the null hypothesis that Inflation rate does not affect

the performance of small scale enterprises in Nigeria and accept its alternate, that high

inflation rate affects the performance of small scale enterprises in Nigeria. Adjudging from

the regression results in Table 6, high inflation rate has a negative effect on the performance

of these enterprises. Therefore, high inflation rate affects the performance of small scale

business performance in Nigeria.

Test of Hypothesis Two

H02: Exchange rate does not significantly affect the performance of small scale enterprises in

Nigeria.

From Table 6 above, the flagged p-value (0.000) is less than the α level of 0.05

(0.000<0.05), the study therefore rejects the null hypothesis that high exchange rate does not

affect the performance of small scale enterprises in Nigeria, and accept its alternate that high

exchange rate affects the performance of small scale enterprises in Nigeria. The regression

results provided empirical evidence that increasing rate of exchange rate has a negative effect

on the performance of these enterprises. Thus, high exchange rate affects the performance of

small scale operations in Nigeria.

6. DISCUSSION OF FINDINGS

The results on the test of hypothesis one as presented in Table 6 showed that high inflation

rate does significantly affect the performance of small scale enterprises in Nigeria. This was

shown by the estimated value of the coefficient of -.6405, which implies that a unit increase in

inflation rate will bring about a significant decrease of 64% on the performance of small scale



enterprises in Nigeria. Aside from the estimated coefficient, the result showed the p-value of

0.000 which was lesser than α level of significance (0.05), which resulted to the acceptance of

the alternate hypothesis and rejection of the null hypothesis. The negative effect of high

inflation on the performance of small scale enterprises as shown in Table 5, have a significant

negative effect on their purchasing power because they incur relatively high cost in the

procurement of raw materials and such, leads to increase in per unit cost of producing

domestic products in Nigeria. The problem of consistent decline on purchasing power of

individuals resulting from inflationary regime also affect customer patronage on products of

small scale enterprises and when customer patronage on produced, it has a negative effect on

the profitability of these firms.

The empirical evidence points to the fact that high inflation rate have negative effect on

the performance of small scale operations in Nigeria. This finding is consistent with the

findings of Muoka and Frankly (2013) were both found that high inflation rate affects the

operations of small scale enterprises in Nigeria. In addition, this finding is further supported

by Adomolu (2014) whose study revealed that high inflation rate exerts considerable

influence on the performance of small scale enterprises.

More so, the result on the test of hypothesis two as presented in Table 6 shows that high

exchange rate does significantly affect the performance of small scale enterprises in Nigeria.

This was evidenced given the estimated value of the exchange rate coefficient of -.5851.47 as

shown in Table 6. The exchange rate coefficient has negative sign. This implies that per unit

increase on the exchange rate, result to a proportionate decrease by 59% significantly on the

performance of small scale enterprise in Nigeria. Furthermore, the regression result also

shown that p-value (0.000) was lesser than α level of significance 0.05, which led to the

acceptance of alternate hypothesis and the rejection of null hypothesis. This result was

supported by the findings of Adeoye (2012) who found that continuous hike in exchange rate

has negative effects on the survival of small scale enterprises in Nigeria.

Also, the negative effect of high exchange rate on small scale enterprises spawns as most

of them incur considerably high cost to import raw materials needed for the production of

domestic products, as a result, there operations were affected, which led to collapse of some

business enterprises in Nigeria.

7. CONCLUSION

From the findings, the study concludes that economic environmental factors have a significant

negative effect on the performance of small scale enterprises in Nigeria. The implication of

this negative relationship of these economic environmental factors provided empirical

evidence that high inflation and high exchange rate predict the operations of small scale

enterprises in Nigeria. The negative correlation among modeled variables points to the need

for the federal government to pay adequate attention to issues relating to economic

environmental factors taking cognizance of the imperative role of small scale enterprises in

nation’s economic development.

Small scale enterprises play a pivotal role in economic development of any nation,

therefore the stabilization of these macro economic variables such as inflation rate, exchange

rate, would drive the performance of small scale enterprises.

RECOMMENDATION

The implication of the findings is that continuous increase in the economic environmental

factors would result to significant decrease on the performance of small scale enterprises in

Nigeria and therefore recommended that the federal government should come up with

economic policy and regulatory framework that will maintain fixed exchange rate, and low



inflation rate. Low inflation rate would improve on the purchasing power of small scale

enterprises, in terms of business diversification, developing existing business capacity.

Stabilizing these economic variables would drive the operations of small scale enterprises, as

they will innovate, create and invent new products and services to stimulate productivity and

create resource-based economy.

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economic factors and small scale businesses ......environmental factors (inflation rate and exchange...

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