franchising as an instrument of promoting small and medium enterprises in nigeria
TRANSCRIPT
FRANCHISING AS AN INSTRUMENT OF PROMOTING SMALL AND MEDIUM ENTERPRISES IN NIGERIA
(A STUDY OF SOME SELECTED SMALL AND MEDIUM ENTERPRISES IN OYO STATE)
BY
ADETOLA, OLUWASEUN FRANKMATRIC NO.: NOU1103xxx1x
A PROJECT SUBMITTED TO THE SCHOOL OF MANAGEMENT
SCIENCES, AWA-IJEBU COMMUNITY CENTER, AWA- IJEBU,
NATIONAL OPEN UNIVERSITY OF NIGERIA, IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
BACHELOR OF SCIENCE (B.Sc. HONS) IN ENTREPRENEURIAL
AND BUSINESS MANAGEMENT.
SEPTEMBER 2015
1
CERTIFICATION
This is to certify that this study was carried out by Adetola Oluwaseun
Frank with Matriculation Number: NOU1103xxxxx of the School of
Management Sciences, Entrepreneurial and Business Management, Awa-
Ijebu Community Center, Awa- Ijebu, National Open University of Nigeria
under my supervision.
_______________________ _____________ Dr. K. A. Obasan DateProject Supervisor
_______________________ _____________ Dr. R. Saidu DateActing Center Director
_______________________ _____________ PROF. Chuks. P. Maduabum DateDean of Management Sciences
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DEDICATION
3
ACKNOWLEDGEMENT
4
ABSTRACTThis work examined franchising as an instrument of promoting small and medium enterprises in Nigeria. It aimed at assessing the role of franchising in small and medium scale enterprises in Nigeria. The study adopted the descriptive research design called survey design. The study population included all the small and medium enterprises operating in Oluyole Local Government of Oyo State. The sample size consisted of hundred (100) small and medium enterprises (SMEs) which are randomly selected from the population while the sampling techniques made use of probability sample technique called simple random sampling technique. A total of 100 questionnaires were administered to the owners, employees and some selected customers in the study area in Oluyole Local Government of Oyo State which were all properly filled and returned to the researcher. The data obtained were analysed using the Ordinary Least Square (OLS) regression model. The regression is simple regression and is computer based. The E-View multiple regression method was used to verify the formulated hypothesis. It was found that there is significant relationship between franchising and promotion of small and medium scale enterprises in Nigeria. This implied that increase in the franchising would promote the activities of small and medium enterprises and vice versa. It was also found that franchising has direct or positive relationship with the performance of small and medium enterprises in Nigeria. This implied that increase in the franchising would bring about increase in performance of small and medium enterprises and vice versa. Based on the findings, recommendations were drawn that efforts should be made by investors, stakeholders and the government of Oyo State to create awareness among small and medium-sized enterprises in Nigeria (SMEs) regarding the potential benefits of franchising.
Keywords: Franchising, SMEs, Franchisor, Franchisee and entrepreneur.Word Count: 309
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TABLE OF CONTENTSPage
Title i
Certification ii
Dedication iii
Acknowledgements iv
Abstract vii
Table of Contents viii
List of Tables xii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 4
1.4 Research Questions 4
1.5 Research Hypotheses 5
1.6 Significance of the Study 6
1.7 Scope of Study 6
1.8 Plan of the Study 6
1.9 Definition of Operational Terms 7
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CHAPTER TWO: CONCEPTUAL FRAMEWORK, THEORETICAL FRAMEWORK AND EMPIRICAL REVIEW
2.1 Conceptual Framework 9
2.1.1 Franchising in Nigeria 13
2.1.2 Factors to be considered by SMEs Wishing to Franchise 16
2.1.3 An overview of small and medium enterprises (SMEs) in Nigeria 17
2.1.4 Types of Small and Scale Enterprise 19
2.1.5 Importance of Small and Medium Scale Enterprises in Nigeria (SMSEs) 20
2.1.6 Rationale for Emphasizing Small Scale Enterprise in Nigeria’s Industrial Development
21
2.1.7 Problems of Small Scale Enterprise 23
2.1.8 Challenges in Facing Small Scale Enterprises in Nigeria 24
2.1.9 Ways of Developing Small Enterprises to Enhance National Development in Nigeria 25
2.2 Theoretical Framework 27
2.2.1 The New Growth Theory 27
2.2.2 Integrated Model of Small Firm Growth 29
2.2.3 Greiner’s Model of Venture Growth 31
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2.2.4 Theory of Franchising as a Means of Entrepreneurial Activity 33
2.2.5 The Franchising Model 35
2.3 Empirical Review 43
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 47
3.2 Research Design 47
3.3 Population of the Study 47
3.4 Area of the Study 48
3.5 Sample Size 48
3.5.1 Sampling Techniques 48
3.6 Types and Sources of Data 48
3.7 Research Instrument 49
3.7.1 Scoring of the Instrument 49
3.8 Method of Data Analysis 50
3.9 Limitation of the Study 50
CHAPTER FOUR: DATA ANALYSIS AND RESULT PRESENTATION
4.1 Re-Statement of Research Hypothesis 51
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4.2 Presentation and Analysis of Respondents Bio Data 51
4.3 Presentation and Analysis of Research Questions 55
4.3.1 Psychographic Data 56
4.4 Data Analysis of Formulated Hypothesis 57
4.4.1 Testing of Hypothesis I 57
4.4.2 Empirical Analysis 58
4.4.3 Interpretation of the Result 58
4.4.4 Testing of Hypothesis II 60
4.4.5 Empirical Analysis 60
4.4.6 Interpretation of the Result 61
4.5 Discussion of the Findings 62
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings 64
5.2 Conclusion 65
5.3 Recommendations 66
5.4 Suggestions for Further Studies 67
References68Questionnaire73
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LIST OF TABLES
Table 4.2.1: Sex Distribution of Respondents 52
Table 4.2.2: Age Distribution of Respondents 52
Table 4.2.3: Marital Status Distribution of Respondents 53
Table 4.2.4: Educational Qualification Distribution of Respondents 53
Table 4.2.5: Religion Distribution of Respondents 54
Table 4.2.6 Length of Service Distribution of Respondents 54
Table 4.3.1: Analysis of Research Questions 56
Table 4.4.1: Summary 58
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Global competition is intensifying because, domestic businesses that
dominated the local market at home now find foreign competitors to contend with
based on their influx through franchise as a distribution strategy in other to gain
entry into new markets. Franchising is a powerful vehicle for the marketing and
distribution of goods and services employed by franchisors to market their
products. International franchising has grown significantly since the 1960s
because of push and pull factors. Domestic saturation, increased competition and
diminishing profits at home have pushed franchisors to examine their
opportunities abroad while, favorable macroeconomic, demographic and political
conditions abroad pulled them into specific markets (Alon, 2007). Franchising has
been observed by industrial watchers as the key strategy adopted by multinationals
to promote and expand their trade in other untapped markets and this cut across
different sectors including the fast food sector which is our area of study
(Aryeetey, 2012).
SMEs franchising in the developed economy has increased geometrically.
Nigeria has net over 521, 215 SMEs alone. Chambarlain (2006) observed further
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that, franchising is well established in most developed countries today with over
one third of all retailing is franchised – related. In recent years however,
opportunities have diminished in these countries as well, and international
franchisors have begun to seek development opportunities in developing
economies such as China, Brazil, South Africa and Nigeria. Sometimes
franchisors even provide accounting and financing support to franchisees. In
Nigeria, the definition of small and medium enterprises also varies from time to
time and according to the Central Bank of Nigeria’s (CBN) monetary policy
circular No: 27 of 1988, Small Scale Enterprises (excluding general commerce)
are defined as enterprises in which total investment (including land and working
capital) did not exceed N500, 000 and or the annual turn-over did not exceed N
5.0 million (Uzor, 2009).
The Circular also defines Medium enterprise (excluding general commerce)
as enterprises in which total investment and not exceed N 1, 000, 000 (1 million
naira) and the annual turnover did not exceed N 1.2 million. Small scale enterprise
is one of the modern strategies underdeveloped countries are employing to break
into the “League” of developed countries (Burns, 2011). Business that fall under
small scale as follows firewood supply, plantain production, restaurant services,
small scale poultry raising, operating a nursery for children, home laundry services
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and host of others. Businesses grouped under medium scale, according to Fasua
(2006), include soap production, hair/body cream production, chemical
production, commercial poultry, and profession practices (law, accountancy,
education) food and beverage production among others.
1.2 Statement of the Problem
Small and medium enterprises are mostly managed by owners and
relations. The financing in most cases is normally provided by the owners. The
owners fail to realize the importance of external source of capital needed for
business expansion, in most cases, finances are raised by the owner, from
members of the family and friends in most cases. In another development, small
and medium enterprises experience difficulties in raising equity capital from the
finance houses or individuals. Even when the finance house agrees to provide
equity capital, the conditions are always dreadful. All result to inadequate capital
available to the sector and thus leading to poor financing. About 80% of small and
medium enterprises are stifled because of this problem of poor financing and other
problems associated with it (Onyeyinka, 2008).
It is as a result of the above stated problem that the study will be embarked
upon to appraise franchising as an instrument of promoting small and medium
scale enterprises in Nigeria.
