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Towards a framework for the development of effective subcontracting and the network relations among small, medium and large industries in Nigeria.


Accelerated economic growth, sustainable development and effective integration of the small and medium enterprises are essential requirements for increasing industrial output. The small and medium enterprises (SMEs) industrial sub-sector which could have functioned as an anchor for rapid industrial development has experienced considerable problems due to less attention given to it when compared to large businesses. In particular, the small and medium enterprises are neither well developed nor are their operations modernized to perform their traditional roles of creating job opportunities for the mass of the people and mobilizing local resources that otherwise will not be drawn into the development process by large businesses. They also are not equipped to stimulate and foster effective horizontal links between themselves and vertical linkages with larger manufacturing and service industries for increased market access, enhanced investment flows, skills development and technological advancements.

Further, the large businesses suffered a loss of their erstwhile dynamism due to the economic crisis triggered by the oil glut in the early 1980s, as well as the devaluation of national currency, poor infrastructural facilities and high interest rates usually above 25% per annum. Therefore, the local cost of doing business in Nigeria is high, resulting in unattractive margins and thereby discouraging investment, particularly in the manufacturing sector. It is therefore not surprising that many operators in the manufacturing sector have folded up. The impact has been severe on the Small and Medium Scale Industries/Enterprises (SMEs). Equally severe have been the impacts on employment, Gross Domestic Product and, by extension, the standard of living of the people. Not only has the unemployment situation worsened: new jobs were not created, while "labour-sharing" became a fallback survival strategy by companies. Hence, it becomes expedient for the government to develop strategies and assistance programmes to help SMEs to develop their own capabilities and bases for responding to the challenges of the business environment by encouraging industrial linkages and networking among SMEs and between SMEs and large businesses. Then, the question is: why do small and medium enterprises need linkages with large businesses and networking among themselves?

Williamson (1991) argues that economic functions can be performed either within the boundaries of hierarchical firms (within the organization) or by market processes that cross these hierarchical boundaries: either hierarchies or markets. For small firms, the economic functions and transactions within the boundaries of hierarchical firms are either impossible or extremely difficult because small firms, being small and alone, are inherently lacking in resources, causing higher production costs. Market mechanism is also not a better solution because perfect competition is far from reality especially in developing countries. It causes higher transaction costs. Hence, it is clear that small firms find it difficult to perform their economic activities either at the level of hierarchical firm (or bureaucracy) or market. Given this, small firms in developing countries need support to compete and survive in their businesses. Networking is one of the best solutions given in the literature for the development of small firms in LDCs because networking lies between the hierarchy (or bureaucracy) and the market (Borg, 1991; Jarillo, 1988; Thorelli, 1986).

In this regard, linkage of businesses (i.e. SMEs) among themselves as well as with large businesses addresses the problems of SMEs and enhances efficiency and competitiveness in the business sector in general. There are many different types of linkages within a country: horizontal and vertical linkages, which in turn can be in the form of subcontracting, ancillary relations and networking. This paper considers modalities and mechanisms through which SMEs could forge horizontal links and vertical linkages with larger manufacturing and service industries for increased market access, enhanced investment flows, skills development and technological advancements.

Based on this, it recommends an institutional but spatial framework to promote these linkages on a national scale. The review of literature starts with the definition of small and medium enterprises (as it relates to the Nigerian business environment), which is important to an appreciation of enabling frameworks for SME development. This is followed by discussion of some of relevant theories that are useful in the study of subcontracting, ancillary relations and networking. Next is the analysis of various modalities of enterprise linkages (applicable to Africa) that will be helpful in the development and recommendation of appropriate frameworks for the SME-larger business industrial linkages and small and medium enterprises networks (SEN). Also, the review of some relevant empirical evidence of successful linkages in industries across the world (Asia, Europe, America and other parts of Africa) will be undertaken with emphasis on the role of government in supporting these linkages through the provision of requisite institutional, regulatory and policy arrangements. The ensuing section examines the past effort at promoting industrial linkages and small enterprise networks in Nigeria. The paper concludes by presenting a novel framework for promoting industrial linkages and small enterprise networks in Nigeria and outlines the activities of the organizations within the framework, including the multilateral institutions.

