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EXPORT STRATEGIES AND PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN LAGOS STATE, NIGERIA
ABSTRACT
Export strategies are tools through which companies can respond to the mutual effects of the internal and external factors for obtaining their export goals. Despite the accumulated efforts of academic, specialist’s, researchers and public policy instruments in the Nigerian economies, progressively geared to actively internationalize the SMEs’ and compete in foreign markets, international market penetration remains a major challenge for most SMEs’ in Nigeria and the expected effects of export strategies on small and medium sized firms performance remain unanswered. Consequently, this study examined the influence of export strategies on the performance of small and medium sized manufacturing firms in Lagos state, Nigeria.
A survey research design was adopted for the study. The population of study comprised 514 middle level managers of small and medium sized firms in Lagos state, that are registered in the export group of Manufacturers Association of Nigeria. The Cochran formula was used to arrive at a sample size of 316. A structured questionnaire was used to generate data. The questionnaire which was partly developed and partly adapted was validated with Cronbach’s Alpha reliability co-efficient for major constructs of the variables yielding between 0.815 and 0.941 respectively. A response rate of 77% was obtained. The data were analysed using descriptive, correlation and regression analysis.
Findings revealed that there was a significant positive effect of export strategies on SMEs’ sales performance = 0.899, p = 0.000). Export strategies had a significant positive effect on SMEs’ growth performance. ( = 0.873, p = 0.000). Export strategies had a positive and strong significant effect on SMEs’ customer performance ( = 0.891, p = 0.000) and export strategies was significantly and positively related to SMEs’ performance in Lagos state. (r = 0.712 p = 0.000). Also, there is strong positive significant moderating effect of export experience and educational level of managers on the relationship between export strategies and SMEs’ performance. ( = 0.863, p = 0.000 < 0.05)
It was concluded that export strategies influences SMEs’ performance in Lagos state, Nigeria. The study therefore recommended that small and medium sized firms in the manufacturing industry of Lagos state, should adopts export strategies such as direct exportation , joint ventures, strategic alliance and licencing when approaching the international market for business expansion.
Keywords: Export Strategies, Small and Medium Scale Enterprises, Manufacturing Firms . .
Sales Performance, Growth Performance, Customer Performance, .
Direct Exportation, Strategic Alliance, Licensing, Joint Ventures
Word Count: 491
CHAPTER ONE
INTRODUCTION
- Background to the Study
International trade and sales activities in the world has gradually expanded the market boundaries within which a firm operates irrespective of its scale or target market. Exporting business activities is progressively seen as a prospect for corporate growth, expansion and improved profitability among small and medium scaled firms in various industries (Amira, 2006). Whorapot (2009) assert that exporting has traditionally been the most common approach of international market access, chosen exclusively by small and medium-sized firms. It tends to be associated with less risk, minimal financial, human, and other resource commitments; exporting is a feasible means of global engrossment for the small and medium scale enterprises (Levi, Martin & Justus, 2010).
Internationalization procedure of many small and medium sized (SMEs) firms in Nigeria is still in the primitive stages, with exporting being the prominent mode of their foreign market involvement ( John & Nicholas, 2007). Over the years, the participation of small & medium scale enterprises in the international market has extensively been under scrutiny. This powerful inspection has been against the backdrop of stumpy performance and competitiveness in exportation that characterised small and medium scale enterprises predominantly in evaluating its role in international business and foreign market participation. The export market has become more of a matter of endurance than choice for many small and medium sized firms (Odularu, 2010). Firms that seek to participate in the international markets employ specific strategies to attract international buyers of their goods. The competitive strategies adopted by firms comprise of productivity strategy, export strategy, follower strategy and differentiation strategy (Odularu, 2010). Export strategy is the most adopted foreign market penetration strategy by small and medium sized firms (Levi, Martin & Justus, 2010).
Export strategy is a tool through which companies can respond to the mutual effects of the internal and external factors for obtaining their export goals. It requires low resources, low exposure to business risks, and high strategic flexibility. Small and medium sized Firms within a certain industry adopt different export strategies and the strategies adopted influence the firm’s growth and performance (Amira, 2006). Smile & Danile (2014) assert that adopting the right export strategy is presumed to be a success factor for the SMEs’ in the International markets.
