International Journal of Management Sciences Vol. 3, No. 8, 2014, 582-592

The Impact of Business Environment on SME Performance in Nigeria AliyuMukhtar Shehu1, Rosli Mahmood2 Abstract The purpose of this study is to examine the relationship between business environment toward small and medium enterprises (SMEs) performance among Nigerian firms. A quantitative approach was employed, using a cross – sectional research design. The data was collected through the self – administration method from 640 respondents. SMEs are very important to economy growth of Nigeria, they serve as a major source of employment, contributes significantly towards industrial establishment, a source of income generation and help in the development of craftsmanship. A model was developed based on theoretical consideration to examine the relationship. Multiple regression analysis was employed, which reported a significant and positive relationship between the business environment and business performance of SMEs. Implications and future research directions were discussed. 1. Introduction Business environment is crucial to all business operating either on international basis or domestic operations (Essia, 2012). The environment in which business operates can either be within or outside (Bougeious, 1980). Business environment today is characterized with competition , and many other external influence. Studies on business environment and performance relationship appeared to producedmixed findings. Nandakumar, Gbobadian and Regan (2010), Sheng, Zhou and Li (2011), Pham, Segars andGijselaers (2012) reported significant association between business environment and performance in their studies. Sul (2002) reported a negative relationship between external environment and performance of restaurant firms. Ishengoma and Kappel (2011) investigated the impact of environment and growth potential of micro and small manufacturing enterprise in Uganda and reported a negative relationship between the constructs. Abd Aziz and Mahmood(2010) reported that none of the external environmental dimensions of turbulence, hostility and dynamism was a significant moderator between business model and firm performance. Therefore, BE – Performance relationship inconclusive, hence the need for further study. Therefore, the paper is organized as follows: section two provides the literature review; section three methodology, including research design, population and sampling technique, and the measurement of variables; section four is about the analysis and results including descriptive analysis results, factor analysis, correlation and regression analysis as well as the hypothesis testing; section five provides the implication, limitations and the direction for future studies. 2. Literature Review Business Environment Business environment (BE) is the set of norms and ethics, legal and governing frameworks, and the overall policy conditions that set rules for conduct of business, and influence positively or negatively the outcome of markets, the flow of investment, factor productivity, and the cost of doing business, these can either be from both internal or external settings and affect the smooth operation and function of an 1 2

Othmam Yeop Abdullah Graduate School of Business, College of Business, Universiti Utara Malaysia School of Business Management, College of Business, Universiti Utara Malaysia, Malaysia

© 2014 Research Academy of Social Sciences http://www.rassweb.com

582

International Journal of Management Sciences organization (Essia 2012). According to Duncan (1972) business environment is considered to be the combination of physical and social factors that is reflected in the individual organization. Environmental dimensions refer to the basic patterns used to assess and understand the concept of environment in a more logical and simple way. Duncan (1972) considered the external environment in a simpler dimension, that is the simple- complex and the static- dynamic dimension. Aldrich (1979) developed six major dimensions of the external organizational environment as capacity, stability/instability, turbulence, homogeneity/ heterogeneity, domain consensus/ disconsensus as well as concentration/ dispersion. Bourgeois (1980) came with the environmental dimensions as complex or heterogeneity and dynamic or volatile. Slevin and Covin (1995) developed the following environmental dimensions. These include: dynamic, hostility, technological sophistication and industry life cycle stage. Dynamic environmental dimension comes from the changes in key operating variables such as market and industry, economic, political, technology and other social forces. Environmental hostility is the level to which environment forces threat to the business organization due to issues like intense competition, lack of adequate exploitable opportunities. Industry technology sophistication refers to the degree of technological advancement in the real production process in producing a given products. Industry life cycle stage represents the period of product life cycle faced by the organization products or services. These stages consist of introductory/ pioneering, growth, maturity and decline respectively. Business Environment and Small and Medium Enterprises Performance Business environment and business performance studies reported conflicting findings The study of Song and Parry in (2009) investigated the desired level of market orientation and business unit performance. Data was collected from multiple respondents in three hundred and eight US firms. The finding indicated that desired level of market orientation is a function of market turbulence, competitive intensity, technology turbulence and innovation strategy. Additionally, Nandakurmar, Ghobadian and Regan (2010) empirically examined four thousand five hundred and eleven US companies and the data were generated from leading commercial database. The study was carried out on business-level plan and performance, the moderating effects of environment and structure, using a survey questionnaire as an instrument and moderated regression method for data analysis. The findings reported a strong relationship between environment and competitive performance. Fereidouni, Masron, Nikbin and Amir (2010) argued on the consequences of external environment on entrepreneurial motivation with data collected from one hundred and six Master of Business Administration students through a questionnaire. They reported a positive relationship between the business environment and entrepreneurial motivation. Cosh, Fu and Hughes (2012) investigated organizational structure and innovation performance in UK small and medium enterprises. They reported that young firms operating in high – technology sector with informal structures have more influence on innovation. Pederson and Sudzina (2012) surveyed two hundred and ninety nine Danish firms, and reported that limited number of internal and external factors have a significant influence on the adoption of performance measurement systems. Aziz and Yasin (2010) reported that external environment (market technology turbulence and competitive intensity) was not a moderator of the relationship between market orientation and firm performance. However, Sheng, Zhou and Li (2011) investigated on the effects of business and political ties on firm performance from a Chinese perspective. Samples of two hundred and forty one high technology firms were selected. The outcome from the study shows that business ties have a stronger positive effects on performance than political ties, and both effects depends on institution and market environment respectively. Mohammad, Ramayah, Puspowarsito and Saerang (2011) examined the business environment as a moderator in the relationship between corporate entrepreneurship and firm performance. The samples consist of one hundred and eight medium-sized companies with at least fifty one to two hundred and fifty full-time employees. A survey questionnaire was used as the study instrument and hierarchical regression for data analysis. The finding of the study indicated that environment; particularly government policies and economy moderated the relationship between corporate entrepreneurship and performance.

