Micro and Small Business Growth Drivers in Nigeria: Evidence from Small Cities Small Federating State

Abstract

This study involves a comprehensive survey of about 1500 micro and small businesses across three major cities in one of the smallest states in Nigeria (Ebonyi State). Based on the cross-sectional data generated, a linearized Tobit regression and a robust T-Test statistical technique are applied to comparatively examine how internal firm attributes, market attributes, and socioeconomic and macroeconomic conditions affect the growth of micro and small businesses in a typical small state and small cities. The results reveal a key challenge to be the dominance of the business space in small cities by micro and largely informal enterprises.

Keywords

MSBs small cities growth drivers female-owned businesses education Nigeria

Introduction

Achieving the goals of inclusive development goals would require carrying every segment of the society along and striving toward equality in the ownership, management, and access to economic resources. It would entail working together to break the dominance and near monopoly of large cities and large businesses in the national and global economic space. The pursuit of equality in access to the economic space does not however prejudice the immense contributions of large cities and businesses; rather it entails recognizing the synergy and contributions of small cities and small businesses in bringing the underprivileged population on board the global economic order. This is especially true in recognition of the empirical evidence confirming their contributions toward addressing issues of poverty and unemployment (Bell and Jayne, 2009; Markantoni et al., 2013; Nel and Stevenson, 2019; Qian, 2017), and the marginalization that they face in the course of their operations.

Small cities are particularly important because they serve as a territorial hub for meeting the marketing and infrastructural needs of peripheral communities (Xuza, 2005). Additionally, they bear certain characteristics that make them repressive to growth and development (Bjelland, 2010). Among the repressive characteristics is the lack of the requisite infrastructure and market capabilities to support business growth. While a good number of studies have dealt with the link between small cities and small business development (Masutha and Rogerson, 2015), an area less studied is how contextual drivers navigate to impact on micro and small business (MSB) growth. The scarcity of empirical efforts in this regard has largely been attributed to the generalization problem relating to the relegation of MSBs to the background of national global economic discourse (Bell and Jayne, 2009; Bjelland, 2010). The lack of evidence on the survivability of MSBs in small cities particularly in less developed states makes it difficult for governments and development partners to design appropriate policy tools capable of efficiently dealing with and supporting businesses. To close this gap, our study is designed to examine the growth drivers of MSBs in small urban cities in Ebonyi State—one of the smallest federating states in Nigeria. In doing this, we contribute to two main strands of literature. On one hand, we contribute to the literature on the development of small cities; and on the other hand, we contribute to the literature on MSB survival and growth in the global economic system.

Our choice of Ebonyi State is strategic and justifiable in a number of ways. First, the state, which was created in October 1996, is among the youngest and one of the smallest of the 36 states in the country. With a total of about 2.1 million inhabitants, the state ranks fourth least populated state in the county.¹ In addition to being among the least developed and smallest federating states, Ebonyi State is also the third poorest state in Nigeria, according to evidence from the 2018 report of the National Bureau of Statistics (NBS). A national poverty report by NBS in 2011 ranked Ebonyi State as the poorest state in Nigeria, with over 80% of the indigenes living below the poverty line of one dollar per day.² High levels of poverty, income inequality, unemployment, and underemployment among youths, as well as the dominance of government in the economy, are highlighted in the Ebonyi State Vision 20:2020 Report as part of the key weaknesses constraining the state’s development (Ebonyi State Government, 2009: 14). In addition to being among the poorest and least developed, the business environment in the state is also classified as repressive, with the tax regime considered among the toughest in the country (The Nation Newspaper, 9 November 2015). As one of the national newspapers in the country once put it:

Should we conduct an economic classification of Nigerian states and regions deploying such human development indices like per capita income, gross domestic product, maternal mortality ratio, infant mortality ratio, poverty index, to name a few; there is no doubt that Ebonyi State and its people will feature prominently at the lower rung of the charts.³