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1.3 Objectives of the Study
The main objective of the study will be to appraise franchising as an
instrument of promoting small and medium scale enterprises in Nigeria. The
specific objectives of the study include:
i. assessing the role of franchising in small and medium scale enterprises in
Nigeria;
ii. determining factors influencing capital raising in small and medium
enterprise in Nigeria;
iii. appraising the extent to which finance house strict conditions have affected
the development of small and medium enterprise in Nigeria;
iv. assessing the extent at which poor financing has affected small and medium
business operation in Nigeria; and
v. describing the relationship between franchising and the performance of
SMEs in Nigeria.
1.4 Research Questions
In the course of the study, the following questions will be raised in a bid to
proffer solution to the stated research problem;
i. What roles do franchising play in fund raising of SMEs in Nigeria?
ii. Are there any factors affecting raising of capital by SMEs?
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iii. To what extent do finance house strict conditions affect the development of
small and medium enterprise in Nigeria?
iv. How does poor financing affect the operations of Small and Medium
Enterprises in Nigeria?
v. Is there any significant relationship between franchising and the
performance of SME in Nigeria?
1.5 Research Hypotheses
The following hypothesis will be formulated to provide the lead for this
study:
Hypothesis I
H0: There is no significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
H1: There is significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
Hypothesis II
H0: There is no significant relationship between franchising and the performance of Small and Medium scale Enterprises in Nigeria.
H1: There is no significant relationship between franchising and the performance of Small and Medium scale Enterprises in Nigeria.
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1.6 Significance of the Study
The study will be embarked upon to contribute to existing body of
knowledge and the findings derived can be used as generalization on academic
endeavours.
The study will be important to the small and medium scale enterprises in
Nigeria in that it highlights alternative means of raising capital. This will solve
their main problem of poor financing.
The study will also important to the economy as it give recommendation on
how to promote small and medium scale enterprises through adequate financing.
This is capable of increasing the activities of SMEs in the country, thereby leading
to sustainable economic growth.
1.7 Scope of Study
The scope of this research study will be limited to some selected business
enterprises in Ibadan and its environs of Oyo state Nigeria, due to limited time and
resource.
1.8 Plan of the Study
The proposed research work will be divided into five (5) chapters in
follows:-
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Chapter one focuses on the general introduction to the study. This chapter
examines background to the study, statement of the problem, objective of the
study, research questions, hypothesis, justification the study. Chapters two focuses
on literature review and conceptual framework and Empirical Studies. Under this
chapter, various works of different scholars are examined and reviewed. Also,
different concepts relating to the study area are examined. Chapter three examines
research methodology. It explains concepts such as the study area, population and
sample of the study. Research design, research instruments data types and methods
of data analysis. Chapter four examines data presentation, analysis and
interpretation. Here, the formulated hypotheses are analyzed and subsequently
analyzed. While, chapter five is about summary of findings, conclusion
recommendations and suggestions for further study.
1.9 Definition of Operational Terms
Franchise: A privilege or right officially granted to offer specific products or
services under explicit guidelines at a certain location for a declared period of
time.
Franchise Agreement: The legal document between the Franchisor and the
Franchisee that governs the relationship between the two entities for a specified
period of time. It frames the relationship in a concise manner.
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Franchisee: A person or entity to whom the right to conduct a business is granted
by the franchisor or licensor.
Franchisor: the Company owning/controlling the rights to grant franchises to
potential franchisees.
Franchising: A long-term cooperative relationship between two individual
companies - a franchisor and one or more franchisees - based on a legal agreement
in which the franchisor provides a licensed privilege to the franchisee to do
business.
Small and Medium Scale Enterprises: Businesses with not more than 50 staff
and small market share.
Entrepreneur: A person with the desire to create his own career opportunity and
who is willing to assume the responsibility, risk and rewards of starting and
operating a business.
Business Plan: A plan developed by the franchisee that provides the objectives of
a business and the steps necessary to achieve those objectives.
Capital Required: The amount of liquid assets a potential franchisee is required
to have to provide for the start up and initial operation costs of the business.
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CHAPTER TWO
CONCEPTUAL FRAMEWORK, THEORETICAL FRAMEWORK AND
EMPIRICAL REVIEW
2.1 Conceptual Framework
Franchising is a long-term cooperative relationship between two entities—a
franchisor and one or more franchisees—that is based on an agreement in which
the franchisor provides a licensed privilege to the franchisee to do business
(Emerson and Robert 2010). The franchisor grants the franchisee the right to use a
developed concept, including trademarks and brand names, production, service
and marketing methods and the entire business operation model, for a fee. The
franchisee then provides the time, capital, and desire to utilize the brand and
services provided by the franchisor to build a thriving business. The product,
method or service being marketed is usually identified by the franchisor's brand
name, and the holder of the privilege (franchisee) is often given exclusive access
to a defined geographical area for a defined period of time, all of which is defined
in the Franchise Agreement. Franchising developed over time as an efficient way
to do business and there were versions of franchising employed in Europe
centuries ago (Konigsberg & Alex 2009). The origin of the word franchise goes
back to Anglo-French, meaning freedom, liberty, and from Middle French,
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franchir, to free, and earlier from Old French franc, free. In the middle ages the
local titled land owner would grant rights to the peasants or serfs, probably for a
consideration, to hunt, hold markets or fairs, or otherwise conduct business on his
domain. With the rights came rules and these rules became part of European
Common Law. Isaac Singer (1811-1875) got the credit for starting the modern use
of franchising in the U.S (Bradach, 1998). During the early 1850s, Singer, who
had improved an existing sewing machine model, wanted to find a wider
distribution for his product but lacked the money to increase manufacturing.
Another problem was that people wouldn’t buy his machines without training, a
service retailers weren’t able to provide. Singer's solution, to charge licensing fees
to people who would own the rights to sell his machines in certain geographical
areas, provided money for manufacturing. These licensees became responsible for
teaching people how to use his machines, which created opportunities to bring the
first commercially successful sewing machine to the public (Allen, 2008).
Franchising was employed on a limited basis after the success of Singer’s
sewing machine distribution method. Business format franchising (the licensing of
the brand name/trademarks and of the entire business concept), which is the
dominant mode of franchising today, came onto the economic scene after World
War II and the subsequent baby boom. There was an overwhelming need for all
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types of products and services, and franchising provided a way to quickly grow
businesses. It was Ray Kroc (1902-1984), a milk shake mixer salesman who
discovered the McDonald brothers' small San Bernardino, California hamburger
stand in 1954, who is credited with unleashing the wave of franchising we know
today (Bradach, 1998). He found they were buying so many of his mixers because
they had developed a high-volume production system which enabled them to
provide fast service with consistent results and low cost. Kroc became their
licensing agent and recruited franchisees, starting in the Chicago area. In 1961 he
bought out the McDonald brothers’ interest and took the title of senior chairman.
By 1988, McDonald’s had opened its ten thousandth restaurant and today there are
over 30,000 McDonald’s restaurants worldwide. As the number of franchised
businesses grew, the need for legislation and consumer protections followed. The
International Franchise Association (IFA) was founded in 1960 as a membership
organization of franchisors, franchisees and suppliers with the purpose of
providing help and guidance to the entire industry. They adopted a Code of Ethics
to establish a framework for the implementation of best practices in the franchise
relationships of IFA members. The Code represents the ideals to which all IFA
members agree to subscribe in their franchise relationships. The IFA works
closely with the US Congress and the Federal Trade Commission on improving
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how the industry relates to the franchisees and has been integral to the expansion
of franchising around the world (The Federal Trade Commission, 1979).
In 1978 the Federal Trade Commission enacted a law requiring all
franchisors to submit to all potential franchisees a document called the Franchise
Disclosure Document (FDD) prior to receiving money. The FDD provides detailed
information on the franchise company, including its history, the officers, any
litigation history, estimated investment, an overview of the business concept, and
a copy of the franchise agreement. A current list of franchise owners’ names and
telephone numbers is a required component, allowing prospective franchisees the
opportunity to research the franchisor’s claims. The purpose of the FDD is to
provide sufficient information on a company to help the prospective franchisee to
make a more informed decision. It is also to be presented in a manner that is
consistent, straight forward and relatively easy to understand (Allen, 2008).
Franchising has had an enormous impact on the U.S. economy.
Entrepreneur magazine, Jan, 2005, quoted then president of the IFA, Don DeBolt,
as saying that franchising accounts for almost half of all U.S. retail sales. A study
released by the IFA in March 2004 and conducted by PricewaterhouseCoopers
measured the direct and indirect impact of franchise businesses. The study showed
that franchises directly employed 9,797,000 people in 2001, as many people that
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year as all manufacturers of durable goods and ahead of the financial, construction
and information industries. Franchising is clearly a powerful model to help people
realize their dreams. Its success is manifested in the number of operating
franchises, the number of brand names built through franchising; the millions of
customers served every day, and the tremendous opportunity it represents to
franchisees (Gurnick, 2011).
2.1.1 Franchising in Nigeria
Nigeria is a growth market for U.S. franchising and franchise development
services. There are opportunities for both business format and product or
trademark franchising. A market survey conducted by the U.S. Commercial
Service in Nigeria (CS Nigeria) in January 2006 clearly showed that food
franchising is currently experiencing strong growth. This growth trend is expected
to continue over the next five years and in fact may have a spillover effect on
other sectors. CS Nigeria recruits and escorts an official Nigerian delegation to the
annual international franchise expo organized by the International Franchise
Association (IFA) based in Washington .D.C. It works closely with the Nigerian
International Franchise Association (NIFA) and participates in the association’s
trade events. In October 2006, representatives of CS Nigeria and NIFA attended
one-week training in Morocco organized by the Africa Development Bank
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(AFDB) to help some emerging franchise markets in Africa to leverage this
business model in providing business advisory services especially to small and
medium enterprises (Kabir, 2008).
