SOCIAL CAPITAL OF FINANCE AND PERFORMANCE OF SMES {SMALL AND MEDIUM ENTERPRISES} IN KADUNA METROPOLIS

ABSTRACT
This study aimed at establishing the influence of social capital on finance and performance of SME‟s in Kaduna Metropolis County. Descriptive research design was used. The target population consisted of all SME‟s operating in the Kaduna Metropolis with a sample of 100 taken. Respondents were CEO‟s or persons in charge of finance department. A questionnaire was used to collect data. The response rate represented 57% of the overall study. In the analysis, growth indicators of profitability, number of employees and sales turnover were used as the dependent variables. Trust, Civic engagement and culture were the variables used to measure social capital. Correlation and regression analysis were used to analyse the relationships. The study found out that social capital affects the growth of SME‟s. However, the nature of the relationships differed with each growth indicator and each social capital variable. A further research can be undertaken to understand why culture and civic engagement variables have negative effects on the growth of SME‟s. A study can be developed and tested to understand the relationship in a better way.

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Worldwide, Small and Medium Size Enterprises (SMEs) are recognized as engines of growth and development. They are the backbone of economy in many developed nations all over the world. The enterprises cut across every sector of the economy. They include general trade like wholesale and retail, services, farm activities and manufacturing. They have emerged as a vibrant and dynamic component of the economy by virtue of their significant contribution to GDP, industrial production and exports (Dunne and Hughes, 2003).

Social capital and growth are two concepts that impact many other aspects of small and medium enterprises. Studies on the interaction between social capital and growth are of interest due to their associated strategic implications regarding SMEs. In order to build new dynamic capabilities to cope with turbulent and unpredictable markets, SMEs need to leverage their network relationships that provide access to information. These dynamic capabilities may in turn positively influence on growth (Carlos, 2011).

Researchers have been investigating the effects of social capital on the performance of institutions (Carlos, 2011). Different studies have been carried out on the interactions between social capital and growth whereby many authors have suggested that SMEs need to carry greater leverage in order to maximize value of the firm. According to Paul et al (2009), social capital played a significant role in innovation. It positively influenced incremental and radical innovative capabilities.

1.1.1 Social Capital
Social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions (Musimba, 2012). Social capital is about the value of social networks, bonding similar people and bridging between diverse people, with norms of reciprocity (Dekker & Uslaner, 2001). A narrow view of social capital, according to the World Bank (1998), can be seen as a set of horizontal associations between people, consisting of social networks and associated norms that have an effect on organizations productivity and well-being. Social networks can increase productivity by reducing the costs of doing business. Social capital facilitates coordination and cooperation.

A broader understanding of social capital accounts for both the positive and negative aspects. It includes vertical as well as horizontal associations between people, and behavior within and among organizations, such as firms. This view reckons that horizontal ties are needed to give organizations a sense of identity and common purpose, but also stresses that without "bridging" ties that transcend various social divides like religion, ethnicity, socio-economic status, horizontal ties can become a basis for the pursuit of narrow interests, and can actively preclude access to information and material resources that would otherwise be of great assistance to the organization (World Bank, 1998). Social capital can have a negative effect on a firm‟s value (Portes and Landholt 1996). Communities, groups or networks which are isolated, parochial, or working at cross-purposes to society's collective interests can actually hinder economic and social development.

Measuring social capital may be difficult, but it is not impossible, and several studies have identified useful proxies for social capital. It can be measured using trust, customer capital, civic engagement or as a function of longevity. Owing to its external nature, knowledge embedded in customer capital is the most difficult to codify. One manifestation of customer capital that can be leveraged from customers is often referred to as “market orientation”. Hsiu-Yueh (2006) indicate that market orientation involves market intelligence pertaining to current and future needs of customers, dissemination of intelligence horizontally and vertically within the organization, and organization wide action or responsiveness to market intelligence.

Once it has been decided which how social capital is to be measured, for example by measuring civic engagement through household surveys, cultural factors may be taken into account in designing the survey instrument. Newspaper readership may be a better indicator of civic engagement in countries where the literacy level is high (Putnam, 1993).