Being poor and small also imposes a burden of sociopolitical and economic instability on Ebonyi state, which explains why the state records incessant communal conflicts leading to deaths and destruction of mainstay economic activities.⁴ It also explains the very weak fiscal basis of the state, where for example the internal revenue generation profile ranks fourth least among the 36 states in the country, according to the NBS report of 2018. Finally, apart from the dominance of civil service institutions, most of the businesses operating in the state are of micro and small scale by national standards. The prevailing economic characteristics are such that reveal the visible absence of functional medium and large-scale business enterprises, and over-reliance on government or micro/small-scale businesses for employment and economic empowerment. A report from the 2011 national survey revealed that in terms of the structure of the economy of Ebonyi State, 1,206 enterprises were of small scale, four were of medium scale, and a relatively larger number (577,216) were microenterprises—a statistic that qualifies Ebonyi among the very least business inclined states in the country. A study on what works and what does not work in Ebonyi is therefore important in understanding the economic contexts not just in other small states and cities in Nigeria, but also for explaining the urban-rural development dynamics in other small cities in Africa. In the wake of growing insecurity in Nigeria, with international cross-border consequences, a study of what drives business growth in small cities provides viable evidence for understanding how to better engage the youth and redirect their attention to activities with positive socioeconomic impacts.

Consequently, the primary objective of our study is to determine the core drivers of growth in the micro- and small-scale business sectors, using survey data from Ebonyi State. With emphasis on enterprises operating in major but comparatively small designated urban cities in the State, the study specifically aims to identify the degree of influence of internal attributes (such as age, size, style of organizational decision-making, industry, financial structure, risk exposure, profitability, and ownership structure, among others), market attributes (such as market share, location, type of customer, access to material inputs, and rate of turnover, among others), socioeconomic and political factors (such as family background, government supports, political connections, and religious affiliation, among others), and macroeconomic factors (such as inflation, price structure, interest rate, government regulation and control, degree of competition, access to the formal financial markets, and infrastructure, among others) on the growth and sustainability of business enterprises in a small state.

Review of related literature

Two strands of literature join to explain the concepts, context, and methodology of this article. The first is the literature on the characteristics and determinants of growth in small cities and towns in developing countries (Frick and Rodríguez-Pose, 2018; Gu et al., 2015; Liu and Li, 2017; Satterthwaite, 2017; Wiggins and Keats, 2013; Xuza, 2005). The well-being of small cities, especially in third world countries, is no doubt an integral element of inclusive development. Small cities possess distinct theoretical and practical features, and their growth potentials are well documented in the literature. On the practical side, they have a relatively small but growing population and are central to a cluster of rural communities. As a result, access to markets and social amenities is easier for the surrounding rural communities. According to Xuza (2005: 91), “the growth of small urban centres is a necessary condition and prerequisite for rural development.” Tacoli and Satterthwaite (2014) argued that urban centers provide the infrastructure that the surrounding rural towns need, including education, health, farm supports, and other government services. Studies of Satterthwaite (2017) showed that the health of a small city is dependent on the health of the rural locations that surround it and vice versa. Small cities provide ready markets for agricultural produce from rural areas at reasonably cheaper transaction and transportation costs (Wiggins and Keats, 2013). Frick and Rodríguez-Pose (2018) in their study found that smaller cities are more impactful for inclusive economic development than the larger ones. It has also been argued that the proximity of small industrial towns to rural communities often results in an increase in the standard of living of the latter, especially during the period of economic stagnation (Gu et al., 2015).

Unfortunately, these potentials are found to be hampered by weak governance frameworks, infrastructure, and a dearth of needed financial resources. In most countries, small cities are often accorded a derogatory status, which places them almost in the same category as rural societies where they scarcely receive a fair share of government funding, private investment, and research attention (Liu and Li, 2017). They also remain grossly underrepresented in the literature as noted by Gibb and Nel (2007). This neglect has been mostly attributed to what Bell and Jayne (2009: 684) described as the dominance of the “visions of urban change that seek to produce generalizable depictions of urbanity.” They argued that this has been achieved with reference to “big” or “global” cities and “great” metropolises. In most of these instances, neglect of small cities gave rise to the emergence of economic structures that benefit larger cities at the expense of smaller ones. This in turn, results in a “rise in unemployment and leaves local people questioning the future of their small-town economies” (Gibb and Nel, 2007: 70). Rather than serving as incubation grounds for micro and small businesses, the very repressive nature of small cities makes them hostile grounds for safe business operations.

The second part of this study has to do with the literature on the drivers of micro and small business enterprises in small cities (Ghosh and Guha, 2015; Owoo et al., 2019). The literature on micro and small businesses focuses on the potential and challenges that such businesses face in contemporary societies. They have a limited scope of operation, are in most cases plagued by informalities, and lack the capacity to incorporate and grow in a globalized/liberalized economic system.

