An Appraisal of Production Subcontracting Toward Small and Medium Scale Enterprises Development in the Nigeria Industrial Sector: A Review Approach

Abstract

This paper is an appraisal of production subcontracting and how it stimulates the survival of small and medium scale enterprises (SMEs) in the Nigeria industrial sector. The aim of this article is to extend the debate on the desirability of production subcontracting between SMEs and its relevance to industrial development policy in Nigeria. The analysis in this paper was based on a desktop review of 15 articles published in Nigeria on production subcontracting and SMEs within a 19-year period (2001–2019). These articles were drawn from peer-reviewed journal articles. This paper found that on the basis of a critical review of literature, research on production subcontracting has apparently enjoyed a smidgen of global acceptance as was shown by its high quality of publications. This paper also found that production subcontracting strategy has been instrumental in the survival of SMEs in the Nigerian industrial sector through its abilities to guarantee reduction in operational cost, risk reduction, and resources accessibility. The found an emerging area of research in production subcontracting which suggests that production subcontracting increases firm performance in the areas of profit growth, market share, and organizational profit. This paper suggested that given the significant contributions of production subcontracting in the SMEs sector, the strategy deserves development and policy support in the country.

Keywords

production subcontracting SMEs development industrial sector Nigeria

Introduction

It has been observed that over the past decade, the world has seen major changes in the composition of its production process. This follows the present globalization scenarios as well as the increasingly turbulent and competitive business environments where small and medium scale enterprises (SMEs) are being forced to become more effective, innovative, and flexible (Ajagbe & Ismail, 2014). Many industries have found that it is difficult to keep up with these demands thus; it is becoming increasingly important for them to adopt more flexible structures such as production subcontracting, as a viable and cost-effective strategy for their business activities (Rambo, 2012).

Following the rapid technological changes, intensified competition and economic librations trailing production system around the world, SMEs in the less advanced nations suffer great difficulties in their operational activities. (Donati & Sarmo, 2015; Kafigi, 2015). This is due to the fact that these enterprises make use of their fragile resources to fund operational costs which cannot be met by enterprises whose production vista is encumbered and restricted by resource inadequacies (Adoyi et al., 2015; Kafigi, 2015; Nwokocha, Madu, Ocheje, & Olerum, 2015; Okon & Edet, 2016).

This situation has left SME activities in developing countries with production constraints and burden. This paper appraised journal publications in Nigeria on production subcontracting to examine the following research question: 1. Does a well-structured production subcontracting give SMEs access to scarce resources. 2. Does production subcontracting plead to cost reduction and risk reductions? 3. Does subcontracting lead to the survival of SMEs activities in the Nigeria industrial sector? This paper critically appraised how cost reduction, risk reduction, and accessibility to scarce resources by SMEs through production subcontracting can lead to the survival and growth of the SME sector in Nigeria. The aim of this paper is to refurbish the state of knowledge in this area of research, play a part in moving forward the expedience and contemporary relevance of subcontracting in the growth and development of the SMEs sector as well as show the relevance of production subcontracting to geographical research in Nigeria. This appraisal will be done using a proposed model specifying the connection between production subcontracting and resource accessibility, cost and risk reduction which leads to the sustenance of SME activities as shown in Figure 1.

Figure 1.

Proposed model of production subcontracting and small and medium enterprise (SME) sustenance in Nigeria.

Conceptualization of Production Subcontracting and SMEs Sector in Nigeria

Production Subcontracting

Production subcontracting according to Ajayi (2003) “is the breaking down of production process into smaller units or parts whereby individual parts is handled by other independent firms.” Consequently, enterprises engage in separate operational activities in a system of production that leads to disaggregation of production processes over space (Ajayi, 2002). This enables SMEs to focus their resources on their core capacities (Boampong, 2015; Dahane et al., 2011; Gakure et al., 2014; Gutelius, 2015; Hajej et al., 2014; Hussian, 2004; Ibeh & Kasem, 2011; Nwokocha & Nwankwo, 2019; Sun et al., 2013; Tokatli, 2012, 2014). Industries resort to production subcontracting because it helps them spread risks, lower costs, gain access to key technologies and reduce working capital. It also helps them to adjust their level of production more flexibly by passing on the burden of idle overheads to the development of industries most especially small and medium sized subcontracting firms as globalization and new technologies challenge supply system in mature industries (Holl, 2007).