583

A. M. Shehu & R. Mahmood Ishengoma and Kappel (2011) examined environment and growth potential of micro and small manufacturing enterprises in Uganda, using a survey questionnaire as an instrument. The Business environment was used as an independent variable and the results from the regression analysis reveal that medium and small enterprises growth potential was negatively associated with limited access to productive resources, high taxes and lack of market access. The finding established a negative relationship between the constructs. Similarly, Qian, Cao and Takeuchi (2012) investigated functional diversity and organizational innovation with the environment as moderator in China. A sample of one hundred and twenty two Chinese firms was used by chief executive officers and chief technology officers as respondents. The finding indicated that competitive uncertainty and institutional support were found to shape top management team decision making process and their outcomes. The study of Pham, Segars and Gijselaers (2012) examined the influence of the trainees work environment for training transfer, employed a sample of one hundred and sixty seven trainees from eight Master of Business Administration programs in Vietnam. Structural equation modelling was used for data analysis, the study reported that work environment factors such as supervisory support, job autonomy, and preferred support were significantly associated with the training transfer; however, trainees use of transfer strategies mediated the work environment and training transfer relationships. The study of Mithas, Tafti and Mitchell (2013) argued on firms’ competitive environment and digital strategies of four hundred US based enterprises. They reported a correlation between digital business strategies for the digital business competitive environment. Additionally, in (2013) Bratnicka, Bratchiki (2013) linked two dimensions of the organizational creativity to firm performance, with the mediating and moderating role of corporate entrepreneurship and the environment. They argued about the role of environment in shaping entrepreneurial activities. In the same vein, Khaldi and Khatib (2014) explore the learning environment in the business schools of both private and public Universities in Kuwait, using a regression method for data analysis. The reported a significant and positive effect of the five dimensions of the learning environment (students’ cohesiveness, teacher support, involvement, tssk orientation and cooperation) on student’s attitudes toward their academic institutions, students’ attitude was significantly higher in the public institution than private ones. Based on these argument, we proposed: H1: There is a significant relationship between business environment and SME performance 3. Methodology Research Design A cross – sectional design was adopted, due to the fact that the data was collected at a single point in time (Zikmund, Babin, Car, &Graffin, 2013; Al – Sarda& Ahmad, 2014; Lucky and Minai, 2011; Shehu, 2014). This design is mostly used in social sciences field which can be carried quickly as the research data is gathered at some point in time. A quantitative technique is also adopted, which was also common to social sciences domain, this was concurred by previous studies of Idar and Mahmood (2011), Al – Swidi and Mahmood, (2012), Fatoki (2012), Mahmood and Hanafi (2013), Suliyanto and Rahab (2012), ShukriBakar and Mahmood (2014), De Luna and Menez (2014), Noor (2005), Noor (2012). Population and Sampling Technique The population of the study covers the entire 1829 SMEs fully operational in Kano – Northwestern part of Nigeria. They cover a total of twelve SME classification ranging from Agriculture, hunting, poultry, forestry and fishing; mining and quarrying; manufacturing; building and construction; wholesale and retail trade; hotels and restaurants; transport, storage and communication; real estate and renting; education; health and social works; other community, social and personal service activities respectively, which constitute the small and medium enterprises development agency classification (SMEDAN, 2012). A systematic sampling method was employed to select 320 respondents based on Kriejcie and Morgan (1970) table for sample size determination, the sample was increase to 640 based on Hair, Wolfinbarger and Ortinal (2008) suggestion. The selected sampling method was used by previous studies of Kheng, June and Mahmood (2013), Albueku 584