On the growth path of MSEs, among the influential drivers found in previous studies are internal attributes of the firms, market conditions, socioeconomic characteristics, and macroeconomic conditions. Studies that focused on the impact of internal firm attributes tend to suggest that factors such as size, age, profitability, leverage, and organizational/ownership structure are important growth drivers for all classes of firms (Coad, 2007; Ezeoha and Botha, 2012; Goddard et al., 2009). Sleuwaegen and Goedhuys (2002) acknowledged that based on the principle of economies of scale and knowledge spill-over, size and age have some definite effects on growth. The emphasis on internal characteristics is also based on the position of the Penrose theory that external causes of corporate growth can only be fully understood in the context of the nature of the firm itself and that the incentives for growth are endogenous to the firm (Penrose, 1959). Ghosh and Guha (2015), in the case of Mumbai slums in India, found the age of the micro-entrepreneur, the place of operation of the micro-entrepreneur, and the reason for starting the business to be among the key factors that affect the profit ranking of the entrepreneur. Based on gender-focused survey data from Ghana, Owoo et al. (2019) argued that business location and credit constraints equally constitute significant growth drivers for micro-enterprises.

In terms of the impact of market conditions, Dyer and Ross (2008) found that the ability of a businessperson to seek advice on market conditions and complexities has significant effects on exposure to risks and uncertainty. A similar study by Peric and Vitezic (2016) also showed that the global recession had the greatest constraining impact on small businesses than it had on large and medium-scale firms. There are also a number of studies on how macroeconomic conditions, as well as socioeconomic and political factors, affect business growth (Adekunle, 2011; Mambula, 2002). On access to macroeconomic benefits, Lang et al. (1996) found that a significantly negative relationship exists between future growth opportunities, on the one hand, and debt and investment, on the other hand.

A few other studies have attempted to contextualize the growth of MSBs in small cities and towns (Curran and Storey, 2016; Gibb and Nel, 2007; Masutha and Rogerson, 2015). Another important angle to the small city business environment literature has focused on whether such cities constitute an effective breeding ground for micro-, small-, and medium-scale businesses. The collective efficiency principle championed by Schmitz (1995) states that small cities bestow a form of business clusters that offer “competitive advantage which they derive from local external economies and joint action, captured in the concept of collective efficiency.” According to Curran and Storey (2016: 16), small cities also provide some sort of relief to small businesses against high rents, difficulties in finding accommodation, and expansion constraints due to intense competition from large-scale businesses. There are also studies that have attempted to conceptualize growth drivers in small cities discriminately based on gender (Chirwa, 2008; Shehnaz and Kumar, 2019; Tiwari and Goel, 2017) and the level of education (Mayombe, 2018; McCormick, 1997). A number of such studies showed that some significant difference exists along the two lines and that location, access to credits, and age-related rigidity challenges differ between female-owned and male-owned businesses, and between businesses operated by individuals with basic education and those operated by individuals with less than basic education.

For a highly populated country such as Nigeria, the study of MSBs in small cities is even more important, especially as it relates to youth empowerment, employment generation, and poverty reduction. Particularly in Ebonyi State, there is no visible presence of large-scale business enterprises. The existing ones are either defunct or in a dire state of collapse at the moment. The implication is that apart from the State Civil Service, few federal establishments and commercial banks which constitute the main sources of formal employment, every other economic agent operates within the micro- and small-scale business sectors as evidenced in a study by Pugalis et al. (2014). Thus, the importance of studies on the drivers of growth in the SMB sector cannot be over-emphasized, especially as it can produce local evidence to guide small city promoters and planners in developing countries.

Methodology

The study area and sample size

Ebonyi State, which has Abakaliki as its capital city, was created from the old Enugu and Abia States on October 1, 1996, under the then-military regime of General Sani Abacha. The State is located in the Southeastern part of Nigeria and has geographical borders with Benue, Kogi, Enugu, Cross-River, and Abia States. It has a land area of about 5935 km² and a population of about 2.5 million according to the recent release of the National Bureau of Statistics. The State is composed of 13 local government areas, with three designated urban and semi-urban cities—namely Abakaliki, Afikpo, and Onueke, located respectively in the three senatorial zones of the state.

Although Ebonyi State and its constituent local governments rely on the monthly revenue allocation from the Federal Government as the major source of their revenues, the economy is largely agriculture-driven. The key agricultural produce where the State has a competitive edge are rice, yam, cassava, and maize. Abakaliki Rice Mill is renowned for its historic antecedents. The State is also richly blessed with mineral resources, and the fact that these resources are mostly unexploited for export purposes makes it a potential target for investors. Notwithstanding, the business space is dominated by micro-scale enterprises. The 2010 National MSMEs Collaborative Survey in Nigeria revealed that there were about 288 SMEs and 416,508 micro-businesses, across 13 different economic sectors in the State as of 2010.

