Chapter 5: Entrepreneurship and managerial capacity in Nigerian firms.

Productivity improvements--the key element to continued competitiveness--is a function not just of capital and labor, but also of that additional factor of production known as entrepreneurship. To what extent does entrepreneurship provide for productivity improvements in the face of a poor investment climate? And more specifically, to what extent does this happen in Nigeria? Earlier efforts to assess this relationship (1) have used latitudinal data across countries and have isolated nontraditional export firms as the proxy for strong entrepreneurship. These studies suggest that productivity gains--achieved as a result of entrepreneurial innovation (2)--depend on the policy environment. More specifically, in weak or strong policy environments small policy changes can have a significant impact on entrepreneurialism. However, in environments in which the investment climate is neither very weak nor very strong, small policy adjustments evoke a feeble entrepreneurial response. Productivity improvements require more structural, institutional reforms. (3) What is the current relationship between the key variables of investment climate, productivity, and entrepreneurship in Nigeria? How can this line of enquiry be strengthened?

Defining Entrepreneurship

Part of the challenge in investigating these questions is arriving at a sufficiently measurable definition of entrepreneurship. Taking nontraditional export firms as the proxy for good entrepreneurship reflects the fact that these firms tend to be the larger, more profitable, and more technologically advanced. But entrepreneurship is not limited to the tradable sector, let alone the nontraditional segment of this sector. An alternative measure is therefore required to provide a more broadly representative picture of entrepreneurship.

More recent entrepreneurship research (4) was based on a questionnaire comprising 18 questions covering four key areas of entrepreneurship management, namely, operations, monitoring, targets, and incentives. The operations dimension attempts to isolate management effort to streamline and introduce efficiencies into production processes. The monitoring questions focus on the tracking and reviewing of process and individual worker performance and management responsiveness. The targets dimension entails an assessment of the type, realism, and transparency of the targets used by the enterprise. The incentives dimension provides a measure of management approach to bonuses, to promotion, and to dealing with good and poor performers. In summary, the questions provide a set of criteria by which to distinguish between good and bad entrepreneurial management. These questions reflect an approach in line with much of the theory about entrepreneurship as an integrator/coordinator by which resources are deployed and managed to exploit market opportunities through performance-based methodologies and practices. The results, albeit for European and U.S. markets, indicated that "better management practices are significantly associated with higher productivity, profitability, Tobin's Q, sales growth rates and firm survival rates." (5) In addition, higher levels of competition are associated positively with better management practices.

Developing the Management Questionnaire for Nigeria

In adapting this model to the sample base available from the Nigeria survey, some 10 questions covering the four areas--operations, monitoring, targets, and incentives--were posed to 408 manufacturing firms drawn from the overall sample frame. The subsample comprises 135 food, 98 garment, and 175 other businesses. The questions posed are summarized in table 5.1.

The questions are open ended, and the responses need to be ranked in accordance with criteria that can serve to distinguish between superior and inferior management practices. The following five-level categorization of entrepreneurship is applied with a score of "1" representing poor practice. A score of "3" constitutes some good practice. A score of "5" represents best practice. This scoring approach is henceforth referred to as the entrepreneurial management practice index (EMPI).

Management Practices across Firms

It is illustrative to look first at the frequency distributions of the Nigeria sample. This distribution for Nigeria is set out in figure 5.1.

The first characteristic to notice in figure 5.1 is that the distribution of Nigerian firms is skewed toward the mid to bottom part of the spectrum. There are no firms that score above 4, the "best practice" rating. Second, Nigerian firms show a bipolar distribution: either they are poorly run or they have an average score. Firms are positioned predominately at the end of the range--that runs at about 1.5 to 2--or are slightly above the rating of 3, with the largest number of observations at about 3.5.

There is no significant difference in the EMPI scores by size of firms. Although large firms score marginally higher than small firms, the difference is minimal and hence insignificant. Similarly, the sector breakdown does not suggest significant differences in management practices. However, firms in export-processing zones (whatever the sector) show a higher rating than firms not in the export zones. Similarly firms in the "economic" capital of the country, Lagos, show a higher level of entrepreneurship management practice than firms in the rest of the country.

[FIGURE 5.1 OMITTED]

When looking at the level of entrepreneurial ability by location (figure 5.2), we see that only two states perform above average in our EMPI--Lagos and Ogun--with scores well above 3. The other states present a similar score between 2.12 and 2.55.

Apart from size, sector, and location, there are other factors that could influence management performance of firms such as age of the establishment and the experience and education of the firm owner/manager. These determinants were tested by running a multivariate regression and controlling for different firm characteristics (sector, size, location). In the case of age, firms were categorized as new (less than 5 years), young (between 6 and 13 years) and old (more than 13 years). The sample of firms was divided into "good" and "poor" managed firms. (6) Not surprisingly, age does not appear to be a significant determinant of good managerial practice. Old or new firms show the same level of managerial capacity. More experienced managers do tend to run their companies better. However this positive impact on the EMPI score diminishes as the experience level reaches approximately 20 years. The impact on the EMPI was also assessed against the education levels of the owner/manager using the following three-tiered set of education categories: (i) little education (less than secondary completed or no education), (ii) some education (secondary completed and some university), and (iii) high education (graduate or postgraduate qualification completed). The results were highly significant. Firms with owners having completed a secondary degree are 12 percent more likely to be better managed compared with those with little or no education. Similarly, firms whose managers have a university education are 40 percent more likely to be better managed relative to those with low education.

