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Effect of SMEs performance indicator of business turnover as a dimension of

economic growth: Borama case

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Effect of SMEs performance indicator of business turnover as a
dimension of economic growth: Borama case

Mr. Mohamed Aden Abdirahman

Faculty of Economics and political science

Amoud university
Borama, Somaliland

Email: muhanad24@gmail.com
 Abstract
This paper seeks to investigate the effect of Small and Medium Enterprises performance
indicator of business turnover as a dimension tool of Economic Growth. A survey method
was used to gather data from 211 SMEs operators, Entrepreneurial officers and Managers
from Borama city, Somaliland. Data was collected with a structured questionnaire and
analyzed with descriptive statistics for frequencies and percentages, and inferential statistics
of correlation and multiple regression analysis to identify the perception of the roles of SMEs
in Borama to economic growth. The results of the study reveals that the most common
constraints hindering small and medium scale business growth in Somaliland particularly
Borama are lack of financial support, poor management, lack of training and experience, poor
infrastructure, insufficient profits, and low demand for product and services, expensive
electricity, lack of government support, lack of credit facility, and low level of education of
business owners and lack of local production which most of SMEs in Somaliland depend on
import. Hence, paper therefore recommends that Government should as matter of urgency
assist prospective SMEs operators and entrepreneurs to have access to finance and necessary
information relating to business opportunities, financial, technology, raw materials, market,
infrastructure, electricity and machinery which would enable them to reduce their operating
cost and be more efficient to meet the market competitions and expected economic
contribution.
Keywords: SMEs, SMEs performance, Turnover, Economic growth.
 ACKNOWLEDGEMENTS

First of all, I guided all thanks to ALLAH who made me this study to be completed
successfully. Thereafter, carrying out this study certainly was the most demanding and
challenging task I have embarked on. However, delighting thing is having finalized the
study and looking back everyone who facilitated me to carryout successfully over the long
course of doing this study.

I would like to send my gratitude to my dear mother Qamar Awale who stand with
me whole my study journey and my darling wife Sahra Ahmed who give me love and
courage during my study in Turkey. Your memories would ever shine in my mind.
 1.0. Introduction

Studies uncovered the role of small and medium scale enterprise (SMEs) which are
familiar in the economy of developed countries while there is a massive of rapidly increase
SMEs in developing countries cannot be underestimated. SME referred as a good indicator
of economic growth in new era. Developing economies as well as third world countries SMEs
plays a crucial role fostering economy and development of these nations. On the other side,
SMEs are the largest portion of all business over the global and contribute immensely
creating jobs, provision of high-quality goods and services which from competition between
small businesses, generating income which improves living standard of small business
owners and overall increase of income level. SMEs contribute huge portion to the gross
domestic production (GDP) of many countries both developed and developing countries.
Small and medium scale enterprises are recognized the most significant basic proxy of
achieving a viable economic growth and sustainable development because they create
income, provide a chance to develop wealth and gives motivation entrepreneurs to utilize
their talents for creating opportunities to stand financially independence and take part income
redistribution. Looking another positive side of the SMEs is believed vehicle of globalization
era and considered worth chain connecting internationally via different business activities
crossing international boundaries creating an international business market. Globalization
brings small businesses chances to create niche markets, ability to expand the business,
integration in technology and promote the ability to get advanced technology, lower risk of
cost allotment and improving getting finance.
Most studies underlined the importance of SMEs to economic growth and job creation.
More than half of the worldwide work force get their jobs from SMEs. SMEs registered
formally in developing countries contribute up to 45 percent of total jobs and approximately
33 percent of national gross of domestic production (GDP), (World Bank, 2015). According
to (IFC, 2012) indicated that SMEs accounts more than 50 percent of overall employment
around the globe and approximately 90 of businesses.
Small and medium scale enterprises are realized innovation and economic
improvement engine, the contemporary key of economies transformation is the establishment
of new business and omitting or reducing less functioning enterprises. Creation of new
enterprises brings enthusiasm of creating new business activities, brings novel goods and
services and rises employment opportunities by creating new jobs. SMEs are considered as
a significant source of the new production process, improvement of economic productivity
which results in both sustainable economic development and better living condition for the
communities in particular area (Muhammad Usaini, 2014).
After civil in 1990, when civil war began in Somalia and central government collapsed,
economic pillars of the country as well start to disappear. From that time, small and medium
scale enterprises (SMEs) has been the backbone and a key source of income for many
Somalis. SMEs show great potential and play a crucial role on income generation and
employment particularly small-scale sector. From this importance, SMEs owners not
government established an organized program for an investment environment to realize
industrial transformation and become largest component of Somaliland (Northern regions of
Somalia) business sector which contributes national economy more than 90 percent of the
GDP greatest portion of the employment.
 Despite the significance of SMEs and their immense role contribution to Somaliland
economy there are a lot of challenges hampered the smooth performance of small and
medium scale sector. Financial access is recognized as the major constrains of Somaliland
small businesses face, electricity become second problem and land is also another major
problem. Another challenging factors include credits, training, patent control, lack of
commercial banks or any other financial institutions except small banks created by local
businessmen are documented major problem of Somaliland small businesses having alone.
Structural adjustment programs from United Nation organizations collaborating Somaliland
government really helped the SMEs sector. Regardless of these constrains Somaliland SMEs
continue to carry out activities left government and other economic sectors as well as filling
gaps and creating large industries connecting between large enterprises and customers
(Somaliland Ministy of Planning, 2013).
This paper seeks to investigate the effect of SMEs performance indicator of business turnover
as a dimension of Economic Growth and Development in Borama. The purpose of this study
is to come up with a conclusion of potential determinants that affect SMEs operations and
set of SMES potential influence economic development in Borama. In this research, focus
was only on SMEs in Borama- the western part Somaliland. Therefore, the first limitation
faced by this study is that the research findings of SMEs in the area might not be able to
represent the situation in the rest of the country. The problem is that the majority of SMEs in
Somaliland might face different problems from different sectors and business areas.