To determine the sample size of the study, we selected three major cities in Ebonyi State based on the population and volume of business activities. We applied a judgmental sampling technique, which allowed us to restrict our sample to 1200 chosen from among the largely homogenous clusters of MSBs in the three selected cities.

Data collection instruments

The questionnaire was divided into three sections. The first section was designed to obtain information relating to the characteristics of the owners of businesses, with respect to age, education, and gender. The second section focused on issues relating to the internal structural characteristics of the business organizations, including age, sustainability, location, kind of business, legal status, size, number of employees, access to finance, and business growth. The third section was to assess the effect on business growth of each set of internal structural characteristics, market structure, socioeconomic and political factors, and macroeconomic factors. A Likert scale (with a range of scores 1–5) was used in rating alternative responses to each of the questions in the instrument.

Variable operationalization and estimation techniques

For the purpose of this empirical analysis and consistent with the objectives of this study, the key dependent variable is business growth (measured in terms of the respondents’ ratings of growth in capital). The hypothetical drivers of growth, which served as independent variables, are classified into four categories—internal attributes, market attributes, socioeconomic factors, and macroeconomic factors. Data on these variables were collected from cities that ideally meet the standard criteria for small cities.

Using the generated survey data, this study adopted the linearized Tobit regression model to assess the relative impact of each component on business growth. The baseline model estimated using the Tobit regression technique is as follows:

{BG}_{i} = α_{0} + β_{i} X_{i} + μ_{i}

where BG stands for a measure of MSB growth; X is a vector of selected business attributes (such as business form, age of business, frequency of change in the business line, business location, business type, number of employees, and use of bank credits); α is the constant; and μ_i is the error term. β_i is the respective coefficients of the attributes estimated.

Results and discussion

The results of our analysis are presented in two subsections. The first deals with the descriptive analysis of the MSB owners’ attributes and the second is the empirical analysis of the impact of selected internal business attributes on growth.

Descriptive results

The descriptive results revealed the uniqueness of the core attributes of MSB enterprises operating in a typical small state and small cities in Nigeria. It gives an indication of some degree of gender equality in the ownership and operations of MSBs in small urban cities. For instance, the difference in the number of male-owned and female-owned businesses in the studied areas was found to be less than 10%. As evident in Table 1, 54.8% of the surveyed businesses were male-owned, whereas 45.2% were female-owned. Another interesting descriptive outcome was the inclusiveness of the business environment in small cities, regardless of the educational attainment of the residents. Among the respondents, 53.1% of the businesses were owned and managed by individuals with secondary education qualifications and below; and 46.9% were owned and managed by individuals with less than senior secondary education. Up to 77% of the businesses were owned by individuals aged 45 years and below. This suggests that MSBs are fertile grounds for youth employment in small states and cities, which agrees with the earlier results from Mueller (2006) and Fritsch (2008).

Table 1.

Business owner’s attributes.

	Scale	Proportion (%)	Std. err.	95% CI
Owner’s gender
Female	0	45.2	0.015	[0.423, 0.480]
Male	1	54.8	0.015	[0.520, 0.577]
Owner’s age
56 years and above	1	9.5	0.009	[0.078, 0.112]
Between 46 years and 55 years	2	13.5	0.010	[0.115, 0.155]
Between 36 years and 45 years	3	30.1	0.013	[0.275, 0.328]
Between 26 years and 35 years	4	24.5	0.013	[0.220, 0.270]
Between 18 years and 25 years	5	22.4	0.012	[0.200, 0.248]
Owner’s educational level
Completed university/higher diploma education	1	26.0	0.013	[0.234, 0.285]
Completed ordinary diploma/NCE program	2	20.8	0.012	[0.185, 0.232]
Completed secondary/technical/vocational education	3	34.8	0.014	[0.321, 0.376]
Completed primary education	4	10.2	0.009	[0.085, 0.120]
Never went to school	5	8.1	0.008	[0.065, 0.097]

On the nature and structure of such businesses, Table 2 shows that the majority of the businesses surveyed were relatively young in terms of the number of years since establishment. Up to 68.3% of them had been in existence for 3–5 years and below, which confirms the high growth potential of small businesses in small cities. With reference to the asset size, the majority (66.1%) considered their businesses to be at least of moderate scale. 62.9% were sole proprietorship, 16.4% were partnership, 12.9% were cooperative enterprises, with only about 7% as limited liability companies. The majority of the participating businesses were also found to be operating only in a single city, with more than 90% operating in just a single city. The dominance of sole proprietorships (most of which are unregistered) and the fact that they mostly operate in a single city, confirm the generally held view that the majority of businesses in small cities are small and informal (Knox et al., 2019).

