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Unformatted text preview: International Journal of Research Studies in Management 2015 April, Volume 4 Number 1, 59-71 Small and medium scale business performance in Nigeria: Challenges faced from an intellectual capital perspective Eniola, Anthony Abiodun Department of Business Management, University of Malaysia, Sarawak (UNIMAS), Malaysia ([email protected]) ISSN: 2243-7770 Online ISSN: 2243-7789 Entebang, Harry Department of Business Management, University of Malaysia, Sarawak (UNIMAS), Malaysia OPEN ACCESS Sakariyau, Olalekan Busra Department of Business Management, University of Malaysia, Sarawak (UNIMAS), Malaysia Received: 30 October 2014 Available Online: 11 January 2015 Revised: 29 December 2014 DOI: 10.5861/ijrsm.2015.964 Accepted: 4 June 2015 Abstract The contribution of small and medium enterprises in a knowledge-based economic system is very salient for the economic growth and development of a developing nation like Nigeria. The competitiveness of the SMEs in a knowledge-based economy is the main purpose of this study. One of the most important component sources of sustainable competitive advantage in intellectual capital is the application of human capital. The paper will reviews the challenges that are confronting the small and medium enterprises (SMEs) performance in Nigeria from this position. The paper will increase the savoir faire about the present concern relating to Small and medium enterprises in Nigeria and human capital value creation. Keywords: SMEs; knowledge - based economy; performance; intellectual capital; human capital © The Author(s) / Attribution-NonCommercial-NoDerivs CC BY-NC-ND Eniola, A. A., Entebang, H., & Sakariyau, O. B. Small and medium scale business performance in Nigeria: Challenges faced from an intellectual capital perspective 1. Introduction With the advance of the innovative era in the globalized and knowledge-based economy, to improve the performance development and competitiveness, small and medium enterprises (SMEs) desideratum is to acquire, monitor and manage intellectual capital (IC). According to resource-based theory Penrose (1959); Andrews (1971) as cited in Marr, Schiuma, and Neely (2004) organizations perform well and create value when they implement strategies that respond to market opportunities by exploiting their internal resources and capabilities. Therefore, intellectual capital (IC) is a key resource and the driver to improve business performance (J. Roos, N. Roos, Dragonetti, & Edvinsson, 1997; Marr et al., 2004). The concept is Intellectual capital promotes competitive advantages that are the base of value generation (Edvinsson & Malone, 1997; Bontis, 2001). Also, Intellectual Capital, of which human capital is believed to be a principal component, potent as the most significant etymology of maintaining competitive advantage (Nonaka & Takeuchi, 1995; Edvinsson & Malone, 1997; Sveiby, 1997; Seleim, Ashour & Bontis, 2004; Cabrita & Bontis, 2008). Human Capital refers to the right combination of intelligence, skills and expertise owned by an organization’s employees. Essentially, this encapsulates: Intellectual capital – the knowledge individuals possess; Social capital - derived from both internal and external relationships between employees; and Organizational capital - the knowledge stored in organizational manuals and databases. Organization valuable asset are determined from the knowledge the workers attract to the establishment (Camuffo & Comacchio, 2005). Scholars surmise that SME performance is the lifeblood of the economic scheme by contributing to the economic growth of the country. Small and medium-sized businesses (SMEs) play a vital role in the economic growth of countries (Altenburg & Eckhardt 2006; Lumpkin & Dess, 1996; Wiklund & Shepherd, 2005). Consequently, the performance of the SME sector is closely associated with the performance of the nation. Referable to the important contribution of SMEs to the growth of the nation's resources; the Nigerian government introduced a different strategy support policy program that presents a great deal of importance in raising the performance growth of SMEs. For improving the SMEs, schemes like industrial development center (IDC) are offered by the government with one of the primary targets of providing training to entrepreneurs and their staff, including management training to heighten SMEs performance and competitiveness. According to Odekunle (2001), investment in human capital has significant end on the impact of entrepreneurial ventures and technological innovation. According to the resource based view, competitiveness is defined by the productivity with which a nation utilizes its human capital and natural resources. Macroeconomic viewpoints acknowledge human capital as the driver of national economic activity, competitiveness and prosperity (OECD, 1996). Hudson (1993) on an individual level, human capital is ensured as a