Commercial Service Nigeria holds an annual exhibition to promote U.S.
computer, telecom and office equipment technology, equipment and services
available in Nigeria for West Africa. In 2007, franchising was the featured
industry, as the “Best Business Model to Empower Micro, Small and Medium
Enterprises in Nigeria.” CTO2007 took place May 7 to 11, in Lagos, Nigeria
(Kabir, 2008). Franchising as a business format is gaining a foothold in Nigeria
through several private-sector-led initiatives originating from Commercial Service
Nigeria and Commercial Service South Africa and supported by the Nigeria
International Franchise Association (NIFA) and Nigerian entrepreneurs. The
industry sectors where franchising seems to be showing some promise and rapid
growth include fast food, hotel services, oil and gas (downstream), computer
training, telecommunications and distribution services (The Federal Trade
Commission, 1979).
The success of some indigenous concepts and systems, such as Mr. Biggs,
Tantalizers and Tasty Fried Chicken, has added impetus to the level of interest this
method of business expansion is generating in Nigeria. As a method of marketing
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and distribution, franchising comes under Nigeria's sales law, which derives its
operating terms and conditions from British common law. According to market
reports and industry estimates (including the reports of international organizations
such as the IFC), small enterprises constitute about 87 percent of businesses in
Nigeria, while medium and large enterprises account for about 9 percent and 4
percent, respectively. The single most important success factor and the biggest
challenge facing Nigerian business enterprises, particularly small-to-medium-sized
ones, is a lack of basic understanding and commitment to business-process
management (Dant, & Gregory, 2009)
More than 80 percent of business failures in Nigeria can be traced to this
critical business factor. Franchise development and services in Nigeria offers U.S.
firms an unmatched opportunity for international expansion and growth and a
huge return on investment. Interested U.S. franchisors may utilize the services of
the Commercial Service Nigeria to identify, pre-qualify and select a competent
and reliable master franchisee or area developer for the country (The Federal
Trade Commission. 1979). The National Office of Industrial Property Act of 1979
established the National Office of Technology Acquisition and Promotion
(NOTAP) to facilitate the acquisition, development, and promotion of foreign and
indigenous technologies. NOTAP is the government agency responsible for
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commercial contracts and agreements dealing with franchising and transfer of
foreign technology. It ensures that investors possess licenses to use trademarks
and patented inventions and meet other requirements before sending remittances
abroad. With the Ministry of Finance, NOTAP administers 120 percent tax
deductions for research and development expenses if carried out in Nigeria and
140 percent deductions for research and development using local raw materials.
NOTAP participates in trade events including international buyer programs such
as the annual international franchise expo organized by CS Nigeria. It has a
mandate to commercialize institutional research and development with industry
(Wild et al., 2000).
2.1.2 Factors to be considered by SMEs Wishing to Franchise
As the agreement or contract between the franchiser and franchisee limits,
to a certain extent, the franchisee's freedom to operate its business at it sees fit, as
it must comply with the franchiser's requirements as stated in the agreement.
Therefore, when selecting a franchiser, apart from considering the preferential
conditions provided, the SME should also take into account other factors,
including: the reputation of the brand, the background of the franchiser, its
operating methods and financial state, stability of product supply, whether the
prices are reasonable, the relationship between the franchiser and its other
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franchisees and possibilities of market development and then select the
appropriate franchiser that it feels will be the best to support its business
development.
Whatever business strategy an enterprise has chosen, it should clearly understand
and be aware of the different kinds of risks and competition (The Federal Trade
Commission. 1979). Therefore, franchisees should take into consideration issues
such as operation strategy, costs and management to maintain its competitiveness.
2.1.3 An overview of small and medium enterprises (SMEs) in Nigeria
There is hardly any unique, universally accepted definition of SMEs
because the classification of business into small and large scale is a subjective
judgment (Chukwuemeka, 2006). Ukpabio (2004), noted that definitions of SMEs
vary both between countries and between continents. The major criteria use in the
definitions according to Carpenter (2003) could include various combinations of
the following: Number of employees, financial strength, Sales value, Relative size,
Initial capital outlay and Types of industry. Inang and Ukpong (2006) however,
stressed the indicators prominent in most definitions namely, size of capital
investment (fixed assets), value of annual turnover (gross output) and number of
paid employees. In countries such as the United States of America, Britain and
Canada, small and medium business is defined in terms of annual turnover and
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number of paid employees. In Britain, for instance, a small and medium business
is defined as that business with an annual turnover of €2 million or less with fewer
than 200 paid employees.
According to Small and Medium Industries Development Corporation
(SMIDEC), an enterprise is considered as an SME in each of the representative
sectors based on the annual sales turnover or number of full time employees.
SMEs are divided into two sectors; manufacturing, manufacturing related services
and agriculture industries; and services (including ICT) and primary agriculture,
companies/ institutions with net assets or shareholders funds of 10 million naira
whilst prior to that the shareholders funds or net asset was limited to 2.5 million
naira. The frequent changes in the definition of SMEs have also affected the
formulation of long-term strategy for SMEs development.
The definitions for SMEs in various countries are different. The criteria for
classifying enterprises into different categories are usually number of employees,
value of assets and sales. Currently, the definition used is in accordance with the
Prime Minister Decree No. 42 officially issued in 2004 based on the number of
employees, the value of assets and the annual average turnover. It states that:
“Small and Medium-Sized Enterprises are independent establishments which are
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legally registered and are running their activities in accordance with the laws of
Nigeria.” The sizes are defined by the following criteria:
1. Small enterprises – those with an annual average number of employees not
exceeding 19 persons or total assets not exceeding 250 million naira or an
annual turnover not exceeding 4 hundred million naira.
2. Medium-sized enterprises – those with an annual average number of
employees not exceeding 99 persons or total assets not exceeding 1.2
billion naira or an annual turnover not exceeding 1 billion naira.
2.1.4 Types of Small and Scale Enterprise
Fasusa (2006) categorized business that full under small and medium scale
as follow in small scale enterprise, firewood supply, packaging of food items,
meat retailing, plantain production, restaurant service, small scale poultry raising,
rabbit raising, organizing labour squad, operating a nursery for children, home
service, arranging food for parties and host of others. Business grouped under
medium scale according to Fasua (2006), are: soap production, aqua culture/fish
farming, chalk making, foam production, nylon production, concrete block
production, hair/body cream productions, chemical production, commercial
poultry, professional practice claw, accountancy, education, food and beverage
production among others.
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2.1.5 Importance of Small and Medium Scale Enterprises in Nigeria
(MSEs)
Small firms are backbone of national development. For a country to reach
its full potential in terms of economic and social development, it cannot afford to
ignore the importance of its indigenous micro and small scale enterprises (MSEs)
and the contributions that they make to the country’s economy. In this wise trade
liberalization and the encouragement of foreign directive investment has to go
hand in hand with a through and concentrated effort to help the growth and
development of small business to enhance development. For instance, study done
by the federal office of statistics in 2004 shows that 97% of all businesses in
Nigeria employed less than 100 employees. It therefore means that 97% of all
business in Lagos State used the umbrella “small business”. The micro and small
enterprises sector provides, on average, 50% of Nigeria’s employment and 50% of
its industrial output. No government can afford to ignore such a high contributor
to its economy. The proportion of Nigeria micro and small enterprises and their
impact on the economy is pretty much similar to these in other countries of the
world especially in advanced economies. These altogether employed more than
50% of private work force, and generate more than half of the nations.
30
2.1.6 Rationale for Emphasizing Small Scale Enterprise in Nigeria’s
Industrial Development
Wortman (2011), observed that one major claim for focus on SMEs is that
they are large employers of labour and this makes them vital in coping with the
problems of unemployment and poverty. According to him, strong evidences
based on country and regional experiences exist to show that small firms are major
source of employment opportunities for a wide cross-section of the workforce: the
young, old part-time workers and the cyclically unemployed. Ukpabio (2004) and
the World Bank (2001), agreed that it is micro and small scale enterprises (MSEs)
that play intermediate role in the development of large scale enterprises. They
reduce regional disparities through the creation of employment opportunities in
the rural areas and mobilize local resources more readily than large-scale
industries. Uzor (2004) opined that micro and small scale enterprises (MSEs)
contribute to national development by positively influencing the distribution of
income both in functional terms, wages and profits in nominal terms. Focus on
SMEs help to decentralize industries thereby not only accelerating rural
development but also stemming urban immigration and the consequent problems
of congestion in the cities. Another rationale for focus on micro and small scale
enterprises (MSEs) is its contribution to value added in the manufacturing sector
31
and to the Gross Domestic Product (GDP) of the economy. Numerous country
studies have shown that the value-added contribution of SMEs can be quite
substantial for example small firms in the U.S. economy in 1978 accounted for
37% of the GDP, SMEs have also the potentials for contributing to export
promotion as is the case in some developed countries where industrial exports are
drawn from the small firms producing textiles, electrical goods, clothing, leather
and ceramic products etc. Micro and small scale enterprises (MSEs) have been
found to have locational flexibility. From the study conducted by Uzor (2004), he
noted that MSEs could be more readily used to achieve industrial dispersal and
regional balance in economic development. Of particular importance is small
firms’ usefulness in the diversification of the industrial structure and for the
transformation of the rural economy. Another outstanding contribution of modern
small business is its influence on the contribution to the competitive price
structure. The large number of small firms forms a broadly based variety of piece
enterprise firms, providing a near perfect competitive situation. In this way, small
businesses act as a natural antidote to the price formation of large and powerful
monopolistic or oligopolistic conglomerations. Economists have in addition to the
above reasons for the attractiveness of small firms, identified specific advantages
associated with small-scale enterprises.