Table 2.

Basic attributes of micro and small businesses.

	Response	Scale	Proportion (%)	Std. err.	95% CI
	Less than 1 year	1	11.7	0.009	[0.099, 0.135]
	Between 1 year and 3 years	2	26.7	0.013	[0.242, 0.293]
Age of business	Between 3 years and 5 years	3	29.9	0.013	[0.273, 0.325]
	Between 5 years and 10 years	4	18.0	0.011	[0.158, 0.202]
	More than 10 years	5	13.7	0.010	[0.117, 0.156]
	Very large	1	10.2	0.009	[0.084, 0.119]
	Large	2	23.7	0.012	[0.212, 0.261]
Size (by asset base)	Medium	3	44.9	0.015	[0.421, 0.478]
	Small	4	18.3	0.011	[0.161, 0.205]
	Very small	5	3.0	0.005	[0.020, 0.040]
	Very large	1	10.3	0.009	[0.086, 0.121]
	Large	2	22.4	0.012	[0.200, 0.248]
Size (by capital)	Medium	3	44.5	0.015	[0.416, 0.473]
	Small	4	18.9	0.011	[0.166, 0.211]
	Very small	5	3.9	0.006	[0.028, 0.050]
	Sole proprietorship	1	62.9	0.014	[0.601, 0.656]
	Partnership	2	16.4	0.011	[0.143, 0.185]
Business form	Cooperative society	3	13.1	0.010	[0.111, 0.150]
	Limited liability company	4	5.6	0.007	[0.043, 0.070]
	Others	5	2.0	0.004	[0.012, 0.029]
	Abakaliki Metropolis	1	41.2	0.014	[0.384, 0.441]
	Afikpo	2	35.4	0.014	[0.327, 0.382]
Business location	Onueke	3	14.8	0.010	[0.127, 0.168]
	Two of the above locations	4	6.7	0.007	[0.052, 0.081]
	All of the above locations	5	1.9	0.004	[0.011, 0.027]
	Retail trading	1	51.2	0.015	[0.483, 0.540]
	Distribution/supplies	2	29.1	0.013	[0.265, 0.317
Business type	Commercial services	3	5.0	0.006	[0.037, 0.062]
	Artisans	4	9.6	0.009	[0.080, 0.113]
	Production/construction	5	5.1	0.006	[0.039, 0.064]
	More than 10 persons	1	6.4	0.007	[0.050, 0.078]
	6–10 persons	2	12.3	0.010	[0.104, 0.142]
No. of employees	3–5 persons	3	29.6	0.013	[0.270, 0.323]
	1–2 persons	4	31.6	0.014	[0.289, 0.343]
	None	5	20.1	0.012	[0.178, 0.224]
Frequency of change in business line	Not yet	1	35.8	0.014	[0.331, 0.385]
	Once	2	29.3	0.013	[0.267, 0.318]
	2 times	3	21.2	0.012	[0.189, 0.235]
	3 time	4	8.6	0.008	[0.071, 0.102]
	More than 3 times	5	5.1	0.006	[0.039, 0.064]
	Very frequently	1	3.2	0.005	[0.022, 0.043]
	Frequently	2	12.5	0.010	[0.106, 0.144]
Use of bank loans	Not frequently	3	21.5	0.012	[0.192, 0.239]
	Rarely	4	15.7	0.011	[0.136, 0.178]
	Not at all	5	47.1	0.015	[0.442, 0.499]

The results are based on proportion estimation, and the total number of observations is 1171.

In terms of the nature of businesses, 51.2% were retail businesses, 29.1% were distribution and supplies, 5% were transportation businesses, 9.6% were artisans, and only 5.1% were production and construction businesses. The majority of the businesses also reported having a maximum of 5 employees, which is a true reflection of the nature of micro- and small-scale sole proprietorships. Arguably, due to their relatively young period of existence, the majority of the businesses (65.1%) had changed their lines of operations at most once; 21.2% had changed twice, and about 13.7% changed three or more times. On the use of bank loans, the results revealed that about 47.1% did not make use of bank credits, and up to 15.7% rarely used such facilities. This result reveals the immense challenges that MSBs face in trying to access formal credits in small cities.