The limitation in the research on these SMEs is that since questionnaires are used to collect
and investigate the effect of SMEs in Borama as dimension of economic growth, the major
disadvantage of this method is the inability to interact with respondents in order to ask
questions to discover more information in order to reach good conclusion for the problem of
under investigation. This limitation poses a problem for this study as the inability to discover
deep the effect between SMEs and economy.
However, since this study conducted of primary data, the study needs to be subjected to
statistical tests in order to establish a more robust validity and reliability. The statistical
instruments conducted in this paper was two, first inferential statistics employed using
frequencies tables and percentages, second inferential statistics of correlation and multiple
regression adopted in order to check the relationship between the main variables. It is
recommended that the replication of this study should involve larger samples and a broader
geographic base for cross-validation purposes.
2.0. Theoretical consideration
This study theoretically discusses why SMEs might be one of the most important factors in
economic growth, for the developed and developing countries. Numerous studies have
recognized that the role of small businesses in national economies is outstanding, these
studies shows the importance of SMEs to economic growth and poverty alleviation, setting
up an infrastructural development. From this view in this chapter will postulate some
previous theories and literacy studies. We look at four of the main arguments for why this is
so:
 First, economic history has provided evidence that Neoclassical economist’s theory in
1980s believes that country’s economic development is based on the support of free market,
privatization and increases in export through market friend approach Dang and Pheng,
(2015). Schumpeter, (1934) argues entrepreneurship is the center and the most importance
system of innovative nature. Schumpeter proposes an approach “New combination” of
economic development, Schumpeter’s theory comprises five cases of establishment of a new
process of production in order to reach economic growth which is needed, a new method of
production, new product, opening new markets, a new source of supply and new forms of
organization. Finally Keynesian economic growth model postulates that government’s
macroeconomic policies should be included funding Small and medium enterprises both
fiscal and monetary policies which can achieve crave level of economic growth and
development(Abdul-Kemi and Zubair, 2014. citted from Zeller and Sharma, (1998).