Knack & Keefer (1997) used indicators of trust and civic norms from the World Values Survey for a sample of 29 market economies to measure social capital. They used these measures as proxies for the strength of civic associations in order to test two different propositions on the effects of social capital on economic growth, the "Olson effects" and "Putnam effects". The Olson effects suggest that associations stifle growth through rent-seeking while the Putnam effects suggest that associations facilitate growth by increasing trust.

1.1.2 Growth
Growth can be defined as an increase in size as the result of firm growth over a period of time. Here, firm growth is a process while firm size is a state (Penrose, 1995). The growth of a firm can be determined by supply of capital, labour, appropriate management and opportunities for profitable investments. Lumpkin and Dess (1996) point out that it is essential to recognize the multidimensional nature of growth. Thus, research that only considers a single dimension or a narrow range of growth may result in misleading descriptive and normative theory building. Research should include multiple performance measures. Such measures could include traditional accounting measures such as sales growth, market share, and profitability. In addition, factors such as overall satisfaction and non-financial goals of the owners are also very important in evaluating growth, especially among privately held firms. This is consistent with the view of Zahra (1993) that both financial and non-financial measures should be used to assess organizational performance.

Chong (2008) declares that there are four main approaches to measure the performance of organizations. These are the goal approach, system resource approach, stakeholder approach and competitive value approach. The goal approach measures the extent an organization attains its goals while the system resource approach assesses the ability of an organization to obtain its resources. The stakeholder approach and the competitive value approach evaluate performance of an organization based on its ability to meet the needs and expectations of the external stakeholders including the customers, suppliers, competitors. Among these, goal approach is most commonly used method due to its simplicity, understandability and internally focused.

Information is easily accessible by the owners‟ managers for the evaluation process. The goal approach is a better fit for the SMEs where targets are being set internally based on the owners- managers‟ interests and capability to achieve.

According to Richard et al. (2008), the goal approach directs the owners-managers to focus their attentions on the financial and non-financial measures. Financial measures include profits, revenues, returns on investment (ROI), returns on sales and returns on equity, sales growth, and profitability growth. Non-financial measures include overall performance of the firm relative to competitors, employment of additional employees, customer satisfaction, employee satisfaction, customer loyalty, brand awareness and owner‟s satisfaction. Atieno (2009) observes that the financial measures are objective, simple and easy to compute and understand. However, financial measures suffer from being historical and are not readily available in the public domain, especially for SMEs. In addition, profits are subject to manipulations and interpretations. The solution to the limitations of financial measures is to apply the non-financial measures, though subjective in nature, as supplements to the financial measures. The combinations of these two measures help the owners-managers to gain a wider perspective on measuring and comparing their performance. Meilan (2010) agrees that this is a holistic approach and Balanced Scorecard approach to performance evaluation for SMEs.

1.1.3 Relationship between Social Capital and Growth
Arrow (2000) contributes to the discussion about the contribution of Social capital to growth by highlighting the importance of cooperation and trust within the firm. The interdependence between decisions of individual agents and the emergence of externalities and common goods makes cooperation imperative to maximizing social welfare. The superiority of social cooperation has long been documented in economic and social thought. But social capital, as social norms and networks, sustains cooperation by emphasizing its intrinsic value and its pursuit as an end in itself. It is a mixed-motive cooperation, in which collective behavior takes account of its effects on the welfare of others, alongside its own. In this manner, it operates as an internal commitment mechanism to resolving the social dilemma or collective action problems from freeriding and narrow-interested calculation.

Empirical work on social capital, which covers a wide spectrum of social science disciplines, attribute differences between firms in the level and rate of economic and social development to differences in the available stock of social capital. Firms with relatively higher stocks of social capital, in terms of generalized trust and widespread civic engagement, seem to achieve higher levels of growth, compared to firms with low trust (Brown & Ashman, 1996; Heller, 1996; Knack & Keefer,1997; Krishna & Uphoff, 1999; Ostrom, 2000; Uphoff, 2000; Rose, 2000).