The second descriptive approach adopted in this study comparatively looked at the influence of internal, market, socioeconomic, and macroeconomic attributes on growth. The results reported in Table 3 are summarized as follows. First, of the four sets of attributes, internal characteristics were found to have the strongest influence on business growth, which is consistent with the theoretical and empirical stances of the literature review included in this paper. Based on a 5-point scaling system, the average response rate for the internal attributes was 3.72—suggesting that the majority of the participants saw these factors as having a somewhat favorable influence on growth. Firm age, size, decision-making process, profitability, and business forms were the most heavily weighted internal attributes that contributed favorably to growth. Market attributes had an average value of 3.53 on a 5-point Likert scale, ranking second only to internal attributes in terms of weighted relevance. This also placed market characteristics among the key factors moderately contributing to positive business growth. Three major components found to be amplifying the growth-driving force of market characteristics in this regard were business location, customer relations, and customer type and class. On the other hand, both sets of socioeconomic and macroeconomic attributes score below 3.5 on a 5-point scale, suggesting that they are not comparatively as significant as the internal firm attributes and market forces.

Table 3.

Factors influencing the growth and survival of s businesses.

Variable	Observations	Mean	Std. deviation.	Min	Max
Age effect	1187	4.09	1.073	1	5
Size effect	1178	3.97	1.060	1	5
Decision-making effect	1169	3.88	1.043	1	5
Industry of operation	1168	3.65	1.074	1	5
Financial structure	1162	3.53	1.114	1	5
Exposure to business risks	1170	3.41	1.178	1	5
Business profitability	1173	3.70	1.134	1	5
Type of ownership	1178	3.68	1.122	1	5
Form of business	1171	3.69	1.086	1	5
Registration status	1170	3.43	1.116	1	5
Engagement of apprentice	1168	3.62	1.120	1	5
Proper bookkeeping	1161	3.79	1.187	1	5
Average internal attributes	1195	3.72	0.651	1	5
Business location	1168	3.88	1.146	1	5
Market share	1168	3.55	1.095	1	5
Type and class of customers	1166	3.61	1.158	1	5
Access to inputs/stocks	1170	3.49	1.151	1	5
Rate of turnover/sales	1174	3.52	1.144	1	5
Level of competition	1173	3.37	1.250	1	5
Supply policy	1169	3.38	1.174	1	5
Relationship with customers	1187	3.68	1.202	1	5
Access to trade credits	1187	3.21	1.286	1	5
Market attributes	1198	3.53	0.730	1	5
Family background	1176	3.37	1.289	1	5
Size of family	1169	3.23	1.186	1	5
Number of dependants	1167	3.16	1.137	1	5
Government supports	1173	3.22	1.111	1	5
Religious affiliation	1163	3.32	1.089	1	5
Socioeconomic and political attributes	1193	3.26	0.825	1	5
Inflation	1172	3.39	1.292	1	5
Price structure	1165	3.32	1.220	1	5
Interest rates	1170	3.19	1.155	1	5
Government regulation	1185	3.07	1.212	1	5
Government control	1176	3.07	1.197	1	5
Degree of competition	1174	3.11	1.263	1	5
Access to formal financial markets	1172	3.16	1.138	1	5
Costs of telephone and transportation	1174	3.32	1.340	1	5
Macroeconomic attributes	1193	3.23	0.837	1	5

The rating scale includes: Strong positive influence = 5; moderate positive influence = 4; neutral influence = 3; moderate negative influence = 2; and strong negative influence = 1.

Empirical results

The next estimation approach was to subject the effects of the internal attributes to empirical checks, based on the Tobit regression procedure. The results, which are reported in Table 4, supported the hypothesis that business form, change in business line, asset size, and number of employees all had positive and significant impacts on MSB growth in small cities. On the other hand, our result shows that the business location and business type did not have a significant impact on the growth of MSB in small cities. The impacts of business form and size were positive—implying that growth manifests naturally as a business transitions from sole-proprietorship to limited liability status, and as the business commits more to its assets and capital. The observation that the business age negatively impacts growth, as evident from this study, suggests that business growth deteriorates as a business gets older in small cities. This result is consistent with the structural rigidity hypothesis tested by Coad et al. (2018) and Ezeoha and Botha (2012); and the rate of discontinuance thesis by Bates and Nucci (1989). The use of bank loans was also found to have a negative impact on growth, which is consistent with empirical findings suggesting that the burden of collateral demand often results in business bankruptcy and liquidation cases.

Table 4.