portmanteau word of four elements: genetic inheritances, education, experience and attitudes about life and business (Edvinsson & Malone, 1997; Sveiby, 1997; Seleim, Ashour, & Bontis, 2004). Scholars posited that the blend knowledge of workers in an establishment produces a competitive advantage for the firm (Barney, 2001; Barney et al., 2001; Marr & Spender, 2004; Schiuma et al., 2007; Kang & Snell, 2009; Kong & Thomson, 2009). According to Kong and Thomson (2009) the collective cognition of an organization is of extremely salient in today’s knowledge based economic system. Intellectual capital (IC) makes up the collective knowledge implanted in the human resources, firm procedures and network connection of an establishment. Being the main element of intellectual capital in achieving and maintaining competitive advantages; human capital has been admitted as fundamental resources that require development of an organization (Edvinsson & Malone, 1997; Seleim, Ashour, & Bontis, 2004; Chen, 2008; Kong & Prior, 2008). According to Drucker (1993) and Bornemann et al., (1999) argue that knowledge which supplant land, labor and 60 Consortia Academia Publishing Small and medium scale business performance in Nigeria capital is the only significant resources for business operation. Nigeria today has the biggest economy in Africa. According to the national planning commission of Nigeria, the country is in progress of achieving vision 20:2020 of improving the pace of economic development by transforming from industry based to knowledge based economy and be among the twenty leading economies of the world come year 2020 (Ebiringa & Okorafor, 2010) the contribution performance of the SMEs is considered as the backbone (Ariyo, 2008). SMEs provide over 90% of employment opportunities available in the manufacturing sector and account for about 70 % of aggregate employment created per annum (Eniola & Ektebang, 2014). Yet, against international best practices Nigeria is rated poorly due to the core component dearth of intellectual capital in the public figure of human capital (innovation, operation and customer capital) of the SMEs owners (Nielson et al., 2006). The paper therefore, reviews the challenges that are confronting the small and medium enterprises (SMEs) performance in Nigeria from this position. 2. SMEs in Nigeria A proper definition of SMEs is important to distinguish between the different categories of the production units in terms of factors like; number of employees, the value of fixed assets, production capacity, basic characteristics of the inputs, level of technology used, capital employed, management characteristics, etc. Scholars have argued that there is no general accepted definition of small or medium businesses because of the classification of businesses into large, medium or small scale is a subjective and qualitative judgment (Eniola, 2014). It is hard to develop a general definition of a small concern because the economies of countries differ, and people take on particular standards for special uses. Different institutions and nations use different standards to define SMES. Because, a lot of their bodily processes depend on the industry in which they operate, also, the personalities and ambitions of those in charge of these businesses. In Nigeria, the CBN puts the employment level of the small scale businesses at less than 50 and medium scale businesses as less than 100. In terms of asset-based, small scale has less than N 1 million, while medium scale has less than N150 million (IFC, 2002). Classification in USA, Britain and Canada defined SMEs in terms of annual turnover and the number of paid employees whereas it is conceptualized in Japan as an industry paid up capital and the number of employees. The Federal Ministry of Industries defines a medium-scale enterprise as any company with operating assets less than N200 million and employing less than 300 persons. A small-scale enterprise, on the other hand, is one that has total assets of less than N50 million, with less than 100 employees. Annual turnover will not be given consideration in the definition of an SME. The National Economic Reconstruction Fund (NERFUND) defines an SSE as one whose total assets are less than N10 million, but makes no reference either to its annual turnover or the number of employees. These and other definitions of the National Association of Small Scale Industries (NASSI), the National Association of Small and Medium Enterprises (NASME), the Central Bank of Nigeria (CBN). The Small and Medium Industry Equity Investment Scheme (SMIEIS), defined an SME as any enterprise with a maximum asset base of N500 million, excluding land and working capital and with the number of employees not less than 10 or more than 300. This definition did not distinct between small and medium scale enterprises (Sanusi, 2003). Table 1 Classification Adopted by SMEDAN for National Policy on MSMEs S/N 1 2 3 Size category Micro enterprises Small