Davide & Erdal (2012) affirmed that the business managers are responsible for making decisions that form the essential features of their firms’ exporting strategy development and implementation in terms of strategy selection, market segmentation, period of exporting, export market selection, degree of export dependence, designing and execution of export strategies in order to overcome a perceived impediment to exporting and attempt to maximise export objective function. Smile & Danile (2014) had earlier affirmed that international experience and entrepreneur orientation of owner/manager of business plays a key role in their firms’ export strategies development and firms’ export performance. Their managerial judgment consequently determines the performance of firms in the international market.
Export strategies in Nigeria remain unclear for the SMEs’ and their international business performance remains less than satisfactory in light of the potential such firms hold (John & Nicholas, 2007). Over the years, the Nigerian government have devised and implemented a number of export strategies and polices to foster SMEs’ export involvement, competitiveness, corporate growth and performance level in the international market. In 1976, The Nigerian Export Promotion Council (NEPC) was vested with a major role for export development and promotion strategy. In 1991, The Nigerian Export-Import Bank (NEXIM) was established under the Structural Adjustment Program as an Export Credit Agency to promote export Trade (Isaac, 2012). Despite the public policy instruments in the Nigerian economies, progressively geared to actively internationalize the SMEs’ and compete in foreign markets, international market penetration remains a major challenge for most SMEs’ in Nigeria. There is a high percentage of SMEs’ in Nigeria that remains small without realizing their growth potentials or appropriate strategies for international market penetration (Isaac, 2012).
- Statement of the Problem
The strategies adopted by most SMEs’ and their managerial judgement in the formation of their export business activities has remained ineffective without yielding the expected multiplying effects on the performance of SMEs’ in the international market. Most SMEs’ do not seek for or acquire adequate information and knowledge about foreign markets and how to manage foreign activities while formulating their exporting strategies (Mwebaze & Hisali, 2013). This has really hampered the export involvement, competitiveness, performance level and corporate growth of the SMEs’. The exportation portion of these companies against their production is low with overall poor export performance (Tongesai & Shylet, 2013).
SMEs’ are characterized with repeated inabilities to effectively respond to the frequent changes in consumer preferences and innovation development due to their smallness nature. Hence, some SMEs’ pursue an agreement with other firms as a strategy to complement their weaknesses in terms of sharing resources to earn a competitive advantage and achieve common objectives (Amira, 2006). Often, the cooperative agreement between the firms is also associated with uncertainty regarding a partner future behavior and the absence of superior authority to ascertain compliance, poor stability with overall poor performance which later results into collapse of the formed partnership (Rosemary, 2007).
Huawei (2013) observed that the cooperative agreement and partnerships are associated with high failure rates because they neither achieved the parent companies goals or the common objective behind the motive of cooperation. There is a high rate of termination of cooperative agreements which later results into the destruction of shareholder value. Identifying the appropriate export strategies for international market entry remains a big obstacle for most small and medium sized firms in Nigeria. Most SMEs’ do not seek to participate in the international market for business expansion, while the potential exporters are discouraged as a result of non-availability of export business information and strategies for targeted countries (Mwebaze & Hisali, 2013).
Craig (2010) noted that being able to identify the successful or unsuccessful strategies for international market participation has remained major challenge for most SMEs’. Although, firms in the same industry tends to adopt similar export strategies especially the one adopted by the leading firms. However, the performance and international market success of firms within the same industry tends to be unequal, as some firms are more successful than others in the export business despite the adoption of similar strategies. Davide & Erdal (2012) opines that the factors which influence firm’s internationalisation differ between companies and industries with specific hindrances and opportunities that require unique export strategies. Potential exporters lack the knowledge of applying the appropriate export strategies for a particular market, industries and business model when approaching the international market.