Theoretical Background and Literature Review

There is no one general framework for promoting small and medium enterprise networks and linkages with larger businesses. Most of the previous studies have been guided by diverse theoretical perspectives, such as: transaction cost (Coase, 1937; Williamson, 1981, 1985, 1991), resource dependence (Pfeffer and Salanick, 1978), relational exchange (Dwyer et al., 1987; Heide, 1995), institutional (Scott, 1992; Zucker, 1988), agency (Bergh, 1995; Fama, 1980; Jensen and William, 1976), social network approach (Birley, 1985, 1990; Birley and Cromie, 1988; Granovetter, 1976, 1985; Johannisson, 1988, 1993; Ostgaard and Birley, 1996; Uzzi, 1996, 1997, 1999), international business and marketing (Beije and Groenewegen, 1992; Hakansson, 1987; Hakansson and Johanson, 1992; Johanson and Mattsson, 1987; Moller and Wilson, 1995), and regional and industrial development (Axelssion and Easton, 1992; Piore and Sabel, 1984; Pyke et al., 1992). (1)

However, only the most relevant theoretical approaches to the study, such as transaction cost approach (TCA), resource dependence approach (RDA), social network approach (SNA), and the Swedish network model (SNM). These theories look at networking from different perspectives and provide insight into the causes as well as the structure of small enterprise networking. For example, the TCA analyzes firm networking from an economic point of view, while the management point of view is the basis of the RDA. The SNA explains networking from a sociological point of view and the SNM is developed on the basis of marketing. In this section, the study highlights the theoretical understanding of these four approaches to networking. Our major objective in discussing these approaches is to draw attention to a wide range of possible theories as well as to identify potential syntheses among them. The transaction cost approach (TCA) provides a rationale for enterprise linkages and networking and alliances rather than analyzing the direction of linkages and networking. According to Williamson (1985), a transaction means a transfer of a good or a service between technologically separable interfaces. Thus, the transaction cost simply means all costs involved in a transfer of goods and services from one unit to another. Transactions are, therefore, characterized by high asset specificity and small-numbers bargaining. In such a situation, firms attempt to overcome transaction costs by vertical integration or other alternatives to the market (Williamson, 1991). In other words, the market is transformed into a hierarchy. One of the purposes of integrating is to minimize transaction costs. Accordingly, particularly small firms have to co-operate with other organizations.

The TCA has been extensively criticized on different grounds (for example, Best, 1990; Groenewegen, 1995; Jarillo, 1990; Johanson and Mattsson, 1987; Nooteboom, 1993; Ring and Van de Ven, 1989, 1994). Here, our concern is not to evaluate or to criticize this theory in line with those different grounds or perspectives. Instead, to look into its relevance to enterprise linkages and networking is our purpose. The focal point of the TCA is transactional events rather than transactional or any other relationships (Ring and Van de Ven, 1994). In relation to vertical linkages (subcontracting) and small enterprise networks, one practical problem we encounter is, although the TCAprovides a better basis for analyzing organization integration, formal integration of small firms among themselves is not a general phenomenon in less-developed countries (LDCs). What is commonly found in LDCs are informal relations with other supporting organizations and other firms, because small firms in developing countries are generally seeking for support rather than looking for avenues to reduce their transaction costs.

Therefore, the major contribution of transaction cost theory is that it provides a rationale for firm networking and alliances. However, it does not help in hypothesis testing, particularly to analyze the directions of enterprise linkages and networking. Thus it is more of a guiding metaphor than a tested set of propositions. Notwithstanding, the basic idea of the TCA provides an economic rationale for our discussion on enterprises linkages and networking.

The resource dependency approach (RDA) is an organizational ecology perspective that looks into the behaviour of an organization in relation to its external environment. According to the RDA, successful performance of a firm depends on resources and supporting networks. The resources and supports are, particularly for small firms, controlled by outside actors of the firms. Thus, firms are linked to their environments by federations, associations, customer-supplier relationships, competitive relationships, and a social-legal apparatus that define and control the nature and limits of these relationships as well (Butler and Sohod, 1995; Pfeffer and Salanick, 1978).

To survive, any organization requires some sort of transactions with its external environment. The exchanges may involve information, monetary or physical resources because enterprises are not self-contained or self-sufficient. According to RDA, linkages provide three primary benefits to organizations in managing their activities related to environmental interdependence. Firstly, a linkage to another organization provides information about the activities of that organization which may impinge on or affect the focal organization. Secondly, a linkage provides a channel for communicating information to the organization on which the focal organization depends. Finally, a linkage provides an important base to ensure a commitment of support from the parties in the network. Hence, these linkages help to reduce uncertainty of a firm.