International Journal of Management Sciences andOgbouma, (2013),Ghambarali, Alibaygi, Rasekchi, Pezeshki, Ghasemi andAkbari, (2013), Sour, Arzan, Feizizadeh, Tavili andAlizadeh, (2013),Zakeri, Jafari, Tavili, Songooni and Soltan(2013). The unit of analysis for this study is at organizational level which covers the owner/managers across the twelve SME classifications. A self – administered questionnaire also known as called drop – off and pick procedure served as the data collection method. The procedure made the researcher to move from one SME owner/manager to another and administered the questionnaire for the respondents to fill up and later come back and pick up the filled questionnaire. This study has a response rate of 79.8%, which is greater than the minimum response rate recommended by Sekaran (2003), Hair etal (2010), Pallant (2001). Measurement of Constructs The study variable were measured using 5- points scale, ranging from 1(strongly disagree) to 5 (strongly agree) based on the previous works of Lucky and Minai (2012), Amin and Khan (2009), Noor and Muhammad (2005), Noor (2012),Wahab, Noor and Ali (2009),Goaill, Perumal and Noor (2014),Naipinit, Kojchavivomg, Kowittayakorn and Sakolnakorn (2014),Haq (2012).The questionnaire instruments were used to measure the extent on which respondents agreed or disagreed on the research items. There are a total of two variables in this study. Detail about the variables measurements are as follow. Concerning the business performance variable, a total of six (6) items adopted from Suliyanto and Rahab (2012), Calonte, et al., (2006), Keskin, (2006), Lin, et al., (2008). Business environment variable, twelve (12) items adopted from the previous work of Abd Aziz (2011), Kaderet (2009). 4. Analysis and Result Descriptive Analysis Result Table 1 indicated the demographic profile of respondents. The respondents were asked to explain some of their demographic information, which includes gender, education, number of employees, years in operation, ownership of the organization, sources of capital investment, firm activities, total assets as well as the scope of operation. This study shows that males are the dominant gender in Kano SMEs with the response rate of 100 (100 percent). This is an indication that the sector is dominated by male without any provision for female to participate in owning and managing the sector. Regarding the educational attainment, those with secondary education constituted 153 responses, representing (34.2 percent) of the total responses, followed by HND/Degree holders with 96 responses (31.3 percent), next are those with Diploma certificates with 96 responses, representing (21.4 percent) of the total response. Master degree certificate holders total of 50 responses, which is exactly (11.2 percent), and finally are those with PhD amounting to 9 responses representing only (2 percent) of the total response. This pointed out clearly that the majority of SME owner/managers are the holders of secondary school certificates followed by HND/Degree holders, whereas those with PhD are few with least percentage of (2 percent) which is insignificant. As for the number of employees, 262 respondents had between 10-49 employees which is equivalent to 58.9 percent whereas 162 respondents (36.1 percent) had between 50-199 employees, followed by those employing less than 10 constituted the least response rate of 24 equivalent to 5.4 percent respectively. Meanwhile, with regards to the number of years in operation 167 respondents had between 5-10 years in operation (37.3 percent), 105 respondents had between 11-15 years (23.4 percent), 71 respondents had between below 5 years of existence (15.8 percent), 66 respondents had between 16-20 years (14.7 percent), 20 respondents had between 21-25 years in operation (4.5 percent), 10 respondents had between 26-30 years in existence (2.2 percent) and 9 respondents had 30 years and above in existence (2 percent).