Second SMEs has been identified vary across nation, policies, programs and measures
takes account into three criteria, employment size, annual turnover and annual balance sheet
total. Studies use in the SMEPOL project which currently used is defined macro enterprises
has less than 10 employees, small enterprises with 10-49 employees having revenue less than
7 million pound and medium enterprises with 50-249 employees and annual revenue of less
than 40 million pound (Usaini, 2014). The ministry of national planning categorized SMEs
following: Micro business which has not more than 5 workers. Small scale business has
labour size which is between 5 – 19 workers. Medium scale business has a labour size 20 –
99. Finally, large scale business has a labour size over 100, so this study was accepted the
definition of ministry of planning which is used to define SMEs.

Late of 70s to early 80s, SMEs began to turn on into more innovative and more pliable
in terms of cost reduction. SMEs starts giving intermediate goods more conveniently than
large scale businesses, for that reason SMEs dramatically exist between industry ranging
from traditional to the modern high technology industries. Entrepreneurial engagement is
increased around the global. Small and medium scale business emerges due to the lessening
of labor lows on developing and emerging markets. SMEs alter the manufacturing process
and brings the emergence of new markets. The interest of SME as a source of economic
growth and employment become appear ((Caner, n.d)
Ayyagari et al. (2007) find that SMEs make a contribution greater than Large
enterprises to GDP, as nations evolve prosperous, there is a rise in the work force engage
working in small and medium manufacturing rather than large manufacturing firms.
According to International Labor Organization (ILO) SMEs has been a key area to interfere
with the promotion economy, because of their crucial contributions to job creation and
income generation, SME accounts two-thirds of all jobs globally (International Labour
Office, 2015)
Broad existing studies regarding small and medium enterprises for developing
countries underlined the importance and their contribution to economic improvements.
Recent studies conducted in developing countries indicated small business sector is an
essential part of the economic output, a major source of income and employment generation,
almost labor force are enlisted SMEs. Share of SME of employment lean to be higher in
developing countries then developed economies. Daniels states on his study, SME in
developing countries are significant to poverty alleviation because of their job creation,
increase owner’s income who were poor (Daniels, 1999).

Third, contribution of SMEs to the economy has become outstanding for the last
decades, SMEs have several benefits over large scale businesses do not have when
comparing, main different benefit aspect include, innovation, evolution, easily adaptation
with the market condition even calamitous economic situation could withstand because of
their flexibility nature, labor intensive and job creation cost is relatively low. Additionally,
for their important effect on income distribution, government tax revenue and job creation,
efficient utilization of resources, family income stability, economic growth and development
(Ijeoma Ekwem, 2011, ; Liedholm and Mead, 1987)

Fourth, the importance of SMEs in innovation, entrepreneurship, employment, and

other factors is demonstrated, Small and medium scale enterprise’s flexibility and innovation
able to react customer’s market demands. Technological production of many SMEs could
restrict flexibility so they believe their people rather than technology that grant flexibility
(Carrie et al, 1996 cited Agyapong, 2010; Gupta and Cawthon, 1996). A citable argument is
that by Edmiston (2007), who discussed about the ability of SMEs to innovate: ‘‘...given the
relative strengths of large and small firms, whether small businesses are more innovative is
an empirical matter...’’ (p. 89). The entrepreneurial activity of starting up new small
businesses and innovation is a crucial indicator of economic sufficient and community
wellbeing, according to OECD, (2008) entrepreneurship is an essential tool for mitigating of
economic inefficiency and center of market finance.

To sum up Economists leave their old approach based on giving priority large
enterprises but today they are relying on SMEs than in the past. Entrepreneurial activity
recent is widely considered by nations throughout the world as a crucial key mechanism for
improving economic conditions, especially areas where entrepreneurial activity is booming
because this provides a relatively and complete agreed way to increase job creation and
improving per capita income increase. For that reason, entrepreneurs wanted access to
resources and market to thrive and play national policies a significant role (Kressel and Lento,
2012)