As Pfeffer and Salancik (1978) noted:
 Linkages help stabilize the organization's exchange with its
 environment and reduce uncertainty. Through negotiation and the
 arrangement of agreements with others, uncertainty is reduced
 directly.... Part of the interaction between individuals serves the
 purpose of maintaining the relationships and exchanging information
 about each other and their activities.... The more of the other,
 such that there are overlaps in friendship networks and other
 business acquaintances, the more binding their relationship becomes
 and the more stable and predictable it is likely to be. (145-46)

Thus, according to the RDA, linkages and networking with external organisations are an important means of stabilizing the environment and ensuring favourable resource exchanges.

The logic of the social network approach (SNA) on studying entrepreneurship and small business starts at the point where two people establish a relation or transaction. Individuals in any society are involved in a number of social relationships with others. These social relationships are crucially important to the entrepreneurial process because the information needed to start a business is passed to the entrepreneur basically through the existing social networks of friends (Aldrich and Zimmer, 1986; Birley, 1985; Butler and Hansen, 1991) and family members (Amin, 1989; Ozcan, 1995), particularly in LDCs. Studies have shown that the impact of social networks is highly significant for individuals to become entrepreneurs. According to Brown and Butler (1993) and Butler and Hansen (1991), the entrepreneur's social network is like an opportunity set. However, they emphasize that once a firm is already established, inter-organizational linkages become necessary for the firm to perform its economic activities. The nature of the relationship ranges from between arm's length to an embedded one (Baker, 1990; Uzzi, 1996, 1997, 1999). The latter is of more importance because it shapes economic actions, creates opportunities to identify new business ideas, new products, and new markets (Baker, 1990; Gulati, 1995, 1999; Gulati and Gargiulo, 1999). It also encourages entrepreneurs to take risks and innovate, as well as enhances business success by overcoming the underlying conditions of uncertainty and distrust that often disturb market exchanges (Granovetter, 1985).

To study entrepreneurship and small business firms, SNA applies the network concept in four different manners. They are: (1) the effect of social forces that increase the density of networks, (2) the role of brokers and other persons or organizations that increase the accessibility of networks, (3) the importance of linkage diversity to the question of which positions in networks are most likely to produce entrepreneurs, and (4) the importance of the social resources embedded in entrepreneurs' networks. However, these are based on the premises that (i) the entrepreneurial process involves the gathering of scarce resources (finance, and other material resource like information, ideas, advice, and customers, among others) and (ii) resources are usually obtained through the entrepreneur's personal network. In this aspect, a social network provides the entrepreneur with information, support, contact, and credibility.

Therefore, the SNA is necessary to the analysis of business networking due to the fact that economic actions are infused and mixed with social context and these embedded business relations are focal issues in social network analysis (Granovetter, 1985; Johannisson, 1990; Uzzi, 1997). The SNA reveals how actors such as entrepreneurs use their social relations to obtain necessary resources in carrying out economic activities. The question is how these major elements, such as actors (i.e. entrepreneurs), resources, activities and linkages, interact with each other in networks. By extension, this is explained by the Swedish network model (SNM).

The SNM is premised on the assumption that the individual firm is dependent on the resources controlled by other firms: thus actors develop and maintain networks due to lack of resources for them (Johanson and Mattsson, 1987). The four basic elements in SNM are (1) actors, (2) activities, (3) resources, and (4) linkages (Beije and Groenewegen, 1992; Hakansson, 1987; Hakansson and Johanson, 1984a, 1988, 1992; Hakansson and Snehota, 1995). The actors can be individuals, organizations, and government agencies (Moller and Willson, 1995). Each actor has its own resources, its specific activities, and knowledge about their activities, resources and other actors in the network. Within the network, there are three subnetworks, namely network of actors, network of activities, and network of resources. They are intimately related to each other and are interwoven in the total network.

According to the model, actors have resources and knowledge of resources, perform activities and have knowledge of activities, and the activities link resources to each other. Actors are defined as those who control resources and perform activities. However, they have independent goals, objectives and strategies even when they are linked to each other in the network. Actors are free to enter and leave at any time. The relationships among the actors of the networks can be explained in different ways based on activities and resources of each other. According to Hakansson and Johanson (1992), an activity occurs when one or several actors combine, develop, exchange and create resources by utilizing other resources. The activities of an actor are always dependent on the outcome of activities of other actors (Awuah, 1997) because in the process of performing activities, actors create exchange relationships among them. Beije and Groenewegen (1992) identify two main kinds of activities; transformation activities and transfer activities. To perform these activities requires resources. Resources could be physical, human and financial assets.