32
2.1.7 Problems of Small Scale Enterprise
Baridam (2001), contend that most of problems of small and medium scale
enterprises including manufacturing ones are external to it. According to Baridam
(2001), “among the more important of these external or environmental factors are
those related to capital shortage, taxation and regulations, product liability patent
and franchising abuses. These are discussed:
Lack of Basic Infrastructure: The micro and small scale enterprises (MSEs)
sector Nigeria operates in an environment with very poor infrastructure which
constitutes a barrier to entry and hinders international competitiveness. In many
States in the country, nonexistent of infrastructure, inability to access market,
communication, power, water etc. prevent development of micro and small scale
enterprises.
Access to Financing: Lack of short, medium and long term capital, inadequate
access to financial resources and credit facilities affect the growth of micro and
small scale enterprises (MSEs).
Capital shortage: The author observes that small scale enterprises (MSEs) have
serious financial problem in at least three respect of:
a) Securing funds in small amount at rates comparables with those paid by large
industries.
33
b) Building and manufacturing adequate financial reserves
c) Securing long term equity capital.
Inflation: Despite the fact that cost of capital is higher for the small scale
manufacturer, the effect is even compounded by raising inflation rate.
2.1.8 Challenges in Facing Small Scale Enterprises in Nigeria
There are various challenges facing micro and small scale enterprises in
Nigeria; while some are financial others are non financial. The financial
constraints include those factors that prevent small scale enterprises from
accessing funds easily, inadequate sources and supply of funds has been a major
setback to the realization of many brilliant business ideas and outward expansion
of existing business. The inability of the small business owners to raise funds
expand their business has been linked to poor business history, high risks,
associated with starting new business, which banks tend to avoid, insufficient
collaterals, inadequate record keeping and knowledge of the risks facing their
business (Carter & Jones, 2000).
Record keeping is particularly important to the integrity of the business.
The prevailing corrupt tendency in Nigeria society, which has permeated the
fabric of the society including Nigeria entrepreneurs, have prevents most small
and medium enterprises operators from keeping adequate records. Many
34
entrepreneurs avoid paying tax into the relevant authorities. Poor governance
structure is another factor preventing small and medium enterprise to access
founds easily from banks and other specialized financial institution. An industrial
analysis recently observed that one of the reasons why small scale enterprises
funds has not been invested, is the operator prefer to get the funds as loan, rather
than as equity contribution. To gain access to finance, small scale enterprises
owner should learn to put up realistic business plan supported with financial
projections, which highlight the profitability of the enterprises before they seek for
funds. Such companies should be duly and legally registered with appropriate
authorities maintain financial records and put in place strong internal control
mechanism (Johnson, 2009).
2.1.9 Ways of Developing Small Enterprises to Enhance National
Development in Nigeria
Small enterprises play dispensable role in national development and to
reflect its acceptance and recognition of this, the federal government must has
small business policy at the top of its agenda; it has to put concrete steps in place
to ensure they are able to grow and prosper (Harrigan, 2008). In for instance one
of the ways of doing this, will be set up a national small business (NSBO) along
the line of the small business agency in the United State and Medium Business
35
Services. The national small business office (NSBO) will be an independent body
and will have overall responsibility nationwide for all policies and programme
relating to small and medium business including micro business, will have its own
budget, and will be closely monitored by and answerable to the National
Assembly. The national small business office (NSBO) can be replicated at the
state level. The state small and medium office will have responsibility for running
national policies and programme set up by national small business office (NSBO)
at the state level and will also be directly answerable to state Assemblies. The task
which will be appropriate to national small business office (NSBO) will be the
promotion of exporting activities amongst small businesses to make them more
outward looking and more able to participate in the global market place (Hisrich
and Shepherd, 2005). Another important way of developing micro and small scale
enterprise is by establishment of a small Business Development Bank (SBDB) to
concentrate solely on the funding to indigenous businesses. The small Business
Development Bank (SBDB) will help to combat the problem of
undercapitalization by providing the necessary cost effective and easily accessible
funding for business (Otokiti, 2004).
Moreover, it should not be the sole responsibility of government to provide
financial assistance to business. The national small business office (NEBO) will
36
then have to seriously took into how it can is largely practiced in both the U.S and
U.K equity funding, or venture capitals as it is widely known, has been the secret
behind the growth of silicon valley, and the mass number of fast growing high
technology companies that abound in developed countries. With high number of
billionaires originated from developing countries like Nigeria, the national small
business office (NSBO) has to find a way of encouraging them to invest their
wealth in small and medium enterprise, thereby helping them and the country to
grow. Lastly, micro and small scale enterprises should from time to time organize
training programme for their employees on how to use some modern equipment
like computer and other machines to tenable them cope with the changing
technology. Employees should equally times be granted study leaves by their
employers; this will go along way producing skilled workers in small and medium
enterprise (Otokiti, 2004).
2.2 Theoretical Framework
2.2.1 The New Growth Theory
The new growth theory, formalized by Romer (2006), assumes that firms
exist exogenously and then engage in the pursuit of new economic knowledge as
input into the process of generating endogenous growth. Technological change
plays a central role in the explanation of economic growth, since on the steady
37
state growth path the rate of per capita GDP growth equals the rate of
technological change. The particular functional form of knowledge production is
explained by the assumption that the efficiency of knowledge production is
enhanced by the historically developed stock of scientific-technological
knowledge. Even the same number of researchers becomes more productive if the
stock of knowledge increases over time.
The most original contribution of Romer (2006), is the separation of
economically useful scientific-technological knowledge into two parts. The total
set of knowledge consists of the subsets of non-rival, partially excludable
knowledge elements that can practically be considered as public goods, and the
rival, excludable elements of knowledge. Codified knowledge published in books,
scientific papers or in patent documentations belongs to the first group. This
knowledge is non-rival since eventually it can be used by several actors at the
same time and many times historically. On the other hand it is only partially
excludable, since only the right of applying a technology for the production of a
particular good can be guaranteed by patenting, while the same technology can
spill over to further potential economic applications as others learn from the patent
documentation. Rival, excludable knowledge elements are primarily the
personalized (tacit) knowledge of individuals and groups, including particular
38
experiences and insights developed and owned by researchers and business
people. New Growth theory offers no insight into what role, if any, entrepreneurial
activity and agglomeration effects play in the spillover of tacit knowledge. While
the new growth theory is a step forward in our understanding of the growth
process, the essence of the Schumpeterian entrepreneur is missed. As pointed out
by Schumpeter (2002) “the inventor produces ideas, the entrepreneur ‘gets things
done’ … an idea or scientific principle is not, by itself, of any importance for
economic practice.” Indeed, the Schumpeterian entrepreneur, by and large,
remains absent in those models.
2.2.2 Integrated Model of Small Firm Growth
The existence of a large number of internal and external factors that could
affect firm growth creates a challenge for studies aiming at approaching full
explanation of the phenomenon. While also other individual studies cover a range
of factors on different levels. Laofontaine, and Shaw (2009) represent two out of
few attempts to formally integrate a broad range of growth determinants in a
causal model and to test it empirically. In the model all manifest predictors are
regarded as aspects of three exhaustive factors: ability, need and opportunity. He
further distinguishes between objective and perceived versions of these variables
39
but as his study was cross-sectional only the objective factors could be related to
actual growth in the empirical analysis.
His results show that all three factors affect growth but also that the
variables indicating variance in the need for growth were the most influential.
They also had the most stable effects across industries. The same pattern emerged
when objective and perceived ability, need and opportunity were related to future
growth aspirations. Laofontaine and Shaw (2009), combined three theoretical
perspectives in his model: the resource-based view, the motivation perspective,
and strategic adaptation. His results confirm that all included categories of
variables influence growth. However, in empirical estimation aspects of
motivation and the environment were ascribed direct effects alongside their effects
via strategy. While Laofontaine, and Shaw models capture many factors and
include mediated effects, they do not include interactive (or moderated) effects,
which recent research has suggested are important. Investigating both mediation
and moderation at the same time may be beyond the capacity of any researcher, or
even the statistical software used. An alternative strategy is then to confine the
study to one level of analysis (or one disciplinary perspective) and to limit other
influences by drawing a sample from a relatively homogeneous empirical context.
An excellent and recent example is Baum and Locke's (2004) psychological study
40
of determinants of firm growth. Confining their study to a population of North
American architectural woodwork firms and including a small number of firm-
and environment level control variables, these researchers find strong direct
effects of goals, communicated vision, and self-efficacy on growth over a six-year
period. In line with their theory, they also found mostly indirect effects of passion,
tenacity and new resource skills. In a study using a more heterogeneous sample
these relationships may well have remained undetected.