enterprises Medium enterprises Employment Less than 10 10-49 50-199 ASSETS (N million) (excluding land and buildings) Less than 5 5 – less than 50 50- less than 500 Source. SMEDAN, 2007 International Journal of Research Studies in Management 61 Eniola, A. A., Entebang, H., & Sakariyau, O. B. 3. Human Capital and SME performance Bruderl et al. (1992) were the first researchers to fit human capital theory in the entrepreneurial context by arguing that although the general application of human capital is on employees, there is no reason why it should not apply to entrepreneurs as well. Accordingly, entrepreneurs with higher general and specific human capital can be expected to show higher levels of performance than those with lower levels of general and specific human capital. This is termed as entrepreneurial human capital. According to Hessels and Terjesen (2008), entrepreneurial human capital is the combination of an individual’s knowledge, skills and experiences linked to entrepreneurial activity. Entrepreneurial human capital is substantial and consequential to entrepreneurial growth. Ganotakis (2012) applied the resource based theory (RBT) to develop the value of human capital to entrepreneurship. Accordingly, human capital is examined to be an important source of competitive advantage for entrepreneurial organizations. Human capital is one of the important dominant forms in the field of intellectual capital. Royal and O'Donnell (2008) said that human resource capital is a really important ingredient of value creation. It is the dimension of intellectual capital which deals with the human knowledge and its experience. It is the employees who offer businesses with experience and expertise, educational qualifications and occupational competencies. Employee knowledge and capabilities are the significant roots of innovation (Wang & Chang, 2005). It is appropriate to infer that human capital closely influences innovation capital. Bontis (1998) emphasizing the organizational view, allude to human capital as the important root of innovation and strategic transformation. A scholar in the field of modern management, Kanter, has focused on the pressing need for innovation. Previous surveys demonstrate that intellectual capital is connected with an organization's innovative success (Subramaniam, & Youndt, 2005; Wu, Chang, & Chen, 2008; Zerenler, Hasiloglu, & Sezgin, (2008). Kanter (1989) develops a model centers on large corporations retaining the flexibility and dynamism of their entrepreneurial youth. Employees are needed to carry out the internal process of a firm. People hand over customer service and create brand connections, as well as build customer lists and desirable products. People are likewise the source of intellectual property while being the mainsprings of corporate culture and knowledge networks. By providing quality service while implementing internal processes, the capability of employees would affect process efficiency and customer satisfaction (Wang, & Chang, 2005). According to human capital theory, people are viewed as valuable resources, and emphasizes that investment by firms in human will produce meaningful returns. The concept views workers as key resource managers used to achieve competitive advantage for their companies (Fombrun et al., 1984). Stewart (1997) focused on the relationship between customers and employee capabilities. He pointed out that employees should have suitable knowledge or skills to serve client demands. According to Bontis (1998); Wang and Chang (2005) human capital affect business performance through innovation capital, process capital and customer capital. Bontis (1998) customer capital is determined as the knowledge embedded in the marketing channels and client relationships. Customer capital mainly based on marketing capability, customer commitment, and relationship with customer and customer satisfactions (Amiri et al., 2010). Process capital is the value to an enterprise which is deduced from the techniques, processes, and programs that implement and enhance the legal transfer of goods and services. It can be created and enhanced by through business process management (Brocke & Rosemann, 2010). Structural Capital is everything in an organization that supports employees (Human Capital) in their work. According to Skandia’s model, the hidden factor of human and structural capital is an assortment of intellectual capital with added together. Sharifirad and Ataei, (2012) put forward that creativity and innovation are important to encourage invention and this situation is driven by the culture of the system. It implies that organizational culture is the essence of innovation. It would be the one in which entrepreneurs are motivated and positive enough to continually test new things out. On the other hand human capital is explained as the blend of 62 Consortia Academia Publishing Small and medium scale business performance in Nigeria innovation capital, process capital