The basic idea of this approach is that the firms (actors) in the network consist of informal contacts between actors, creating close interpersonal relations. In this approach, it is not only the actors and their relations that are important, but also the activities and resources are included in the analysis. The interpersonal relations provide various kinds of benefits for actors in networks. In this regard, the argument is whether there is a significant relationship between the network involvement and performance of actors in networks.

Therefore, the central theme of the SNM is the provision for actors to influence one another directly or indirectly. Actors develop and maintain networks due to lack of resources for them. The contributions of the model to the understanding of small-firm networks are: (1) it provides a useful guideline for researchers in the field of small-firm networks to identify the basic elements in networks and (2) it shows us how small firms can overcome their resource limitations and develop themselves through entrepreneurial networks.

Empirical Evidence on Subcontracting and Network Models on Productivity

The intention is not to review all empirical studies in the field of firm networking in general or networks in small business in particular, but to discuss some selected empirical studies. The choice of empirical studies or models discussed is driven by their perceived relevance to the subject-matter of the paper--that is, subcontracting between large and small and medium enterprises on one hand and small and medium enterprises networks on the other. Subcontracting as used in this industrial context is a contractual arrangement between a primary company (purchasing company) and a secondary company (subcontracted company) for: the supply by the subcontracted company on order from the purchasing company, of parts, components, sub-assembly and assemblies that are then incorporated into a product sold by the primary company; or the processing of material for the primary company--whether the materials are provided by it or not--and the processing or finishing of parts provided by and returned to the primary company (UNIDO, 1985).

The process of development, which includes enterprises moving into higher value-added activities, involves an increasing complexity of production and transformational processes. For trading activities this entails diversifying into the manufacture of traded goods and, for micro production activities, this involves moving into more advanced technology as more diverse or sophisticated products are made. As more stages are carried out in the value-adding processes, a host of market linkages can develop out of the increasing complexity of production.

For example, from the upstream level of raw material production to downstream distribution one can indeed see the many stages involved. In the processing of food crops for example, activities such as drying, pickling, preserving, canning, freezing or dehydrating are required, not to mention transport, marketing and finance. Manufacture of synthetic products involves production of raw materials by chemical companies, twisting and sizing, weaving, finishing and apparel making. Delivery services, such as hostel services, involve a number of functions including non-core ones which alone are quite wide ranging--from laundry to landscaping, from upholstery to supply of poultry.

In Japan, these interrelationships are historically covered through inter-firm contracting rather than by vertical integration within an organization. In Korea, the government, emulating the Japanese model, encouraged inter-firm subcontracting relationships in certain designated sectors. Faced with global competition, contemporary business organizations are also increasingly "unbundling" their functions and contracting them out to third parties in an effort to reduce cost. In Indonesia, one example of smaller and larger businesses' subcontracting schemes is the "Bapt Ankat" (i.e. Foster-Father scheme) produced in 1978 by the Directorate of Small Industry of the Ministry of Industry.

In Korea, there is the Small Business Systematization Act established as far back as 1975 aimed at protecting the interests of small businesses as subcontractors from large businesses by preventing a delay in payment by a large-scale firm to its subcontracted small-scale enterprises. The Act intended to foster the specialization of the subcontracting small-scale firms in the production of components and parts that would be assembled by large companies into final product(s). The scheme is overseen by the Systematization Promotion Council which resides in the Korean Federation of Small Businesses. Their responsibilities include: (1) coordination of disputes between purchasing and subcontracting enterprises, (2) examination of business transactions quarterly and taking of necessary steps, and (3) dig-out problems of systematization. The result since the practical start-up of the system in 1979 has been impressive. In four years, the number of products increased 25 times, the purchasing company by a factor of 9 times and the subcontracting companies by 12 (UNIDO, 1985). So far the system is being improved upon and functions satisfactorily.