Albert and Yuan (2006) contributes that the internationalization process is elongated and most SMEs do shorten or skip the necessary stages of this processes which later result into serious problems after some time. Often times, most small and medium sized firms neither inquires about the dynamism of the host market business environment, product specification requirement nor possesses the required skills and experience to identify business opportunities, risk and strategy formulation before approaching the international market. Their products are rejected in the host market after much commitment of resources due to their inability to meet the required standard and specifications by the leading customers in the host market (Jolanda & Siri, 2007). Tongesai & Shylet (2013) assert that small and medium sized firms are typically resource constrained, lacks the international market power, knowledge and resources to operate feasibly in the international markets. They lack the financial resources to pursue a market development strategy that requires direct foreign investment in the host countries. Often, their exportation strategies option to compete in the global competitive landscape remains unclear and ineffective.
The competitive pressure in the manufacturing industries and frequent changes in the taste of leading customers to demands for high standard products in the host market has necessitated the frequent creation of new products. Hence, the small firms are weak in terms of insufficient infrastructural facilities, technology and financial resources to meet up to the demand and compete with large firms. This has resulted to the poor performance of small and medium sized firms in the international market (Candace & Thomas, 2012).
Jennifer (2010) opines that although small firms’ mostly from developing nation often times directly interface with host market potential customers, but their products are often rejected and sent back to the home country as a result of not meeting the client product specification and standards in addition to the fact that small firms have no representatives who can coordinate their export activities in the host market. Trust is another major concern for most clients in the host market and most of the leading potential customers are very skeptical in doing business directly with small firms from developing nations (Isaac, 2012).
1.3 Objective of the Study
The main objective of this study is to determine the relationship between export strategies and performance of small and medium scale enterprises in Lagos State, Nigeria.
The specific objectives are to:
- determine the effects of export strategies on SMEs’ sales performance;
- examine the effects of export strategies on SMEs’ growth performance;
- evaluate the effects of export strategies on SMEs’ customer performance;
- assess the relationship between export strategies and SMEs’ performance and
- determine the combined moderating effect of export experience and educational level of managers on the relationship between export strategies and SMEs’ performance.
- Research Questions
The study answered the following questions:
- What is the effect of export strategies on SMEs’ Sales performance
- How does export strategies affect SMEs’ Growth performance
- What is the effect of export strategies on SMEs’ Customer performance
- What is the relationship between export strategies and SMEs’ performance
- How the effect of export experience and educational level of managers does moderates the relationship between export strategies and SMEs’ performance.
- Hypotheses
: There is no significant effect of export strategies on SMEs’ sales performance
: There is no significant effect of export strategies on SMEs’ growth performance
: There is no significant effect of export strategies on SMEs’ customer performance
There is no significant relationship between export strategies and SMEs’ performance
There is no significant combined moderating effect of export experience and
educational level of managers on the relationship between export strategies and SMEs’
performance.
1.6 Scope of Study
The scope of the study examined the effect of export strategies on performance of small & medium scale enterprises. The population for this study were the middle managers in small and medium sized manufacturing firms in Lagos state, that are registered in the export group directory of Manufacturers Association of Nigeria. The justification of Lagos state is that, Lagos state represent major economic centre of the nation and over sixty percent of manufacturing firms in Nigeria are located in Lagos (MAN, 2016).
The sample frame for the study was limited to the middle managers of small and medium sized manufacturers registered in the export group directory of Manufacturers Association of Nigeria (MAN) in five selected local governments in Lagos state. The collected data were analysed using frequency distribution and percentages to analyse the respondents’ demographic characteristics and descriptive analysis such as mean and standard deviations to answer the research questions, while inferential statistical tool such as correlation analysis and regression analysis to determine the effects between dependent and independent variables.
- Significance of the Study
The significance of this study examined the exact transmission mechanism through which export strategies have significant impact on performance of small and medium scale enterprises. Most literature rather focuses on the impact of export marketing strategy (product, price, place and promotion strategy) on the macroeconomic indicators such as foreign exchange, balance of payment, GDP, without looking at the strategies that impact the performance of SMEs’ in the international market.