2.2.3 Greiner’s Model of Venture Growth
The phases depicted in stage models are often similar. One model that is
frequently referred to is the one suggested by Greiner (2002), who claims that
during growth organizations would move through five distinct and distinguishable
phases of development. Each of these phases contains a relatively calm period of
growth that ends with a managerial crisis. Each phase is characterized by a
dominant managerial style employed to achieve growth, and each crisis is
characterized by a dominant managerial problem that must be solved before
growth can continue. Thus, each phase is not only the outcome of the previous
stage, but also the cause of the next phase. The model begins with the
foundation of an organization, in which it searches for a product-market
combination. This entrepreneurial phase is based on informal and frequent
41
communication between the CEO and employees, and the control of activities
derives from immediate marketplace feedback. As the organization grows and thus
the scale of production increases, greater knowledge about manufacturing
(efficiency) is required, and the increased number of employees can no longer be
managed informally. Greiner argues that at this point a crisis of leadership would
occur, in which new managers might have to come in who are acceptable to the
founder(s) and who can pull the organization together. Those companies that
survived this first phase by taking on board capable managers will embark on
periods of sustained growth. Greiner suggests that at this stage a functional
organizational structure would be introduced and job assignments would become
more specialized. Communication becomes more formal and less personal, and a
hierarchy of positions and titles develops.
Though these steps are meant to channel energies into growth, they
eventually become inappropriate for a larger and more complex organization.
Especially lower level employees find themselves restricted by the centralization,
leading to a crisis due to demands of greater autonomy. The result of the crisis is a
higher level of delegation, although lower-level managers might not be used to
making decisions for them and top-level managers might not be willing to give up
responsibility. The next growth phase evolves from the successful employment of
42
decentralized organizing principles. In this stage, top management is freed of
operational involvement and can make acquisitions, which can be operated
alongside other decentralized units. In terms of growth, this stage is driven by
increased employee motivation as well as acquisitions, but top management might
eventually sense that they are losing control over the diversified company. Thus,
the following crisis occurs when management attempts to regain control by
coordinating the activities more tightly. The fourth phase is then characterized by
the use of formal systems for achieving better coordination, and formal planning
systems are being established. Typically, planning would be centralized in
headquarters, while at the same time daily operating decisions would remain
decentralized.
The driving force for growth in this phase is the more efficient allocation of
resources. However, gradually a lack of trust might emerge between staff and line,
and between headquarters and the decentralized units. This leads to a crisis, which
according to Greiner (2002) would lead to more collaboration.
2.2.4 Theory of Franchising as a Means of Entrepreneurial Activity
Franchising developed most in USA, International expansion to cope with
market saturation Growth rate accelerated, end of 1980's appro x 400 American
business format Fr'sors operated in about 37,000 foreign outlets If you consider
43
the iconic US business format franchise - the fast food/restaurant industry -
number of outlets exported' to other countries rose from 2,169 establishments in
1974 to 8,485 in 1989 (Howarth International, 1991). Conditions favourable to
the growth of franchising~' Achieved Figures suggest, that 15% of US Franchised
outlets are now located in lesser developed countries (International Franchise
Research Centre Special Studies Series Paper No:7 - John Stanmore). Developing
countries must decide whether 'know-how' gained by the import of, mainly US,
franchise systems outweighs disadvantages resulting from the displacement of
existing local business and capital outflows (repatriated profits).
Risks of employing franchising as a vehicle to international expansion,
(Fr'sors viewpoint) are:
Possible difficulties in repatriating royalties;
Difficulties in protecting copyright and other IP rights;
Difficulty in policing quality standards;
Local laws may create difficulties in terminating contracts;
Unfamiliar laws, regulations, languages and business norm.
Franchising as form of business expansion SMEs play an integral role all
economies 90% of enterprises are SMEs and account for 50-60% of employment
the Franchising Industry accounts for 13.70/0 (indirectly) of employment in the
44
private sector in the Nigeria and UK contributes to about £10.5 billion to UK
Clearly franchising is integral to all economies and is here to stay.
2.2.5 The Franchising Model
Generally speaking, franchising in SME refers to a situation on which,
upon agreement between the parties, the franchisee pays the franchiser a Franchise
Fee (which may include the fees for participation, promotion and advertisement,
the right to use the franchise name, store location assessment, training, leasing
costs for equipment and fixtures), in order to take advantage being able to use the
franchiser's brand name or trade mark and operate or provide services under the
franchised rights. Furthermore, the franchisee must operate in accordance with the
operating model provided by the franchiser, while the franchiser has the obligation
to provide the franchisee with the respective rights and support needed to
supervise its operation, as a means to ensure that the brand name is operated in
accordance with the company's policies.
A. Production Distribution Franchises SME model
Under this operating model, the relationship between the franchiser and the
franchisee is similar to that between a supplier and agent. The franchisee may sell
products, brand names or service belonging exclusively to the franchiser, but this
type of franchising does not confer to the franchisee the right and technical know-
45
how to develop products and services. Production distribution franchises are
usually suitable for the distributors of soft drinks, mobile phone agencies and
petrol stations.
B. Business Format Franchises SME Model
Under the Business Format Franchise SME model, apart from enjoying
exclusive rights to sell the product, brand name or service, the franchisee may also
be authorised to produce and develop products or services itself. This franchising
model is the most commonly used, for instance, in fast food restaurants, retail
stores and restaurants. This sections of the chapter deals with various submission
of various authors on the area of the study and also discusses relevant theories on
franchising and Small and medium enterprises. Whether or not programs which
promote small and medium scale (SME) enterprises can stimulate job creation and
contribute to poverty reduction in developing countries is an important question.
The motivation for such support is often predicated on the view that small firms
create more jobs per unit of investment by virtue of being more labor intensive
and that the jobs so created are concentrated among the low-skilled and hence the
poor. In spite of the policy prominence of SME support programs, the empirical
evidence for these propositions is weak.
46
Franchising has attracted research attention from diverse disciplines,
including: management, law, economy, marketing, and finance (Dant and
Kaufmann, 2008). However, there is limited research on the valuation of
franchising based on theoretical model constructions. Among these researchers,
Betcherman (2004), adopts a 2-stage model to explore strategies underlying
industry consolidation and explore the optimized franchise fees included in a
franchise contract. Jeon and Park (2012) establish a model to compare the
franchise fee rate that is common among Japanese convenience stores, namely the
franchise fee based on margin-based royalties or sales-based royalties. They find
that convenience stores adopting margin-based royalties will lower retail prices,
order higher merchandise volumes and earn higher profits under demand
uncertainty.
Michael (2009) establishes a model to test if a franchisor is impacted by a
difference in merchandise and estimates the magnitude of such an impact. He
shows that franchise elasticity represents the impact on a franchisee's payment
expense due to changes in demand. Small and medium scale enterprises in most
developed and economics of which Nigeria is one are the main life wire of the
economy. Small scale enterprises have helped in the transformation of many
countries including Nigeria. Franchising is commonly understood as a
47
"contractual agreement between two legally independent firms in which one firm,
the franchisee, pays the other firm, the franchisor, for the right to sell the
franchisor's product and/or the right to use its trademarks and business format in a
given location for a specified period of time."The franchise format has evolved
over time to include variations ranging from the basic rights to sell a product, to a
more complex agreement that might include branding, manufacturing, sales,
distribution, and all operational processes associated with running a business.
Avon, for instance, rapidly increased its business by franchising the sale of its
cosmetics using Avon Ladies who took a door-to-door sales approach. The route
McDonald's took to franchising, in contrast, includes most facets of operating and
running the business, ranging from menu selection to real estate to product inputs
and operating procedures.
Perhaps, no other development strategy has enjoyed as much prominence in
Nigeria's development plans as the Small and Medium Enterprises (SMEs)
development strategy. In recent years, particularly since the adoption of the
economic reform programme in Nigeria in 1986, there has been a decisive switch
of emphasis from the grandiose, capital intensive, large scale industrial project
based on the philosophy of import substitution to micro and small scale enterprises
with immense potentials for developing domestic linkages for rapid, sustainable
48
industrial development. Apart from their potential for ensuring a self reliant
industrialization, in terms of ability to rely largely on local raw materials, small
scale enterprises are also in a better position to boost employ raw materials, small
and medium enterprise, are also in a better position to boost employment,
guarantee a more even distribution of industrial development in the country,
including the rural areas, and facilitate the growth of non-oil exports. According to
the National Council on Industry (1991) cited in Olajide, Ogundele, Adeoye and
Akinlabi (2008), micro/cottage industry is an industry whose total project cost
excluding cost of land but including working capital is not more than N500,
000:00 diversified company. Thus, the following crisis occurs when management
attempts to regain control by coordinating the activities more tightly. The fourth
phase is then characterized by the use of formal systems for achieving better
coordination, and formal planning systems are being established. Typically,
planning would be centralized in headquarters, while at the same time daily
operating decisions would remain decentralized.