In respect of networking--the working together of two or more firms (of the same size) in order to develop, exchange ideas and share knowledge in a collective attempt to improve their competitive positions and market segments (McCormick, 1999)--UNIDO (1999) cites an example of a successful improvement in SME performance through networking in Honduras. Small enterprises in Honduras are characterized by low productivity and the poor quality of their output. They survive on extremely narrow profit margins by paying low wages and using cheap inputs. Few are capable on their own of undertaking the process and product innovations that would allow them to become more viable.

In 1995, UNIDO undertook a project to support groups of SMEs in the same sub-sectors to allow them collectively to tap resources and services for greater efficiency and productivity. By developing relations with other enterprises, buyers, customers, subcontractors and service providers, the SMEs were able to improve their competitiveness. By banding together and breaking out of their isolated operating environment, they have generated economies of scale, created complementary strengths and specialization, reduced transaction costs and improved their flexibility in responding to market challenges.

During the three years of operation, the project established 33 networks with common development projects involving about 300 enterprises. Common projects focused on the joint purchasing of raw materials, the joint establishment of retail shops to sell finished products, the launching of new products, product or process specialization, the sharing of large orders (including public procurement), and the creation of new enterprises to complement existing production facilities. A recent in-depth evaluation of six networks showed a positive trend for all basic indicators. By the end of 1998, these networks recorded an increase in sales of up to 200%, a rise in employment levels by as much as 50%, and increased investment in fixed assets of up to 100%.

In order to guarantee long-term sustainability, a foundation was established, Centro de Recursosy Tecnologia (CERTEC), which began operations in 1997. During its first year of operation, it generated US $60,000 in revenue from fees charged for its services to enterprises and institutions. This represents more than 50% of CERTEC's annual costs. The institution is now managing the networking program in Honduras.

Nigerian Industrial Outlook

At its independence, Nigeria adopted the import substitution industrialization strategy primarily to replace imported manufactures with locally produced goods, improve exchange savings and acquisition of transferred technology. This resulted in the establishment of many consumer-goods industries like soft drinks, cement, paints, soap and detergent among others. The growth rate in the sub-sector was relatively high in the period 1966-75 at an annual average of 12.9%. At the early stage of industrialization, the government adopted a package of fiscal incentives to attract foreign investment so as to increase industrial production and the modernization of the operation of the small and medium enterprises (SMEs). These include:

1) The Pioneer Status: this confers a tax holiday of 3 to 5 years on any company granted pioneer status depending on the size of the capital expenditure;

2) Accelerated Depreciation of Capital Investment: an income-tax incentive that assisted investors by providing a rapid write down of capital assets;

3) Custom (Draw-back) Regulation: this allows the manufacturer of export commodities reimbursement of the whole amount of import duty paid on imported inputs used in the manufacture of exported goods.

4) Approved Users Scheme: under the scheme, manufacturing industries are allowed to import certain raw materials either free of import duty or at very reduced duty rates.

Growth in the sector expanded in the period 1976-85 with the establishment of more import substitution industries, with an annual average growth of 18.5%. The oil boom of the era provided enough foreign exchange for the importation of needed inputs (raw materials, spare parts and machinery) and the impetus for this phenomenal growth. However, the collapse of crude oil in the world oil market in the early 1980s drastically reduced foreign exchange earning capacity, and the sub-sector was no longer able to import needed inputs. Hence, manufacturing output growth fell drastically to an annual average of about 2.6% during the period 1986-98, even with the introduction of SAP in 1986. In fact, for the period 1993-98, growth in the sub-sector was negative (Anyanwu, 1999).

Capacity utilization rate followed the same downward trend, from an annual average of 53.6% in the period 1981-85, to 41.1, 35.4 and 31.8% during the periods 1986-90, 1991-95 and 1996-98. In addition, the sectors' share in the gross domestic product fell persistently, from 9.2% in 1981-85 to 8.3% for the period 1986-90, 7.5% in 1991-95 and 6.3% in 1996-98 (see Tables 1 and 2 for details).

To correct these negative trends, the Federal Government of Nigeria solely or in partnership with the organized private sector and multilateral institutions introduced the following stimulating and supportive measures with the industrial policy initiatives of the Structural Adjustment Programme (SAP) in:

1) Establishment of National Directorate of Employment (NDE) in January 1987 primarily to combat unemployment by giving training, financial and management support services to potential and actual entrepreneurs.

2) Establishment of Raw Material Research and Development Council to review local raw material resource availability and utilisation, and advise on adaptation of machinery to processes of materials utilization.

3) Establishment of more industrial estates.

4) Establishment of Technology Business Incubator Centre.