Existing literature see’s lack of finance, low entrepreneurship skills & orientation, government policies among other problems as the major problems affecting the performance of small and medium scale enterprises in the international market; whereas there is a superficial relationship between the export strategies and the performance of small and medium scale enterprise. This study elaborates more than earlier works to properly examine the relationship between export strategies and the performance of SMEs in Lagos state, Nigeria. Furthermore, the study established the relationship between export strategies and SMEs’ performance. The result would facilitate to build better knowledge for international business managers to discover export strategies that would achieve international business objectives and enhance optimal firm’s performance. It will also benefits owners of SMEs’, marketing & sales managers, business development executives and manufacturing companies to have access to comprehensive information on various export strategies that can enhance firms performance in the international market and achieve export objectives.
- Operationalization of Variables
The Operationalization of the research variables are presented below:
- Independent Variable
X = Export Strategies
Dependent Variable
Y = Small and Medium Scale Enterprises Performance.
- Moderator Variables
Z = , )
= DE: Direct Exportation
= SA: Strategic Alliance
= LI: License
= JV: Joint Venture
= Sales Performance
= Growth Performance
= Customer Performance
= EPE: Export Experience of Managers
= ELM: Educational Level of Manager
Regression Models
Y= f (X)
Y = f (DE, SA, LI, JV)
= + + + ……………………………..i
= + + + …………………………….ii
= + + + ……………………………iii
Y= + + + ………………………………..iv
Y= + …………………………………………….v
- Operational Definition of Terms
Export Strategy: These are processes and policies adopted by a firm to strategically positioned itself to explore and maximise international business opportunities, minimization of risk towards the achievement of the organizational goal and international market success.
Direct Exportation: This is a strategy adopted in which the firm directly undertake a full export activities to the host countries. Direct export entry approaches are preferred whenever a comparatively high capacity of exports is predictable; hence an advanced level of asset is required.
Strategic Alliance: This is a strategic relationship in form of simple licensing contracts amongst two associates, market (access)-based alliances, operations and logistics alliances, operations (shared production)-based alliances. Strategic alliance is made to pursue a common goal by both parties to pursue a common goal such as building a market position.
Licensing: This type of export strategy is based on a contractual relationship between the licensor and the licensee. Licencing is a form of international market penetration mode which tends to involve an agreement between the licensor and the licensee. It tends to be associated with low resource requirement and firms commitments Licencing is a substantial foreign market entry mode for a low risk international business relationships between the home and host countries firms.
Joint Venture: This is a supportive relationship between two or more firms. Joint ventures is a possession distribution system of business partnership which can involve parities from the within the domestic countries or from the host countries. It can also involve the government as a trading partner to form a joint venture for business participation in the international market.
Small & Medium Scale Enterprises: Ekpenyong (1992) classify SMEs’ as it varies between countries. In countries Such as: USA, Britain, and Canada; small and medium scale business is defined on the premise of yearly revenue and the total of salaried staffs. In Britain small scale business is well-defined with yearly income of £2.8 million or less and below 200 salaried staffs. The medium scale enterprise is defined with revenue of not more than £11.2 million; and not more than 250 staffs. In Nigeria, there is no clear-cut definition for small scale enterprises. The current national definition of SMES in Nigeria as advocated at the National Council on Industry (NCI) in 1996 and as quoted by the Central Bank of Nigeria (CBN) in 1997 is to classify small scale enterprises as those with entire cost with working capital inclusive but excluding cost of land above N1.0 million, but not more than N 40.0 million with number of employees between 11 and 35 workers. Medium Scale Enterprises are well-defined as those with total cost, comprising capital but excluding cost of land above N40.0 million but not exceeding N150.0 million with a labour size of between 36 and100 workers (Olowofeso, 2010; Ayozie, 2011). But for the purpose of this study, small scale enterprises are defined as those industries with total project cost (investment and working capital) not exceeding 100 million naira ( N100, 000,000) and not more than 100 employees and medium scale enterprise, not exceeding two hundred million naira (N 200,000,000) and not more than 200 employees.