Impacts of internal attributes of micro and small businesses.

	Overall sample	Male-owned	Female-owned	Primary education	Above primary education
Business form	0.107 (0.035)***	0.082 (0.048)*	0.136 (0.050)***	0.118 (0.048)***	0.085 (0.051)*
Age of business	−0.081 (0.031)***	−0.086 (0.040)**	−0.080 (0.051)	−0.074 (0.043)*	−0.096 (0.046)**
Change in line of business	0.097 (0.033)***	0.110 (0.047))**	0.083 (0.047)*	0.053 (0.045)	0.151 (0.049)***
Business location	−0.025 (0.034)	−0.033 (0.045)	−0.002 (0.050)	0.021 (0.046)	−0.067 (0.050)
Business type	−0.001 (0.028)	−0.004 (0.038)	0.004 (0.043)	−0.002 (0.041)	0.008 (0.039)
Asset base	0.626 (0.045)***	0.668 (0.060)***	0.564 (0.068)***	0.520 (0.065)***	0.731 (0.062)***
Number of employees	0.198 (0.037)***	0.165 (0.051)***	0.237 (0.055)***	0.174 (0.054)***	0.241 (0.053)***
Use of bank credits	−0.094 (0.031)***	−0.078 (0.043)*	−0.108 (0.045)***	−0.077 (0.042)*	−0.117 (0.045)***
Constant	0.333 (0.212)	0.335 (0.303)	0.339 (0.297)	0.669 (0.282)**	−0.012 (0.326)
F-statistic	41.80***	25.36***	17.76***	16.01***	28.95***
NOBs	1170	1176	1196	1196	1190

Standard errors are given in the parentheses.

p ⩽ 0.00, **p ⩽ 0.05, ***p ⩽ 0.01.

To test the sensitivity of the preceding results, we again compared the estimations across two sets of attributes. First by gender, business form had a greater impact on female-owned businesses than on male-owned enterprises, consistent with the evidence from Kalnins and Williams (2014) on why “female-owned businesses often tend to out-survive male-owned businesses in numerous industries and areas.” Similarly, firms owned and controlled by people with higher education qualifications experienced a greater beneficial impact. This is expected considering that education has been found to be important for the successful management of more complex business forms (such as partnership and limited liability companies) (Ali, 2018; Jones et al., 2018; Lourenço et al., 2013). Individuals with higher education qualifications are also more likely to formalize their businesses at some stages and maintain accurate accounting records than those with lower education qualifications. By age of business, the observed negative impact was more for male-owned than it was for female-owned businesses. This interestingly indicates that male-owned businesses are more likely to suffer age-related rigidity problems than their female counterparts. Age was equally observed as a greater constraint to the growth of businesses owned and managed by individuals with primary education and below.

The positive impact of change in the business line (i.e. moving from one trade to another) and the role of asset base are found to be higher for male-owned than for female-owned businesses. It was equally more important for businesses owned and managed by individuals with less than secondary education qualifications. On the other hand, the positive impact of a number of employees on growth was more for male-owned than for female-owned businesses. The impact was also greater for businesses owned by individuals with less educational qualifications. Finally, the constraints imposed by exposure to bank loans were felt more by female-owned businesses, as well as businesses operated by individuals with above primary educational qualifications.

Conclusion and policy implications

Small cities by their nature show characteristics that make them repressive to growth and development. Yet, there is a paucity of empirical studies on drivers of growth in MSBs in small cities, particularly in under-developed states, which makes it difficult for the government to design appropriate policy tools capable of efficiently dealing with and supporting local businesses. To close this gap, our study employed a Linearized Tobit regression model. This was based on data collected from 1200 micro and small businesses in three small urban cities in one of the smallest federating states in Nigeria. The resulting findings show that sole proprietorship businesses, which are typically small and unregistered, dominate the small city business landscape. Among the four sets of theoretically relevant attributes examined in the study, internal firm characteristics (such as firm age, size, decision-making process, profitability, and business forms) were rated to have the strongest influence on business growth. Market characteristics (such as business location, customer relations, and customer type and class) ranked second most important attributes (which agrees with the earlier evidence from Owoo et al. (2019) and Ghosh and Guha (2015)), whereas socioeconomic and macroeconomic factors were ranked to be comparatively of less important growth drivers in small cities. The empirical results showed that the business form, the change in business line, the asset size, and the number of employees all had positive and significant impacts on MSB growth in small cities. The use of bank loans was also found to have a negative impact on growth, a result that is consistent with empirical evidence positing the burden of collateral demand on the business bankruptcy and liquidation cases. Most of the studied attributes were found to be gender- and education-sensitive. For instance, business form and use of bank credits had a greater impact on female-owned than male-owned businesses; whereas the impacts of business age, the change in business line, and employment of a higher number of employees were greater on male-owned businesses.