5) UNDP-SME Support Programme: This was implemented under the fourth country program. The scheme was to provide a core of technical manpower and institutional structure capable of providing technical advise and credit to viable small- and medium-scale industries.

The average growth of 2.6% during the SAP period fell short of the expected rate of at least 8% needed to put the sector on the path of recovery. Its stunted growth constrained the capacity of the reform process to pull the economy out of recession. In addition, capacity utilization rate at about 30% is low to make for profitable operations estimated at about 50%. Its share of about 6% of GDP is also poor when compared with between 20 and 40% in many industrialised and industrialising nations. Worse still, it is not encouraging that over 60% of the nation's foreign exchange earnings are allocated to a sub-sector that contributes only about 6% of the GDP.

Many researchers have concluded that the above scenario can be linked to the following constraints: low level of technology, very low value added, low level of capacity utilization rate, low investments, high cost of production, and poor performing infrastructure characterized by frequent disruption in electric power and water supplies and inefficient transportation systems

The Actors in the Nigerian Manufacturing Industrial Subsector

The actors of the Nigerian Industrial sector are diverse and numerous. However, for simplicity and explanatory purposes, the following classes are adopted:

1) Government Ministries and Parastatals: These include the Federal Ministry of Industries, States Ministries of Industries, Nigerian Council of Industries (NCI) Small and Medium Enterprises Development Agency (SMEDA), Nigeria Export Promotion Council (NEPC), Standard Organisation of Nigeria (SON) and National Agency for Food, Drug Administration and Control (NAFDAC).

2) Industrial Research and Development Institutions: Federal Institute of Industrial Research Oshodi (FIIRO), Industrial Development Centres (IDC) and universitly-based industrial research Centres.

3) The Industrial Associations: There are many industrial associations in Nigeria; however, the notable ones are the Manufacturers' Association of Nigeria (MAN), National Employer Consultative Agency (NECA), National Association of Small Scale Industrialists (NASSI), National Association of Small and Medium Enterprises (NASME), Chambers of Commerce, Industries, Mines and Agriculture.

4) The Financial Institutions: Bank of Industries (BOI), Committee of Bankers and commercial banks.

5) The Individual Industrialists of diverse scales (small, medium, and large) and the numerous raw-materials producers across the county.

Unlike the situation in other countries (Sweden, Britain, Japan, Indonesia, Korea, etc.), the activities are not well coordinated in Nigeria. These actors, rather than seeing themselves as complementary institutions, are in most cases in competition with one another. Further, there are unnecessary interventions by the government from time to time, particularly in the election, selection and appointment of their executives. Many times these are politically motivated.

Recommended Framework for the Promotion of Industrial Linkages in Nigeria: Subcontracting and Networking

In Nigeria, there is no industrial policy designed to facilitate subcontract and networks development between large businesses and SMEs and among SMEs themselves, particularly, in the aspect of legal relations, coordination of disputes between purchasing and subcontracting companies. Thus, to promote industrial linkages (subcontracting, and networking) the government should not only mobilize funds for the larger and smaller businesses, assist in modernizing the operation of small and medium enterprises and make them suitable for contractual agreement, but create a legal and regulatory institution that is primarily concerned with the promotion of inter-industry linkages in order to achieve growth of industries and promotion of indigenous entrepreneurship in Nigeria.

The regulatory institution should be referred to as the Nigeria Industrial Linkage Promotion (NILP) Network.2 The NILP Network (when formed) should be a product of government effort (the ministry of Industry) and the collaborative effort of the following institutions that shall be represented on the NILP Network:

1) National Council of Industry (NCI).

2) Small and Medium Enterprises Development Agency (SMEDAN)

3) Business associations like the Manufacturers Association of Nigeria (MAN), National Association of Small Scale Industrialists (NASSI) and National Association of Small and Medium Enterprises (NASME).

4) Financial Institutions such as Bank of Industries (BOI).

5) The Industrial Training Fund (ITF)

6) The Techno-managerial Industrial Research and Development Organisations like Federal Institute of Industrial Research Oshodi (FIIRO), Centre for Industrial Research and Development (CIRD), Obafemi Awolowo University, Ile-Ife, Nigeria, and Industrial Development Centres (IDC), Project Development Agency (PRODA), etc.