Similarly, production subcontracting enables SMEs to access resources (Bailey et al., 2002; Kumar & Subrahmanya, 2007), knowledge (Smyth & Duryan, 2016), reduce both transaction cost (Cheng, 2015) and risk. In the area of resources accessibility, production subcontracting gives SMEs the opportunity to access new technologies, significant technological information, and opportunities for technological transfer (Elmuti & Kathawala, 2001). Subcontracting enables SMEs to gain special and essential knowledge from each other. (Yavirach, 2012). This creates fast institutional learning, and grows the capabilities of the partnering enterprises. In production activities requiring a deal of technical information, production subcontracting helps SMEs to share risks and penetrate new market (Ajagbe & Ismail, 2014; Nwokocha & Madu, 2015; Nwokocha, Madu, Ocheje, & Olerum, 2015).

In Nigeria, production subcontracting has made significant contributions to the Nigerian industrial sector. For instance, the works of Ajayi (1998, 2000, 2001, 2003, 2007) revealed that there is an increase in volume, pattern, and nature of production subcontracting linkages in Nigeria. The work found that production subcontracting strategy in addition to helping industries increase their flexibility has provided viable markets for small-scale industries through interfirm partnerships and co-operations with the large-scale industries. The study also suggested that production subcontracting can increase industrial development in Nigeria through the cooperation of large- and small-scale enterprises. Similarly, Arimah (2001) attempted a quantitative analysis of the nature of informal sector’s linkages with formal sector in Nigeria. The study found that there are two types of forward linkages between firms in the Nigerian industrial sector. These, according to the study, are subcontracting agreements between small and large domestic companies, government agencies, foreign companies, and the supply of consumer goods from informal sector enterprises to the formal sector. On the contrary, Alarape (2007) critically analyzed the development of effective subcontracting and the network relations among small medium and large industries in Nigeria. The findings of the study showed that there is neither a clear framework nor model of subcontracting and networking in the Nigeria industrial sector, however, subcontracting exist between the small medium and large industries.

Small and Medium Scale Enterprises Sector in Nigeria

The Nigeria industrial sector as was contained in the 2010 survey report on micro, small, and medium enterprises (MSME) is a sector that has an average of 56.4% capacity utilization of various products in Nigeria. It has the highest number of enterprises with over 90% of SMEs in Nigeria engaged in manufacturing to compare with other sectors (2010 Survey Report on Micro, Small and Medium Enterprises in Nigeria). The sector is made up of nine subsectors as is shown in Table 1

Table 1.

Nigeria Industrial Sector.

1	Food processing
2	Cloth making
3	Wood and wood product
4	Publishing and paper product
5	Paint and domestic plastics including nylon and water sachet production
6	Nonmetallic products (aluminum)
7	Basic and fabricated metal products
8	Electrical and electronics
9	Miscellaneous assembly.

Source. Adopted from 2010 survey report MSME in Nigeria.

According to Debbie (2004) cited in Ebitu et al. (2016), about 50% of employment as well as 30% of manufacturing output are contributed by small and medium scale enterprises while they make-up about 97% of all businesses in the sector. Currently, in Nigeria, SMEs contribute 48% of the country’s gross domestic product (GDP), account for 96% of businesses and 84% of employment in the country. It also accounts for about 7.27% of goods and services exported out of the Nigeria (Udo, 2020). Out of this number, Lagos state was credited with the highest number of micro enterprises (3,224,324); followed by Oyo and Kano States (1,864,054 and 1,794,358 respectively), while Nasarawa State had the least (226).

However, evidence from research has shown that SMEs in Nigeria have remained under-developed (Iyortsuun, 2017). The challenges of SMEs in the Nigeria industrial sectors are unfriendly business environment, poor funding, high interest rate, inaccessible collateral requirements, low managerial skills, and lack of access to modern technology. For instance, following the work of Muritala et al. (2012), high production cost, poor funding, inadequate infrastructural development, and unstable profit were the most common challenges constraining the growth of SMEs in Nigeria. Similarly, according to Small and Medium Scale Enterprises Development Agency of Nigeria (Small and Medium Enterprises Development Agency of Nigeria [SMEDAN, 2012) the topmost of all the assistance needed by SMEs is finance. The survey also shows that only about 17.2 million SMEs have been able to get credit facilities such as loans and overdrafts from financial institutions while start-ups find it almost impossible to get funds from banks (SMEDAN, 2014). This has made most SMEs operating in Nigeria to depend on individual savings, donations, or loans from associates to keep afloat their operations (Ebitu et al., 2016; Irefin et al., 2017).