According to these studies, social capital contributes to efficiency and growth by facilitating collaboration between individual conflicting interests towards the achievement of increased output and equitable distribution. Additionally, recent literature has focused on the determinants of social capital. This constitutes the first step towards developing a consistent and integrated framework concerning the nature of social capital and its relationship to socioeconomic growth. A number of studies have empirically tested the impact of individual- and aggregate-level factors on the components of social capital, that is, on social trust and group membership (Helliwell, 1996; Brehm & Rahn, 1997; Krishna & Uphoff, 1999; Glaeser et al, 2000; Costa & Kahn, 2001; Rothstein & Stolle, 2001). Some of these tend to emphasize the role of individual factors in determining the incentive of individuals to invest in social capital, such as personal income and education, family and social status; others offer greater weight to the effect of more institutional or systemic factors, such as income inequality, confidence in government, impartiality of policymaking bodies, and prior patterns of cooperation and association amongst individuals in a group.

1.1.4 SMEs
There is no universal definition of small and medium enterprise. Definitions vary from country to country. In Australia, for example, SMEs are defined as enterprises employing between five and 199 employees (Kotey & Folker, 2007). In Indonesia, they are business enterprises with 5-99 employees (Mira, 2006). The World Bank (2002) has also defined SMEs. Micro enterprises have 1–9 employees; small scale enterprises have 10–49 employees and medium have 50–249 employees. However, in the majority of countries, this definition did not match the local definition, in which cases the local definition took precedence.

In East Africa most SMEs started as small family businesses or small group called „chamas‟. The support and recognition of the role and importance of micro and small enterprises in Nigeria dates back to the colonial period. Active participation in this sector by the government began in 1992 when the government developed Sessional Paper No. 2 on Unemployment where the government identified its primary challenge as its ability to find ways to help accelerate the expansion of SMEs as a strategic avenue of job creation in Nigeria (Ng, 1992). In the 1986 Sessional Paper No. 1 on Economic Management for Renewed Growth, the government acknowledged the increasing importance of the informal sector in economic development with respect to employment creation, particularly in the face of the economic crisis and structural adjustment policies that were prevailing at that time (Ng, 1986).

In 1989, the government published a document entitled, “A Strategy for Small and Medium Enterprises (SMEs) Development in Nigeria: Towards the year 2000. The document focused on the constraints the sector was experiencing. Sessional Paper No. 2 of 1992 on Small enterprises and Jua Kali Development in Nigeria set out a policy framework to enhance assistance to individual entrepreneurs and small scale enterprises. This was expected to precipitate the transition of micro and small enterprises into medium-sized enterprises by among other strategies, facilitating easy access to credit and information to this sector (Ng, 1992).

Small and Medium Enterprises (SMEs) are dynamic entities. Some grow into larger enterprises while others stabilize without changing the scale of operation. Others disappear (Bhalla, 1992). The Sessional Paper No. 2 on Small Enterprise and Jua Kali Development in Nigeria set out a comprehensive policy framework to promote the growth and catalyze the transition of SME. This was to be achieved by enhancing direct assistance to these enterprises by primarily facilitating access to finance, credit, and information to this sector. Micro enterprises were then expected to register positive growth (Ng, 1992).

According to the Global Economic Report, Nigeria ranks 98th Country out of 133 in global competitiveness in 2009-2010, a 5 point drop from the 2008-2009 ranking when it was 93rd (World Economic Forum, 2010). Though favorable in the African context, this rating is lower than that of key trading partners in Africa particularly Egypt and South Africa who rank 70th and 45th respectively (GCI, 2010) The rating is also significantly low from the global perspective. According to World Bank Report an issue of concern for Nigeria is low intellectual capital utilization by SMES owners among key comparator countries that impact negatively on Gross domestic Product (World Bank, 2010).