and customer capital. Human capital is the ability of company’s individual employees to take on the task at hand (Bhatt, Gupta, & Kitchens, 2005). Royal and O’Donnell (2008) determines the clamp of human capital in the community between the capital and knowledge management, reflecting the human capital is the backbone of intellectual capital. Chen, Cheng & Hwang (2005) found that intellectual capital and physical capital have a positive impact on market returns, in addition to current and future financial performance. This was corroborated by Tan, Plowman & Hancock, (2007) in their study using the publicity trade companies in Singapore. El-Bannany (2008) suggests that the investment in intellectual capital variables has a substantial impact on firm performance. Figure 1, shows the links between the human capital components and SME firm performance. Innovation Human Process Performance Customer Figure 1. Human capital components and SME firm performance Source. Wang and Chang (2005) 4. SMEs Performance Contribution in Nigeria Marr and Schiuma (2001) posit that Intellectual capital is the group of knowledge assets that are attributed to an organization and most significantly contribute to an improved competitive position of this organization by adding value to defined key stakeholders.” Nowadays, the intellectual capital and knowledge management are both importance by the organizations. The differentiation between knowledge management and intellectual capital – knowledge management is a process surround within a company and intellectual capital covers whole operations of all organizations. Nigeria, has the leading economy in Africa is in progress of transforming from industry based on the knowledge based economy and be among the twenty leading economies of the world come year 2020, the contribution performance of the SMEs is considered as the spinal column. Nigeria SMEs is extremely important and contribute significantly to the economic growth, particularly, the manufacturing sectors. SMEs comprise about 70% to 90% of the business establishment in the manufacturing sector in Nigeria (Eniola & Ektebang, 2014). Moreover, the potential of SMEs is to serve as an engine for wealth creation, employment generation, entrepreneurial skills development, and sustainable economic development. SMEs is the creativity and ingenuity of entrepreneurs in the utilization of the abundant non- oil, natural resources of this nation will provide a sustainable platform or springboard for industrial development and economic growth as is the case in the industrialized and economically developed societies (Eniola & Ektebang, 2014). SME provides over 90% of employment opportunities available in the manufacturing sector and account for about 70 % of aggregate employment created per annum (Ebiringa, 2011; Eniola & Ektebang, 2014). The 2014 Global Competitiveness Index (GCI) published placed Nigeria in 127th position, a further downfall of seven places to 120th position in 2013. This result pointed out that institution in Nigeria remained weak with a ranking of 129th position out of 144 countries, due to insufficiently protect intellectual property. Other factors that led to the country’s drop in the GCI are high corruption, undue influence, security, infrastructure as well as non-betterment in its health and primary education. Though, the country boast of substantial financial market ranked 67th out of 144 nations, following its gradual recovery from the 2009 International Journal of Research Studies in Management 63 Eniola, A. A., Entebang, H., & Sakariyau, O. B. financial crisis. Nevertheless, the country ranked 137th position as poor availability and affordability of finance in general and the difficulties in getting loans in particular still remain an important bottleneck to economic development. Furthermore, the state is not tackling the latest technologies for productivity enhancements, as proven by its low rates of ICT penetration. These affirm the fact that the Nigerian SMEs firm has not fully enhanced his intellectual capital (human capital). As a result, the firm would fold-up due to their inability to manage and nurture their intellectual resources (Antal et al., 1994). Brennan and Connell (2000) stated that SME is more than the proprietorship or the founder; it is about the people who make things going and make a profit for the organization. The most important in human capital is about what people can do, individually and collectively. According to Abernathy et al. (2003) as cited in Salman et al. (2012) estimate that investment in intellectual capital yields twice returns as compared to the same amount of investment in physical assets. The top ranked10 Asian companies between the periods of 1995 to 2001 were those companies that create value to their shareholders through intellectual capital (Salamudin et al., 2010). Specifically, these companies' investments are focus...
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