7) Financial Institutions that primarily provided funds for small and Medium Enterprises development like Bank of Industry (BOI), Nigeria Bankers Committee, responsible for the Small and Medium Industries Equity Investment Scheme (SMIEIS).

8) The Multilateral Institutions like United Nations Industrial Development Organisation (UNIDO), International Labour Organisation (ILO), United State African Initiative Development (USAID) and New Partnership for African Development (NEPAD), who shall have observer status.

The Nigerian Industrial Linkage Promotion (NILP) Network

The NILP shall be a legal entity with the following terms of reference:

1) Assisting in ensuring that there are valid contractual agreements between smaller and larger industrial outfits;

2) Coordinating disputes between purchasing and subcontracting enterprises or the primary company and the ancillary;

3) Protecting the right of the subcontracted company;

4) Monitoring, evaluating and periodically reviewing subcontracting and ancillary arrangements in order to give useful advise to the parties concerned; and

5) Other issues related to the mandate of the promotion of effective industrial linkages, such as determining the maximum percentage of investment a primary company can have in the total investment of its ancillaries, etc.

Further, to foster subcontracting and ancillary relationships, the government should put in place the following supportive policy measures: 1) incentives, like tax exemption, on subcontracted product and rebates for technical assistance and training expenditure incurred by larger businesses in respect of smaller businesses; 2) financing schemes emanating from subcontracting and ancillary relationships; 3) a legal framework for subcontracting and ancillaries; and 4) reservation of production of some product for small business.

The Manufacturers Association (MAN) and the SME associations like National Association of Small Scale Industrialists (NASSI) and National Association of Small and Medium Entrepreneurs (NASME) shall mobilize their members and educate them on the need for industrial linkages. Also, they should encourage their members to have contractual and subcontracting relationships. The Financial Institutions shall provide funds for financing subcontracting and ancillaries' schemes. The Industrial Training Fund shall pay rebates for technical assistance and training expenditures by larger businesses in respect of smaller ones.

The Research and Development Institutions shall make available their findings and techno-managerial breakthroughs for the large businesses and small and medium enterprises. Particularly, they should assist in modernizing the operation of small and medium enterprises and enhance their suitability for contractual subcontracting and ancillary agreements (see Table 3 for further details).

The Relationship of the Multilateral Institutions (UNIDO, ILO, USAID, NEPAD) with the NILP Network

The activities of the multilateral institutions shall centre on the provision of technical, financial and advisory assistance that will make the Nigerian experience a success story like those of many Asian countries (India, Japan, Malaysia, Indonesia and Korea). In specific terms, these are:

1) provision of advisory services that enhance the development of viable inter-industry linkages between larger and smaller businesses;

2) capacity building of the smallholding enterprises (including the agro-allied industries) to modernize their operations and make them suitable for contractual agreement;

3) capacity building of the Nigeria Industrial Linkage Promotion (NILP) Network through the provision of technical assistance, training and required exposure;

4) backstopping such technical assistance, training, organized tours, etc.;

5) facilitating the development of mutual relationships between the Nigerian Industrial Linkage Promotion Network and other relevant authorities or counterparts in other part of the world.

Summary and Conclusion

In general, there is no single theory of small and medium enterprises networks and subcontracting relations with large business. Researchers have used different types of theoretical approaches in order to analyze and understand these networking relationships and small business development. Why do small enterprises need subcontracting and networking? For small firms, the economic functions and transactions are too costly, making it either impossible or extremely difficult for them to perform their economic activities in a competitive market. Given this, small firms need support to compete and survive in their businesses. Subcontracting and networking are the best solutions given in the literature for the development of small firms in LDCs because subcontracting and networking make it possible for small and medium enterprises to collectively achieve economies of scale beyond the reach of individual small firms. It allows them to specialize in their core business and participate in a system of external division of labour and quality improvement of the products of the small businesses (Borg, 1991; Jarillo, 1988; Thorelli, 1986). Furthermore, networking among enterprises, providers of business development services (e.g. Industrial Research and Development Institutions) and local policy makers can help to shape a shared local development vision, give strength to collective actions, and improve the pool of entrepreneurs and their resourcefulness. However, all these can only be effectively achieved through a conscious stimulatory and supportive framework that emphasizes subcontracting and ancillary relationships between smaller and larger businesses, and networking among small businesses, without undermining the contribution of the required facilitating and supportive institutions, like the one recommended.

Contact Information

For further information on this article, contact

A.A. Alarape, Centre for Industrial Research and Development, Obafemi Awolowo University,

Ile-Ife, Nigeria.