According to Nigeria Economic Survey 2008 out of the total new jobs created, micro, small and medium enterprises (MSME)s created 426.9 thousand new jobs out of a total of 474.5 thousand new jobs in Nigeria (Economic Survey, 2009). In the same year, the sector contributed N 806,170 million of GDP, which is 59 percent of total GDP (RoK, 2009). The Nigeria economic survey 2010 notes that this same sector generated 390.4 thousand new jobs which translated into 87.6 percent of the total jobs generated in 2009 (RoK, 2010).

1.2 Statement of the Problem
SMEs play significant role in the economic development by creating employment, wealth creation, poverty eradication and creation of new firms (Kioko, 2010). This sector contributed to about 70% of the GDP in 2011 of Nigeria (ROK, 2012). In the global economy, SMEs are largely recognized as engines of growth and development and are the backbone of economy in many developed nations (Zhou, 2007). SMEs have emerged as a vibrant and dynamic component of the economy by virtue of their significant contribution to GDP, industrial production and exports. The 2012 Enterprise Baseline Survey revealed that there are 17 million Small and Medium Scale Enterprises in Nigeria, employing 32.41 million persons and makes a contribution of about 46.54 per cent to the nation‟s Gross Domestic Product in nominal terms. In Malaysia SMEs contribute to about 32% to the country‟s GDP (World Bank, 2012). According to World Bank (World Bank,2012) in general, the SME sector can contribute to the GDP of high income countries by as much as 51 percent and the middle and low income countries SMEs can produce up to 39 percent and 16 percent respectively of local GDP (World Bank,2012).

In Nigeria, despite having SMEs start up on a very high note, there is a high rate of collapse and most enterprises are short lived and barely survive third anniversary (ROK, 2011). They eventually stagnate and lack continuity (Tera, 2011). Sessional paper No. 2 of 2005 shows that despite the significant role by the SMEs, they have continued to experience many constraints like poor access to market and financial services and unfavorable polices. These have inhibited the realization of its full potential (ROK, 2005). Would the failure be caused by lack of utilization of social capital by SMEs?

Mwangi (2012) in his study about Social Capital and Access to Credit in Nigeria, indicated that no detailed study has addressed the relationship between social capital and the performance of

SMEs and their impact of social network on the overall growth of small enterprises. A study by Musimba (2012) on the Role of Human and Social Capital in Internationalization of ICT SMEs in Nigeria concludes that the survival and performance of a firm are influenced by the firm‟s ability to utilize the social capital to the fullest. He draws attention to how connections, relationships and networking in Nigeria can be crucially important for SMEs seeking to export or invest abroad.

All these studies are essential to the understanding of the contribution of social capital to the growth of SMEs. However, the studies do not fully elaborate on how the social capital initiate, develop and maintain network relationships, and how these impacts on growth of SME‟s. This study therefore sought to answer the following question: Is social capital a contributor to the performance and growth of small and medium enterprises in Nigeria?

1.3 Objectives of the Study
The objective of this study was to investigate the influence of social capital on finance and performance of SMEs in Nigeria.

1.4 Research Hypothesis
H01: Culture and civic engagement does not affect the growth of the SMEs

H02: The annual sales turnover is not related to the trust in the organization.

1.5 Significance of the Study
The findings of this study will be invaluable to the small and medium enterprises as they will be able to understand vividly the factors that influence their growth. The recommendations given in the study will help the SMEs by equipping them with adequate tools to get the solutions to the problems posed by the identified factors thereby sustaining themselves. The development partners who are usually interested at helping the SMEs grow will have an understanding of a wide variety of factors that affect SMEs and the extent to which the identified factors affect SMEs. Equipped with the right information, they will be able to develop adequate policies that will benefit the SMEs & finally. Scholars and researchers who would like to debate or carry out more studies on SMEs will find this study useful as a basis of carrying out more studies in Nigeria. The findings of these studies will develop a base from which researchers and scholars will formulate theses statements and proposals and carry out more studies.

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Item Type: Project Material  |  Size: 60 pages  |  Chapters: 1-5
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