3.0. Methodology
This paper seeks to investigate Small and Medium Enterprises performance indicator as
a veritable dimension tool in Economic Growth and Development in Borama. The purpose
of this study is to come up with a set of potential determinates that affect the SMEs
performance indicator influence as a dimension economic development and their effect of
economic growth dimension factor. Registered SMEs operating in Borama, as shown on the
registered of local Municipality of Borama, Somaliland and Ministry of Commerce and
Industry, constituted our target population.
In order to confirm SMEs respective relevant significance and the greatest drawback for
SMEs in Borama, following hypotheses postulated:
H1: SME’s Investment has positive effect on business performance indicator on business
turnover.
H2: SME’s Employment has positive effect on business performance indicator on business
turnover.
H3. SME’s Profitability has positive effect on business performance indicator on business
turnover.
H4: Entrepreneurship increase has positive effect on business performance indicator on
business turnover.
Primary sourced data is the main data used for analysis. These were collected using
an administered, purposive and some Likert scale questionnaire to the selected sample SME
operators. The study was mainly constructed on information derived from responses to the
questionnaire from Borama SMEs operators.
Primary data conducted for this study were collected from a cross section of SMEs in
Borama. Random sampling technique was used to determine the suitable SMEs in Borama
to be questioned. Collected data presented in tabular form with descriptive statistic while the
hypothesis formulated was tested with correlation coefficient and regression to determine the
respondents’ perception on the subject matter under investigation. This study employed a
quantitative approach. In which all, 211 respondents that made up the sample were randomly
selected.
4.0. Result, Findings and discussion
Based on the analysis relating to the responses of the study participant on the sex of the
business owners, revealed that 181 (85%) of the respondents are male while only 30 (14%)
are female. Analysis from descriptive statistics on reason behind staring small business
revealed that 78 (40%) of the respondents star their business identification of market
opportunity, other 78 (37%) revealed they started to improve their income while 32 (15%)
indicated that there is no alternative business and only 16 (7%) tell that they are not happy
their previous jobs. Type of small business engaged, reveals that majority 147 (70%) of the
respondents are into trading business. another 56 (26.5%) are into services rendering
business; only 7 (3.3%) are into production business. On the financial collaboration
respondents revealed that 112 (53%) do not have collaboration any financial institution while
83 (39 %) have commercial bank collaboration while other 11 (5%) have collaboration with
remittances and only 5 (2.4%) have collaboration with central bank. On the bank loan
accessibility analysis revealed that 148 (70%) of the respondent underlined that they cannot
get loans from bank while only 63 (29.9%) can access bank loan. When come to the annual
turnover of the business 55 (26.1%) has an annual turnover of $5000, while other 45 (21.3%)
has between $6000-$10,000 and 44 (20%) of them has $11,000-$50,000 annual turnover,
some other 30 (14.2%) has an annual turnover of $51,000-$100,000. Other 18 (8.5%) has
annual turnover between $110,000 - $500,000. 15 (7.1%) has annual less than $5000, finally
on 1.9% has an annual turnover which is equal to or over $1 million. Analysis on the
responses on business profitability, strongly agree that 88 (41.7%) of the businesses in this
study were considered profitable by the owners and/or management staff and other 74 (35%)
agree of the businesses is profitable, other 11 (5%) have not commented whether business is
profitable or not but 8 (3.8%) strongly disagree that business is profitable and other 30 (14%)
disagree that business are profitable. Half of the business revealed that they made investment
of other small business while other half of the business don’t make any investment. On the
SMEs contribution to the city employment respondents revealed that 87 (41%) strongly agree
that SMEs contribute employment in the city, other 78 (37%) agree but 30 (14%) have not
comment while 1 respondent strongly disagree and 15 (7%) disagree the claim of that SMEs
contribute. Based on the result from descriptive section analysis indicate that business in the
production and service sectors have the largest annual turnover and has the collaboration of
financial institutions which make them easy the accessibility of credit facility.
The result from correlation analysis of the study suggests that turnover of the business
has positive correlation of 0.593 on business investment, also business turnover has good
positive correlation of 0.62 on employment but business turnover has negative correlation of
-0.389 on business profitability as well as negative correlation of -0.331 on new entrepreneurs
in the market.
Regression analysis also used in this study in order to measure the relationship
between dependent and independent variable. Business turnover is used as dependent
variables to know its effect on economic growth dimension factors of investment,
employment, business profitability and entrepreneurship which are used as independent
variable.
Table 1: Regression Analysis
Model Summary
R Adjusted R Std. Error of the
Model R Square Square Estimate
1 .731a .535 .526 1.027
a. Predictors: (Constant), INV, EMP, ENT, PRF.