[FIGURE 5.2 OMITTED]

The relationship between staff training and management practices was also investigated. Do firms that are better managed also provide more training to their staffs? And does staff training improve the way firms are managed? To address the first question, a dummy variable for training was regressed on the EMPI. It indicated that better managed firms are approximately 30 percent more likely to provide training to their staffs. This result is strongly significant even when controlled for a number of firm characteristics. However, the second question was addressed with a focus on the monitoring subcomponent of the EMPI. Because monitoring depends on a great deal of staff participation, it was hypothesized that staff training would improve the ability of staff to better monitor the production process and hence to improve the managerial practice of the establishment. The data tend to confirm the hypothesis. Firms that offer training are approximately 20 percent more likely to have better "monitoring." This correlation is strongly significant. But when we controlled for export status, the correlation becomes insignificant. Although an order of causality cannot be established, it is still observed that better managed firms provide more training and a better trained staff is more responsive to management efforts to introduce effective monitoring practices, especially for export firms.

Finally there is the impact of technology absorption and managerial practice to consider. Are better managed firms also more prone to adopt new technology? The data do indicate that the better managed firms are more likely to adopt foreign technology. More specifically, better managed firms are 30 percent more likely to adopt foreign technology. This result is strongly significant. However this is driven mainly by the export orientation of the firm. If a control is applied for export status, then the correlation becomes insignificant. Once again, an order of causality cannot be established.

Management Practices and Investment Climate Constraints

Table 5.2 provides a summary of how good versus poor "management practice" firms rank investment climate constraints. We can see that even when using this classification the top three constraints identified more generally by firms in Nigeria--power, finance, and transport--are also identified as major problems to both groups of good and poor managed firms. The only notable exceptions where the ranking of obstacles are significantly different are land and taxes, where low-performing firms complain more than better managed firms. On the contrary crime is the only constraint where better managed firms complain more than poor performers. This confirms what already mentioned in the Business Environment chapter. Crime appears to be a significant constraint to Nigerian firms, especially better managed firms, even more than corruption. This perception is confirmed by objective data on cost of crime. Better managed firms in Nigeria lost double the amount of sales due to theft, robbery, and arson (3.8 percent) compared to 1.8 percent for poorly managed firms.

Implications for Productivity, Firm Performance, and Investment Climate

To what extent do our EMPI measures of better management practice have a similar strong association with firm performance? Correlations of average EMPI against value added per worker generated significant results indicating that better managed firms were able to improve productivity performance (figure 5.3).

More specifically "good management performers" are some 60 percent to 80 percent more productive than "poor performers." This is confirmed both by using value added per worker as well as TFP as measure of firm performance. Moreover where management performance was significant, state dummies were not, suggesting that in the majority of states management practices are a more significant determinant of productivity than location. The exception to these results occurred in Lagos and Ogun, where the location dummy remains marginally significant at the 10 percent level. Interpreting this will require some additional analysis, but prima facie, it suggests that these two states have some other economic benefits with a positive impact on productivity performance that is absent in the other states.

[FIGURE 5.3 OMITTED]

To what extent does managerial ability compensate for a bad business climate in Nigeria? Are firms better managed able to increase their productivity even in a poor business environment? This question was investigated by interacting the good/poor managerial practice dummy with a dummy for high- and low-productivity states--constructed using the level of value added per worker. As presented in figure 5.4 our data show that, in states with low productivity, firms better managed are approximately 80 percent more productive compared with firms that are poorly managed. Similarly in states with already high productivity, the better management of firms is able to add an additional 30 percent to 40 percent more productivity.

What do these conclusions imply? The analysis suggests that the more entrepreneurial firms have a greater capacity to exploit opportunities that impact productivity performance whether or not investment climate is relatively favorable. At the same time, improving both the investment climate and the managerial ability of firms will ensure the highest impact on enhancing productivity.

[FIGURE 5.4 OMITTED]

Notes

(1.) M. Iyigun and D. Rodrik; "On Efficacy of Reforms: Policy Tinkering, Institutional Change and Entrepreneurship," March 2004.

(2.) What the authors refer to as "cost discovery."

(3.) J. Schumpeter, "Capitalism, Socialism and Democracy," 3rd ed., 1950.

(4.) By Bloom and Van Reenan from the London School of Economics and Political Science (LSE).

(5.) N. Bloom and J. Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries," Centre for Economic Performance (CEP) Discussion Paper #716, March 2006.

(6.) Firms with EMPI above the mean score of 2.49 are grouped as the "better performers" and those firms with score below this average are consider "poor performers."

Table 5.1 Building the Entrepreneurial Management Practice
Index (EMPI)

Category                             Question

Operations   1. How do you improve your manufacturing process?
Monitoring   2. How do you track performance?
             3. How do you review your performance indicators?
             4. What happens if there is a part of your firm that
             is not achieving the agreed results?
Targets      5. What kind of time scale are you looking at with
             your targets?
             6. How tough are your targets?
Incentives   7. How does your bonus system work?
             8. If you had a worker who could not do his or her job,
             what would you do?
             9. How do workers get promoted?
             10. If you had a star performer in your staff who
             wanted to leave, what would you do?

Table 5.2 Share of Firms Ranking a Constraint as One
of the Top Three by Managerial Performance Level

                                  Managerial Performance Level (%)

Constraint                             High             Low

Electricity                             93               91
Transportation                          40               45
Access to Finance                       45               44
Access to Land                          21               32
Tax Rates                               16               24
Finance Cost                            20               14
Informal Sector                         11                9
Crime, theft and disorder               18                9
Political Instability                    5                7
Tax Administration                       8                7
License                                  6                5
Corruption                               7                4
Inadequately educated workforce          3                4
Labor Regulations                        3                3
Customs and Trade Regulations            4                0
Courts                                   0                0