GSM Phone No: +234-0803-4090821



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A.A. Alarape, Centre for Industrial Research and Development, Obafemi Awolowo University, Ile-Ife, Nigeria

(1.) See Sandaram P. Premaratne, Entrepreneurial Networks and Small Business Development: The Case of Small Enterprises in Sri Lanka (Eindhoven: Technische Universiteit Eindhoven-Proefschrift, 2002).

(2.) The word "network" is preferred to "board" or "committee" in order for all stakeholders to see the "NILP" as a collective responsibility and to work toward achieving desired result.
Table 1. Annual Growth Rate of Industrial Production,

 All Industries Manufacturing

1966-75 19.2 12.9
1976-85 5.3 18.5
1986-98 6.5 2.6
1991 6.3 9.3
1992 7.0 11.8
1993 12.3 (26.9)
1994 (1.9) (0.9)
1995 (0.4) (5.5)
1996 2.8 (1.3)
1997 6.2 (0.4)
1998 (4.7) (3.9)
1999 (3.9) 3.5
2000 8.0 3.6
2001 3.2 4.2
2002 0.2 7.0
2003 4.5 9.0

Source: Computed from CBN Statistical Bulletin.

Table 2. Capacity Utilization Rate and Share of Manufacturing
in GDP(%)

Period 1981-85 1986-90 1991-95

Capacity Utilization Rate 53.6 41.1 35.4
Share in GDP 9.2 8.3 7.5

Period 1996-98 1999-2003

Capacity Utilization Rate 31.8 40.4
Share in GDP 6.3 4.8

Source: Computed from CBN Statistical Bulletin.

Table 3. Functions of the Participating Institutions in the
Promotion of Industrial Linkages in Nigeria

S/N Name of Institution Primary Activity of Institution

 Ministry of a) Ensures that there is comprehensive
1 Industries (Federal industrial policy on industrial linkages
 and State levels) in Nigeria.

 b) Sees that there is a legal instrument
 establishing the Nigeria Industrial
 Linkages Promotion (NILP) Network.

 c) Inaugurates the NILP(at Federal and
 State Levels).

 d) Relates with other Ministries like
 Finance, Labour and Productivity,
 Agriculture, etc. that can facilitate
 the attaining of NILP objectives.

2 Small and Medium a) Protects the interest of SMEs in
 Enterprises industrial-linkages agreements through
 Development Agencies the Ministry of Industries at policy
 of Nigeria (SMEDAN) level.

 b) Works with the other members of the
 NILP Network to see that the rights of
 smaller businesses are protected.

3 Manufacturers a) Mobilizes their members' (usually
 Association of larger businesses) support for the
 Nigeria (MAN) programs.

 b) Sensitizes members on the activities
 of the NILP Network.

 c) Assists in initiating viable
 industrial linkages.

 d) Protects the rights of their members
 participating in industrial-linkages
 contractual agreements.

4 Small and Medium a) Mobilizes their members' (usually
 Enterprises smaller businesses) support for the
 Associations: NASSI programs.
 and NASME
 b) Sensitizes members on the activities
 of the NILP Network.

 c) Assists in initiating viable
 industrial linkages.

 d) Protects the rights of their members
 participating in industrial-linkages
 contractual agreements.

5 Financial a) Financing of Subcontracting and
 Institutions, e.g. Ancillaries schemes.
 Bank of Industries

6 Industrial Training a) Payments of rebates for technical
 Fund (ITF) assistance and training expenditure
 incurred by larger businesses in respect
 of smaller businesses.

7 Research and a) Make available improved production
 Development processes for participating firms,
 Institutions (like particularly smaller businesses, to
 CIRD, FIRRO, IDC, make them suitable for industrial
 PRODA, etc.) linkages with larger businesses.

 b) Improve the managerial capabilities
 and management practices of
 participating firms, particularly
 smaller businesses, to make them
 suitable for industrial linkages with
 larger businesses.

8 Multilateral a) Provision of technical, training and
 Institutions (like advisory services to the NILP so as to
 UNIDO). facilitate the attainment of their
 goals and objectives.
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Author:Alarape, A.A.
Publication:Journal of Small Business and Entrepreneurship
Geographic Code:6NIGR
Date:Mar 22, 2007
Next Article:Entrepreneurship and national policy: growth with justice.

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