The driving force for growth in this phase is the more efficient allocation of
resources. However, gradually a lack of trust might emerge between staff and line,
and between headquarters and the decentralized units. This leads to a crisis, which
according to Greiner (2002) would lead to more collaboration. This sections of the
49
chapter deals with various submission of various authors on the area of the study
and also discusses relevant theories on franchising and Small and medium
enterprises. Whether or not programs which promote small and medium scale
(SME) enterprises can stimulate job creation and contribute to poverty reduction
in developing countries is an important question. The motivation for such support
is often predicated on the view that small firms create more jobs per unit of
investment by virtue of being more labor intensive and that the jobs so created are
concentrated among the low-skilled and hence the poor. In spite of the policy
prominence of SME support programs, the empirical evidence for these
propositions is weak, (Betcherman 2004).
Franchising has attracted research attention from diverse disciplines,
including: management, law, economy, marketing, and finance (Dant and Rajiv,
2007). However, there is limited research on the valuation of franchising based on
theoretical model constructions. Among these researchers, Blair and Lafontaine
(2005) adopt a 2-stage model to explore strategies underlying industry
consolidation and explore the optimized franchise fees included in a franchise
contract. Jeon and Park (2012) establish a model to compare the franchise fee rate
that is common among Japanese convenience stores, namely the franchise fee
based on margin-based royalties or sales-based royalties. They find that
50
convenience stores adopting margin-based royalties will lower retail prices, order
higher merchandise volumes and earn higher profits under demand uncertainty.
Michael (2009) establishes a model to test if a franchisor is impacted by a
difference in merchandise and estimates the magnitude of such an impact. He
shows that franchise elasticity represents the impact on a franchisee’s payment
expense due to changes in demand. Small and medium scale enterprises in most
developed and economics of which Nigeria is one are the main life wire of the
economy. Small scale enterprises have helped in the transformation of many
countries including Nigeria. Small scale enterprises that are adequately managed
and properly funded help the government to achieve some macro-economic
objectives, which include employment creation, mobilization of local resources,
mitigating rural urban migration and poverty reduction. Small and medium scale
enterprises also to help in encouraging capacity utilization in agriculture and
industries. Small scale enterprises help in income distribution, and encourage
development of local technology.
According to Agganwal (2011) small and medium enterprise are defined as
business enterprises having a maximum asset base of N 20 million (US $ 1.78
million) excluding land and working capital. The number of employees is defined
as “not less than 10 and not more than 300”. The nation council of industries
51
(NCI) in 1992 streamlined various definitions given to small medium enterprise
(SMES). The NCI defined SMEs as those with fixed assets above N1 million –
excluding land but including working capital. According to Oyelaran (2007),
small medium enterprises are businesses with turnover of less than 3100 million
per annum and/or less than 300 employees. The promotion of sustainable
enterprises is a broad and wide-ranging subject, not least because enterprises take
many forms, not just in terms of size, sector and spatial dimensions but also in
terms of how an enterprise is managed and governed and its legal status and
operational objectives. All enterprises are part of society; they shape and are
shaped by the communities in which they operate, Robert (2007).
Promoting sustainable enterprises is about strengthening the institutions
and governance systems which nurture enterprises – strong and efficient markets
need strong and effective institutions – and ensuring that human, financial and
natural resources are combined equitably and efficiently in order to bring about
innovation and enhanced productivity. This calls for new forms of cooperation
between government, business and society to ensure that the quality of present and
future life (and employment) is optimized whilst safeguarding the sustainability of
the planet. It is apparent that small and medium enterprises (SMEs) play a vital
role in the economic development of a country. The current trend of economic
52
growth and the rapid industrial development has made Nigeria as one of the most
open economies in the world. In conjunction with the Central Bank, the
government is devoting and designing the SME development plan to assist the
SMEs to meet the new business challenges in the competitive global business
environment, Onyeyinka (2008).
2.4 Empirical Review
Olu (2011) in his study on Franchising: hybrid organisational arrangement
for Firm growth and national development examined the practice of franchising as
a strategy by which entrepreneurs can expand their venture and make substantial
return from their investments. The paper tried to explore the extent to which
franchising is being practiced in Nigeria and the resultant effect of franchising on
the national economy. The study was done by taking intensive study of Nigerian
business world to see the extent of the practice of franchising system of business.
The result of this study showed that franchising is not well known or practiced in
Nigeria. Only a handful of business entities such as the Nigerian Bottling
Company and some fast food companies have been engaged in franchising. The
paper recommends that government should create a greater awareness of the
franchise strategy so that more investors will be aware of it and invest in it. This
53
will create more employment opportunities, reduce poverty level, and ultimately
improve the Gross Domestic Product of the nation.
Olu and Irefin (2011) also embarked on Franchising and organizational
performance: Empirical investigation of selected fast food Restaurants in Nigeria.
The study tried to gain insight into the relationship between franchising and
organizational performance using selected fast food restaurants in Nigeria as case
study. It specifically investigates the effects of franchising types and franchising
ownership on organizational performance. The survey research design was
employed. Primary data were used and they were collected through the
administration of question to our respondents. Data collected were analyzed using
descriptive method and simple percentage. Three hypotheses were advanced and
tested with the aid of correlation coefficient. The findings show that there is
positive relationship between franchising types and organizational performance
and that positive relationship also exists between franchising ownership and
organizational performance. The author concluded by saying that franchising as a
business form is fast becoming the in thing in Nigerian business arena and it is
therefore a good investment opportunity for upcoming entrepreneurs.
Carlin and Peng (2013), carried out a study on Franchising In Indonesia:
An Empirical Study From Franchisee Perspective. The study examined the issues
54
and challenges of international franchising from the perspective of franchisees in
an emerging market, Indonesia. Due to the popularity of restaurant franchising,
this sector is the focus of the present study. This study attempts to validate a
similar study done in South Korea. Based on data gathered from 85% of the US
restaurant franchises operating in Indonesia, our results reveal that brand value is a
key component in franchise selection criteria as well as one of the success factors
in running a franchise. The findings justify a highly efficient franchise system as
the most important factor in selecting US franchises. In addition, cleanliness and
high quality food are recognized as factors attributing to the success of US
franchises. Training is found to be needed in areas of service and food preparation
in order to maintain the standards set by the franchisors. In addition, a survey of
local consumers discloses that they prefer to go to shopping malls to get food from
US franchises. The results of this study will provide important lessons for both
international franchisees and US franchisors.
Khanungnit, Ishak, & Hasnah, (2013) in their study Franchisors’
Relationship Marketing and Perceived Franchisor Support on Franchisors’
Performance: A Case of Franchise Food and Beverage in Thailand. This study was
undertaken to investigate the franchisees’ satisfaction, which is a measurement of
franchisors’ performance. In particular, how franchisor can better manage their
55
franchisees so as to ensure sustainability of their franchisees. It is also established
that the perceived franchisor support mediates the relationship between
relationship marketing and franchisors’ performance. 111 Thai franchisors in food
and beverage of Thailand, this will match to their franchisees. 80 questionnaires
were collected from franchisees that represent a 72.07% response rate. The results
of this study have presented evidence that perceived franchisor support (PFS) is
the contribution in the franchise business system. The mediating effect of PFS is
the key structure of franchisors’ performance to keep in touch for future success in
the franchise system.
56
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter focuses on the techniques to be adopted in gathering vital
information needed for this study. It covers research design, scope of the study,
sample of the study, sampling technique, method of data analysis and limitation of
the study.
3.2 Research Design
The research design for this study is descriptive research design called
survey design. The design helps the researcher to describe the event in question
using the resulting data to explain and predict the given situation. It gathers
consistently the data of occurrence to test hypothesis, make predictions or get
meaning and implementation of the situation.
3.3 Population of the Study
The study population included all the small and medium enterprises
operating in Oluyole Local Government of Oyo State. As at the last count, a total
of two thousand and twenty-seven (2,027) small scale businesses were noticed in
the local government. So, the study population included two thousand and twenty-
seven (2,027) small and medium enterprises in Oluyole Local Government areas.
57
3.4 Area of the Study
The area of the study of Oluyole Local Government of Oyo State.
3.5 Sample Size
The sample size consists of hundred (100) respondents from some small
and medium enterprises (SMEs) which are randomly selected from the population.
3.5.1 Sampling Techniques
The research work makes use of probability sample technique called simple
random sampling technique. This technique gives equal chances to variables in the
study scope of being selected or rejected in the sample. In selecting the sample
units from the population, equal chances were given to the population items of
being included in the sample.
3.6 Types and Sources of Data
The research work makes use of primary and secondary data. These data
are used to validate, test or analyze the formulated hypothesis.
The primary data are quantitative in nature. The quantitative data will be
sourced from questionnaires administered on the owners of small and medium
scale enterprises that have spanned over 5 years of operations.
58
3.7 Research Instrument
The research work employs questionnaire as the method of data collection.
The questionnaire is carefully designed and prepared in other to obtain sufficient
responses needed to answer the formulated research questions. A total of 100
questionnaires are administered to the owners, employees and some selected
customers in the study area.
3.5.1 Scoring of the Instrument
The Rensis Likert scoring method is used for the scoring of the
questionnaire. The researcher adopts the five scale points of Likert style of scaling
research instrument in other to generate sufficient responses needed for data
analysis in a bid to provide solution to the formulated research problem. The
following scales are attached to the research instrument.
5 – Strongly agreed
4 – Agree
3 – Undecided
2 – Disagree
1 – Strongly disagree
59
3.8 Method of Data Analysis
The data obtained were analysed using the Ordinary Least Square (OLS)
regression model. The regression is simple regression and is computer based. The
E-View multiple regression method was used to verify the formulated hypothesis.