The following are the effects of the aforementioned findings on small business growth promotion in small cities. First, the fact that growth is observed to be a natural transition from sole-proprietorship to the limited liability status and a company investing more in its assets and capital (particularly in the case of female-owned businesses) suggests that intentional measures be taken to streamline the formalization of business in small cities. The structural rigidity hypothesis proven in earlier studies is confirmed by the observed inverse link between business growth and business ages in small cities (especially for enterprises controlled by men). This highlights the necessity for a sustainability support framework to minimize the rigidity concerns. The constraining impact of bank loans, which mostly affect female-owned businesses, calls for special intervention on bank loan conditionality and collateral requirements against MSBs in small cities. The conclusion that education is crucial for company formalization supports Mayombe’s (2018) emphasis on Adult Education and Training (AET) in the case of South Africa and consequently highlights the necessity for the development of special adult education schemes aimed at MSB owners. The aim of such schemes will be to equip the business owners to effectively handle increasingly complex business structures such as partnerships, cooperatives, and limited liability companies. This study clearly shows that education is crucial for making critical business decisions such as shifting a company’s focus, increasing the asset base, hiring more staff, and addressing age-related business rigidity challenges.

Footnotes

Acknowledgements

We thank Sunday Emeka and his group for excellent research assistance; and our co-faculty members for finding out time to go through the earlier drafts of the manuscript. We are also grateful to the Honourable Commission for Business Development and his ministerial staff for facilitating the stakeholders’ workshop held on the 31st of January 2020, where the research findings were presented and richly discussed. The usual disclaimer applies.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research was funded under the Nigerian government’s Tertiary Education Trust Fund Institution-Based Grant (No. EBSU/TETFund/IBR/2018/010). We are grateful to the agency for the magnanimous sponsorship.

ORCID iD

Kelechi Anyigor

Notes

Author biographies

Abel E. Ezeoha is a professor of finance and presently the Deputy Vice Chancellor (Administration) at Alex Ekwueme Federal University Ndufu-Alike. He was an Andrew Mellow and a Hobart Houghton Research Fellow in Economics and Economic History at Rhodes University, South Africa, and a visiting fellow of the Africa Studies Centre, Leiden University, The Netherlands. His research interests include economic reforms, capital flows, governance and institutions.

Lius C. Nkwagu is a senior lecturer in Accounting at Ebonyi State University Abakaliki. He is also the State Chairman of the Association of National Accountants of Nigeria (ANAN) and senior facilitator and assessor at the Nigerian College of Accountancy (NCA). His areas of research interest include environmental and sustainability accounting, public sector accounting, and accounting standards.

Udu U. Ama is a professor of Management and Entrepreneurship at the National Open University of Nigeria (NOUN) and Ebonyi State University Abakaliki. He is the State Director of NOUN. His research interest covers entrepreneurship development, apprenticeship and microbusiness development.

Ebere Okorie is a lecturer in the Department of Business Management, Ebonyi State University Abakaliki. She is a professional business manager specializing in business development, customer relations, sales, networking and client management. Her areas of research interest include organizational politics, workplace conflict management and general management.

Chioma Iteshi is a senior lecturer in the Faculty of Law, Ebonyi State University Abakaliki. She is a barrister at law, solicitor and member of the Nigerian Bar Association. She is also the University’s Director of the Law Clinics. Her research interest covers commercial and industrial law, as well as consumer protection.

Kelechi Anyigor is an assistant professor in Project Management in the Department of Architecture and Built Environment, Northumbria University, Newcastle upon Tyne, UK. Before taking up an academic post, Kelechi was Head of the Research and Training Department of a UK-based charity with operations in Asia and Africa. His research interests include the interplay of deprived urban communities’ social, economic and environmental aspects to deliver sustainable improvement projects. He is also interested in project leadership and knowledge management for effective project delivery.

Okereke J. Ugwu is a Senior Lecturer in the Department of Banking and Finance, Ebonyi State University Abakaliki. He is equally a Visiting Lecturer at the College of Management Sciences, Evangel University, Akaeze. He has PhD in Banking and Finance with a flair in Management. His research interest centres on banking, public finance, capital flows and investment management.

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