585

A. M. Shehu & R. Mahmood

Demographic variables Gender

Education

Number of Employees

Years in Operation

Ownership of the Organization

Sources of capital investment

Firm activities

Table 1: Profile of Respondents Categories Frequency Male Female SSCE Diploma/NCE HND/Degree Master Degree PhD Less than 10 Between 10-49 Between 50-199

100 ---153 96 140 50 9 24 262 162

Percentage% 100 --34.2 21.4 31.3 11.2 2 5.4 58.5 36.1

Below 5 years Between 5-10 years Between 11-15 years Between 16-20 years Between 21-25 years Between 26-30 years 30 years and above

71 167 105 66 20 10 9

15.8 37.3 23.4 14.7 4.5 2.2 2

Individual Partnership Joint Venture Others

221 130 47 50

49.3 29 10.5 11.1

Personal Savings Family Partnership Friends Loan from bank

192 21 137 37 61

Agriculture, Hunting, forestry, fishing and poultry Mining and Quarrying Manufacturing Building and construction Wholesale and Retail trade Hotels and Restaurants Transport, storage and communication Real estate, renting and business activities Education Health and social works Other community, social and personal activities

10 4 298 6 59 9 17 7 8 9 21

42.9 4.7 30.6 8.3 13.6 2.2 .9 66.5 1.3 13.2 2 3.8 1.6 1.8 2 4.7

586

International Journal of Management Sciences However, in organizational ownership, there are 221 respondents (49.3 percent) that were owned and managed by individual owner/managers, 130 (29 percent) owned in form of partnership, 50 respondents (11.1 percent) were owned by others not listed on the questionnaire, while the remaining 47 respondents (10.5 percent) of the SMEs were owned in the form of joint ventures. The sources of capital invested considered in this study are personal savings, family, partnership, friends and bank loan. The result from table 1 shows that personal savings recorded 192 (42.9 percent) of the total respondents, which was the highest response. The family as the source of capital investment recorded 21 (4.7 percent) stand to be the least. Partnership source of capital investment carries 137 respondents which represent 30.6 percent. The capital source through friends recorded 37 (8.3 percent), and then followed by bank loan as a source of capital recorded 61 which was equivalent to 13.6 percent. The level of firm activities was equally considered; those firms in manufacturing recorded the highest respondents of about 298 which carries the larger percentage of 66.5 percent, then followed by those in whole sale and retail trade with respondents 59 (13.2 percent). Other community and social services 21 (4.7 percent). Those firms in transport, storage and communication 17(3.8 percent), agriculture, hunting, poultry, forestry and fishing 10 (2.2 percent), hotels and restaurants recorded 9 (2 percent), health and social works 9 (2 percent), education 8 (1.8 percent), real estate and renting 7 (1.6 percent), building and construction 6 (1.3 percent), mining and quarrying 4 (.9 percent). Factor Analysis A factor analysis was conducted on the study variables in order to check for their construct validity, that is to see whether each item was able to measure what it intends to measure is for. The entire items were validated using the principal component analysis with varimax rotation. The factor loading required for each item to be included is 0.3 as suggested by (Hair, et al., 2010; Tabachinick&Fiddel, 2014). Prior to the conduct of factor analysis in Table 2, the Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy was performed and indicated a value of 0.733 which is above the benchmark of 0.60, this shows that the sample size is adequate for the conduct of factor analysis. Similarly, the Bartllet’s test of sphericity is statistically significant which support the factorability of the correlation matrix as the p-value stands at 0.000.

Per02 Per01 Per05 Per06 Per04

Table 2: Result of the Factor Analysis for Firm Performance Items Component 1 Product sales .855 Wider market .780 Increase in employees .777 Increase in customers .737 Customer complaint .704 Eigen value 2.982 Percentage of variance 59.636 KMO .733 Bartlett’s Test of Spheriticity 986.367 Significance .000

The Principal component analysis (PCA) shows the presence of only one component with eigenvalue exceeding 1. The extracted component is named firm performance. The percentage of the variance was 59.636 percent. Prior to the conduct of factor analysis in Table 2, Kaiser – Meyer – Olkin for measuring sampling adequacy (KMO/MSA) shows a value of 0.700 exceeded the benchmark of 0.6 which indicated that the sample size is adequate for the conduct of factor analysis. Examination of correlation matrix indicated the presence of most of the coefficient at 0.3 and above. Bartlett’s test of sphericity was statistically significant at p