3.9 Limitation of the Study
The study only examined the impact of franchising on promotion of SMEs
in Nigeria. It did not look into the impact of franchising in the operation of SMEs.
It only considers Small and Medium Enterprises in Ibadan while neglecting SMEs
in other states of the federation.
In the course of raising data to compile the work many problems were
encountered. The problems were as follows:
i. Secrecy: The SMEs visited were reluctant to divulge relevant information
needed to complete the study. This problem was solved by obtaining letter
of introduction from the department needed to clarify that the study was for
academic purpose.
ii. Financial constraint: The financial aspect of the project also posed problem.
Through assistance from family, relatives and friends, the researcher was
able to surmount the problem.
60
CHAPTER FOUR
DATA ANALYSIS AND RESULT PRESENTATION
4.1 Re-Statement of Research Hypothesis
The research work formulated two hypotheses. The hypotheses, as
formulated in chapter one, is re-stated below:
Ho: There is no significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
H1: There is significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
Hypothesis II
H0: There is no significant relationship between franchising and the performance of small and medium scale enterprises in Nigeria.
H1: There is no significant relationship between franchising and the performance of small and medium scale enterprises in Nigeria.
4.2 Presentation and Analysis of Respondents Bio Data
This section of the chapter deals with the presentation and analysis of
respondents bio-data. Questionnaires were administered to 100 respondents from
the study area and all the questionnaires were properly filled and returned to the
researcher. So the return rate of the questionnaire was 100% since the researcher
employed a face to face administration to respondents. The data generated through
the administration of questionnaires are presented on tables and subsequently
analysed using simple percentage analysis.
61
Table 4.2.1: Sex Distribution of RespondentsSex Frequency PercentageMale 68 68Female 32 32Total 100 100
Source: Researcher’s Field Survey, 2015
Table 1 shows the sex distribution of respondent. From the table, it can be
inferred that 68% of the total respondents are male while the remaining 32% are
female. The research work is not gender bias as female students are fairly
represented.
Table 4.2.2: Age Distribution of Respondents
Age bracket Frequency Percentage30 yrs and below 22 2231-40 yrs 38 3841-50 yrs 13 1351yrs and above 27 27Total 100 100
Source: Researcher’s Field Survey, 2015
The table 2 above shows the age distribution of the research respondents.
From the table above, it can be concluded that 22% of the total respondents are 30
yrs. and below, 38% of the respondents are 31-40 years old, 13% of the
respondents are 41-50 years, while 27% of the respondents are 51 yrs. old.
In African culture, age is a sign of maturity, Edewor (2003). The underage
are considered immature. The respondents in this study, to a large extent are
mature and have contributed maturely to the research work.
62
Table 4.2.3: Marital Status Distribution of Respondents
Status Frequency PercentageSingle 64 64
Married 32 32
Divorced 4 4
100 100Source: Researcher’s Field Survey, 2015
Table 3 above shows the marital status distribution of the respondents. The
table above shows that 64% of the total respondents are single, 32% of the
respondents is married, while the remaining 4% of the respondents are divorced.
Table 4.2.4: Educational Qualification Distribution of Respondents
Occupation Frequency PercentageO’level 47 47NCE/ OND 34 34B.Sc 19 19M.Sc - -Others - -Total 100 100
Source: Researcher’s Field Survey, 2015
Table 4 above shows that 47% of the total respondents hold O’ level, 34%
of the respondents hold NCE/OND certificate while the remaining 19% of the
respondents are graduates.
63
Educational qualifications show the level of education attained by
individuals, Gbadamosi (2005). The respondents in this study to some extent are
not literate and have contributed meaningful to the study.
Table 4.2.5: Religion Distribution of Respondents
Religion Frequency PercentageChristianity 67 67Islam 33 33Traditionalist - -Total 100 100Source: Researcher’s Field Survey, 2015
The result on table above indicated that 67% of the total respondents are
Christians while the remaining 33% of the respondents are Muslims. However,
none of the respondents are of traditionalist type of religion.
Table 4.2.6 Length of Service Distribution of Respondents
Years Frequency Percentage5yrs and below 35 356-15 54 5416-25 19 1926 and above - -Total 100 100
Source: Researcher’s Field Survey, 2015
The table above shows that 35% of respondents are with the organisation
for 5years and below, 54% of the respondents are with the organisation between 6-
15 years, while the remaining 19% of the respondents are with the organisation
between 16-25 years. The occupation distribution above shows the economic
64
relevance of respondents. It depicts the ingenuity of respondents, Alade (2001).
The research respondents are occupied and earned means of livelihood.
4.3 Presentation and Analysis of Research Questions
This section of the chapter presents the responses to the research questions
included in the questionnaire. Responses generated through the administration of
questionnaire during the survey of 100 SMEs in Ogun State are presented on
tables and subsequently analyse using simple percentage.
65
4.3.1 Psychographic Data
Level of Agreement (%)N= 100
S/N QUESTIONS Strong Agreed
Agreed Undecided Disagreed
Strongly Disagreed
1 Franchising is a good form of finance to Small and medium scale enterprises in Nigeria
34 22 - 10 34
2 Franchising provides small and medium scale enterprises with technical know-how on operating business
73 27 - - -
3 Franchising provides small and medium scale enterprises with modern equipments to operate with
24 32 - 18 26
4 Franchising of small business in Nigeria make it use of well known trademarks and patented inventions.
66 12 - 22 -
5 High interest rate by commercial banks in Nigeria is a factor affecting the raising of capital by SMEs in Nigeria
35 52 - 13 -
6 The request for collateral for granting loan is a factor affecting the raising of capital by SMEs in Nigeria
40 30 - 12 18
7 The performance of small and medium scale business decreases as a result of limitation in raising capital
36 31 15 - 28
8 Poor financing leads to the closure of most small and medium scale businesses in Nigeria
50 12 25 6 7
9 Poor financing affect the operations of Small and Medium Enterprises in Nigeria
71 11 9 - 9
10 Franchising license fee is not encouraging small scale business to involve in it
8 18 - 55 19
11 Franchising makes small and 78 22 - - -
66
medium scale business to grow rapidly
12 Franchising educates SMEs on modern operating methods
65 27 - 5 3
13 Finance house strict conditions affect the development of small and medium enterprise in Nigeria
56 - 44 - -
14 There is significant relationship between franchising and the performance of SMEs in Nigeria
86 14 - - -
15 Franchising is the practice of the right to use a firm’s business model and brand for a prescribed period of time
17 83 - - -
16 The franchisor is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s good for specific fee
15 85 - - -
Source: Researcher’s Field Survey, 2015
4.4 Data Analysis of Formulated Hypothesis
Testing of Hypothesis I
There is significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
There is no significant relationship between franchising and promotion of Small and Medium scale Enterprises in Nigeria.
67
Table 4.4.1: Summary
Dependent Variable: PSME
Variable Coefficient F-Stat Sig. T-test
Constant 8.205 4.509 .046 2.110
FRANC 5.205
R-Square = 0.530
Adj. R2 = 0.412
F-Stat = 4.509
Durbin Watson = 0.684
Source: Regression output (2015).
4.4.2 Empirical Analysis
PSME = f (FRANC) …………………………equ (i)
PSME= α0 + α1 FRANC+ µ………………..equ (ii)
So, PSME = 8.205+ 5.205 FRANC
Tcal = 2.110
Durbin Watson = 0.684
F statistics = 4.509
4.4.3: Interpretation of the Result
The Durbin Watson value showed the validity of the assumption of non-
auto correlation disturbance of the specified model. It determined the reliability of
68
the standard criteria used for the model. It established whether the estimates have
the properties of good estimate such as unbiasedness, consistency, sufficiency,
efficiency, etc. or not. The value obtained showed that there existed positive auto
correlation. The durbin Watson figure of 0.684 indicated that the estimates have
the characteristics of good estimates.
The R2 value of 0.5297 (53%) showed the coefficient of determination for
the model. The result depicted that franchising accounted for 53% variation in
promotion of SMEs. The remaining 47% changes in promotion of SMEs are
explained by other factors other than franchising.
The result indicated that the parameter of the constant term of the regressed
equation (α0) gives a positive value of 8.205 for the model. The rate of
transformation give a positive value and the magnitude between the variables is α1
= 5.205. This showed that franchising has positive impact on promotion of SMEs,
the more efficient the franchising exercise the greater the performance of SME.
Conversely, the less efficient the franchising exercises the lower the performance
SMEs.
The analysis of variance showed the overall significance of the regressed
model which is the F-statistics test. The goodness of fit for the model is 4.509, the
value obtained shows that the model has goodness of fit at the level of
69
significance. The result showed that the F-stat. value of 4.509 is greater than the
significant value of 0.650.
4.4.4 Testing of Hypothesis IIHypothesis IIH0: There is no significant relationship between franchising and the
performance of Small and Medium scale Enterprises in Nigeria.