Table 2: Coefficients
Coefficientsa
Unstandardized Standardized 95.0% Confidence Interval
Coefficients Coefficients t Sig. for B
Std. Lower Upper
Model B Error Beta Bound Bound
1 (Constant) 2.526 .464 5.443 .000 1.611 3.441
INV .978 .165 .335 5.932 .000 .653 1.303
EMP .120 .016 .408 7.603 .000 .089 .151
ENT -
-.339 .167 -.104 .044 -.668 -.010
2.030
PRF -
-.271 .108 -.134 .013 -.485 -.057
2.501
a. Dependent Variable: Turnover.
Turnover = 2.526 +0.978(INV) +0.120(EMP) -0.339(ENT) -0.271(PRF)+ε
Result from multiple regression analysis indicates that investment has strong positive effect
of 0.978 on business turnover, this result support hypothesis one. Employment has also
positive effect of 0.120 on business turnover the result of support hypothesis two.
Entrepreneurship effect negative of -0.339 on business turnover this result oppose hypothesis
three in this case we can take alternative hypothesis, same to this result profitability of the
business negatively effect on business turnover rate of -0.271 so we reject hypothesis four
and take alternative hypothesis. The result of both correlation and regression has confirmed
the economically meaningful relationship between the importance of SMEs performance
indicator of business turnover and the Economic growth dimension factors.
5.0. Conclusion and Recommendation
A major drawback in Somaliland’s economy and industrial development process is the
absence of strong SME sector. more than 90 percent of Somaliland people engage small
business sector with over one million people, vast productive livestock, rich variety of
mineral deposits and other natural resources, Somaliland should give attention to SMEs.
SMEs performance indicators of business turnover shows a positive relationship with
SMEs share of economic growth dimension factors, but not enough as expected prior the
result SMEs have not played the crucial role they are expected to play in Somaliland
particularly in Borama city’s economic growth and development. Driven by the results in the
study, SMEs in Borama as well as the whole country have a long way to go for the sector to
be productive enough and play the significant role it is expected to be in relation to
contributing to the growth and development of the Somaliland economy.
The challenges and problems of the SMEs in Somaliland face are hydra-headed and can
only be solve effectively tackled and collective action. the result shows that SMEs in
Somaliland particularly Borama town indicated their major problems as capital, lack of credit
is underlined as a most severe problem they have, electricity, lack of local product, lack of
technology, poor infrastructure was also emphasized as another major problem. Lack of
government support to SMEs have was also indicated one of the major problems. Study
underlined drawbacks of SME contributions to the economy of Somaliland is from several
problems SMEs face during their operation process which hindering SMEs vital role in
Somaliland economy also these bottlenecks causes doubt of new investment on SMEs sector
and overall performance of SMEs.
The solution to the SMEs challenges can only be solve if both the government policy
makers, business related institutions, business operators and the citizens concertedly work
together. The government has to take the lead action by extending their reforms to the
financial system and credit facility especially as regards SMEs friendly policy formulation
and implementation, tax and licensing reforms, revamping the infrastructural facilities, value
re-orientation and reduction of corruption to the barest minimum if not completely
eradicated. Given efficient and effective execution of these as well as the political will and
good leadership, the SME sector will certainly be an effective tool for rapid economic growth
and industrialization of the Somaliland Economy.
This study recommends that Government should take an urgency actions to assist
prospective entrepreneurs to have access to finance and necessary information relating to
business opportunities, technology, raw materials, market, land and machinery which would
enable SMEs operator to decrease their operating cost and be more efficient to meet the
market competitions. SMEs policy implication, understanding the factors hindering the
growth, performance and survival of SMEs in Somaliland will help policy makers – central
government, local municipalities, NGOs, microfinance and other stakeholders to design
targeted policies and development programs that will actively stimulate innovation, as well
as helping those policy makers to support, encourage, and promote SMEs for poverty
eradication and fight unemployment in Somaliland.
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