H1: There is no significant relationship between franchising and the performance of Small and Medium scale Enterprises in Nigeria
DEPENDENT VARIABLE : PSME
Variable Coefficient F-Stat Sig. T-test
Constant 2.225 4.990 .090 42.50
FRANC 34.210
R-Square = 0.68Adj R2 = 0.54F-Stat = 4.99Durbin Watson = 0.86
Source : Field Survey (2015)
4.4.5 EMPIRICAL ANALYSIS
PSME = f ( FRANC ) …………………………equ (i) PSME = α0 + α1FRANC+ µ…………………. equ (ii)
70
So, PSME = 2.225 + 34.210 FRANC Tcal = 42.50 Durbin Watson = 0.86 F statistics = 4.99
4.4.6 Interpretation of the Result
The Durbin Watson value showed the validity of the assumption of non-
auto correlation disturbance of the specified model. It determined the reliability of
the standard criteria used for the analysis. It established whether the estimates
have the properties of good estimate such as unbiasedness, consistency,
sufficiency, efficiency, etc. or not. The value obtained showed that there existed
positive auto correlation. The durbin Watson figure of 0.86 indicated that the
estimates have the characteristics of good estimates. The R2 value of 0.68 (68%)
showed the coefficient of determination for the model. The result depicted that
franchising accounted for 68% variation in performance of SMEs. The remaining
32% changes in promotion of SMEs are explained by other factors other than
franchising.
The result therefore indicated that the parameter of the constant term of the
regressed equation gives a positive value of 2.225 for the model. The rate of
transformation gives a positive value and the magnitude between the two variables
is 34.210. This shows that franchising have positive impact on the performance of
71
Small and Medium enterprises in Nigeria, the higher the participation in
franchising, the higher the performance of small and medium enterprises in
Nigeria and vice versa.
The analysis of variance shows the overall significance of the regressed
model which is the F-statistics test. The goodness of fit for the model is 4.990.
The value obtained shows that the model has goodness of fit at the level of
significance.
4.5 Discussion of the Findings
From the result obtained from hypothesis I above, it can be inferred that
there is significant relationship between franchising and promotion of Small and
Medium scale Enterprises in Nigeria. This implied that increase in the franchising
would promote the activities of small and medium enterprises and vice versa.
Through the t-test, it was shown that t-test value of 2.110 was greater than the
significance value of 0.684. This led to the rejection of null hypothesis and
subsequent acceptance of the alternative hypothesis. While from the results
obtained from hypothesis II above, it can be inferred that Franchising has direct or
positive relationship with the performance of small and medium enterprises in
Nigeria. This implied that increase in the franchising would bring about increase
in performance of small and medium enterprises and vice versa. Through the t-
72
test, it was shown that t-test value of 42.50 was greater than the significance value
of .090. This led to the rejection of null hypothesis and subsequent acceptance of
the alternative hypothesis. As a result of the above, it was concluded that there is
statistical relationship between franchising and the performance of small and
medium enterprises and such association is direct or positive.
These results obtained is in line with Olu (2011) who embarked on
Franchising and organizational performance: Empirical investigation of selected
fast food Restaurants in Nigeria and concluded by saying that franchising as a
business form is fast becoming the in thing in Nigerian business arena and it is
therefore a good investment opportunity for upcoming entrepreneurs.
73
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings
The study assessed the impact of Franchising on the performance of SMEs
in Nigeria. Franchising is a long-term cooperative relationship between two
entities—a franchisor and one or more franchisees—that is based on an agreement
in which the franchisor provides a licensed privilege to the franchisee to do
business. The franchisor grants the franchisee the right to use a developed concept,
including trademarks and brand names, production, service and marketing
methods and the entire business operation model, for a fee. The franchisee then
provides the time, capital, and desire to utilize the brand and services provided by
the franchisor to build a thriving business. The product, method or service being
marketed is usually identified by the franchisor's brand name, and the holder of the
privilege (franchisee) is often given exclusive access to a defined geographical
area for a defined period of time, all of which is defined in the Franchise
Agreement.
The findings of the study revealed that Small and Medium Enterprises rely
heavily on the short term source of finance. It is also revealed that most of the
SMEs used for the study have not considered franchising as a method of raising
74
short term funds. Through the analysis of the hypotheses, the study showed that
franchising has positive impact on the performance of SMEs. It was found that
franchising is a good source of finance and also brings the needed knowledge,
basis modern facilities and a good business trademark which are essential to small
and medium enterprises. Findings also shows that franchising as a form of finance
has impact on the success of SMEs and that performance of SME businesses
decreases as a result of limitation in raising capital.
5.2 Conclusion
Based on the findings of this study, it can be concluded that franchising is a
good source of finance that brings the needed relationship between two entities (i.e
the franchisor and the franschisee) that eventually beings about technical
knowledge, basis modern facilities and a good business trademark which are
essential to small and medium enterprises. Furthermore, franchising is a form of
finance that has impact on the success of SMEs and that performance of SME
businesses decreases as a result of limitation in raising capital. Franchising also
creates consumer trust for a particular product since consumers have the behavior
of patronises a brand that is well known to them. In this case, a new product with a
new business name may find it difficult to thrive in the midst of competition.
75
5.3 Recommendations
Although this study is restricted mainly to appraise the franchising as a
means of promoting small and medium scale enterprises in Oyo State, it cannot
be concluded that the study is encompassing. Based on the findings and
conclusions of the study, the research recommended the following inter-alia:
1. Efforts should be made by investors, stakeholders and the government of
Oyo State to create awareness among SMEs regarding the potential benefits
of franchising to small- and medium-sized businesses.
2. Training should be encouraged to SMEs embarking upon franchising in
other to create a long lasting relationship between the franchisor and the
franchisee which will in turn encourage more SMEs to participate in
franchising activities in Oyo State.
3. The government of Oyo State should re-introduce the small business credit
scheme so that beneficiaries can use them to run the micro, small and
medium enterprises.
4. Government, chamber of commerce and other non-governmental
organization of Nigeria should regularly organize seminars for potential
and actual small and medium enterprise operators where they should be
educated on how to plan, organize, direct and control their businesses.
76
5. Micro, small and medium enterprises operators’ should device effective
fund raising strategies. This could be inform of loan, debt discounting,
franchising, licensing, etc..
6. There should be re-introduction of soft loans with lower interest rates for
small and medium business by the government and financial institutions in
Nigeria.
Finally, the quality and quantity of micro, and small scale enterprises
products should be high at all times. This will attract more customers. Besides,
operators should exploit ways of producing at low costs and selling at relatively
low price. This will make demand to be high always.
5.4 Suggestions for Further Studies
The researcher also enjoins other willing prospective researchers to update
and upgrade this research work in order to contribute more to existing knowledge.
Based on the aforementioned, the following areas or research problems can be
studied in a bid to update and upgrade this research work:
The impact of invoice discounting on the finances of small and medium
enterprises.
The perceived roles of government in financing the operation of small and
medium enterprises.
The influence of alternative means of finances on the operation of small
and medium scale enterprises.
77
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NATIONAL OPEN UNIVERSITY OF NIGERIAAWA- IJEBU COMMUNITY CENTER, AWA- IJEBU, OGUN STATE.
QUESTIONNAIRE
LETTER OF REQUESTDear Respondent,
My name is Adetola Oluwaseun Frank, a final year (400l) student of the
School of Management Sciences, Entrepreneurial and Business Management of
the above named institution. I am carrying out a research on “Franchising as an
instrument of promoting small and medium enterprises in Nigeria”.
Please feel free and express your candid opinion because I am assuring you
that all information will be treated with utmost confidence and will be used only
for this research purpose.
Thank you for your anticipated cooperation.
Yours faithfully Adetola Oluwaseun F.
SECTION A: DEMOGRAPHIC DATA1. Sex (a) Male [ ] (b) Female [ ]2. Age (a) 30 yrs and below [ ] (b) 31-40 yrs [ ]
(c) 41-50 yrs [ ] (d) 51yrs and above[ ]
3. Marital Status (a) Single [ ] (b) Married [ ] (c) Divorced [ ](e)
Others (please specify)
4. Educational Qualification (a) O’level [ ] (b) NCE/ OND [ ] (c) B.Sc [ ] (d) M.Sc [ ]
(e) Others (please specify)
5. Religion (a) Christianity [ ] (b) Islam [ ] (c) Traditionalist [ ]6. Length of Service Distribution of Respondents
83
(a) 5yrs and below [ ] (b) 6-15 [ ] (c) 16-25 [ ](d) 26 and above [ ]
SECTION B: PSYCHOGRAPHIC DATA
S/N STATEMENT SA A D SD U7 Franchising is a good form of finance to Small and
medium scale enterprises in Nigeria8 Franchising provides small and medium scale
enterprises with technical know-how on operating business
9 Franchising provides small and medium scale enterprises with modern equipments to operate with
10 Franchising of small business in Nigeria make it use of well known trademarks and patented inventions.
11 High interest rate by commercial banks in Nigeria is a factor affecting the raising of capital by SMEs in Nigeria
12 The request for collateral for granting loan is a factor affecting the raising of capital by SMEs in Nigeria
13 The performance of small and medium scale business decreases as a result of limitation in raising capital
14 Poor financing leads to the closure of most small and medium scale businesses in Nigeria.
15 Poor financing affect the operations of Small and Medium Enterprises in Nigeria
16 Franchising license fee is not encouraging small scale business to involve in it
17 Franchising makes small and medium scale business to grow rapidly
18 Franchising educates SMEs on modern operating methods
19 Finance house strict conditions affect the development of small and medium enterprise in Nigeria
20 There is significant relationship between franchising and the performance of SMEs in Nigeria
21 Franchising is the practice of the right to use a firm’s business model and brand for a prescribed period of time
22 The franchisor is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s good for specific fee
84
85