Furthermore, Agwu and Emeti (2014) in their survey of SMEs in Port-Harcourt City, Nigeria found that inadequate funding; high risks, poor physical and social infrastructures, poor managerial skills, and multiple taxation were the major socioeconomic challenges confronting SMEs in Nigeria. They suggested that the provision of credit facilities to SMEs operators by institutions of government, establishment of small and medium scale enterprises funding agency would go a long way in rejuvenating the sector in Nigeria. These challenges as were mentioned above have largely led to high cost and risk of production, inaccessibility of both tangible and intangible resources, poor market penetration etc. leading to the massive shut down and relocation of SMEs from Nigeria to other countries in Africa.

However, following the strategic potentials and importance of SMEs in the economy of Nigeria, a number of programs have been initiated by various governments’ institutions to propel the growth and sustainability of the sector. Some of these programs are Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), Small and Medium Industry Equities Investment Scheme (SMIEIS), Real Sector Support Facility (RSSF), The National Enterprise Development Program (NEDP), among others (Afolabi, 2013). In spite of the usefulness of these initiatives, the achievements and accomplishment of SMEs in the Nigeria industrial sector remain abysmal. Consequently, considering the failed policy interventions from successive government in addressing the challenges of this sector in Nigeria, SMEs have been propelled to adopt strategic structure such as production subcontracting in their operations.

The present research was undertaken to show how subcontracting has become a strategic tool for SMEs in addressing socioeconomic challenges hindering the sector. Some of these constraints are high risk, high production cost, poor resource accessibility, inaccessibility to technology, and so on. This was also undertaken to illuminate an under-reported area of research so as to reveal its importance to the SMEs sector of Nigeria as was reported in published research.

Method

This article adopted a systematic appraisal of the state of awareness of production subcontracting and the recent development in SMEs in Nigeria. The choice of this method was informed by its innovativeness and capacity to systematically appraise a production strategy which has contributed to the development and growth of SMEs in Nigerian industrial sector. The analysis in this paper was hinged on the appraisal of 15 peer-reviewed journal papers published in Nigeria on production subcontracting within a 19-year period (2001–2019). Journal papers were drawn from Emerald, Wiley EBSCOS, Sage, Elsevier, Science Direct, Inderscience, Taylor and Francis, and Springer-Verlag. ProQuest and Google Scholar were the databases used. Criteria for article inclusion were explicitly focused on Nigeria with discussion centered on production subcontracting and SMEs.

Views on Production Subcontracting Toward SMEs Development

To evaluate the standard and the global acceptance of studies in production subcontracting, this research classified journal papers on the basis of their citation index and Scopus rank. This criterion was adopted for this research owning to the fact that it is the universally recognized standard for published journal papers. This research made use of journal papers that have at least one citation by other papers. This is to show the comparative effects of the publications in the development of the subject area. In view of this, 15 journal papers met the selection criteria for this study and were used for the review as shown in Table 2. The table shows the summary and attributes of the journals, the results of a systematic review of publications on the use of production subcontracting by SMEs as well as the relative impact of the publications. The papers are listed in chronological order with the earliest publication appearing in 2001.

Table 2.

Summary of Reviewed Publications on Production Subcontracting in Nigeria (2001–2019).

S/N	Source	Name of journal/area of research	Number of citations in Google scholar	Scopus/Schimago rank	Publisher
1	Arimah (2001)	African Development Review	28	Yes	Wiley Online Library
2	Oyelaran-Oyeyinka (2005a)	International Journal of Technology and Globalization	30	Yes	Inderscience Publishers
3	Kehinde & Mosaku (2006)	Engineering, Construction and Architectural Management	13	Yes	Emerald Group
4	Alarape (2007)	International Journal of Small Business and Entrepreneurship	8	Yes	Taylor and Francis
5	Fagbenle et al. (2011)	Journal of Sustainable Development	8	Yes	Canadian Center of Science and Education
6	Jegede et al. (2012)	African Journal of Science	7	Yes	Taylor and Francis
7	Oke & Onwuegbuzie (2013)	Journal of Manufacturing Technology Management	16	Yes	The Canadian Center of Science and Education
8	Nwokocha, Madu, Ocheje, & Olerum (2015)	Mediterranean journal of social sciences	4	Yes	Mediterranean Center for Social and Educational Research
9	Nwokocha & Madu (2015)	Production and Manufacturing Research	1	Yes	Taylor and Francis
10	Mutalemwa (2015)	African Journal of Economics and Management Studies	30	Yes	Emerald Group
11	Awa et al. (2015)	Journal of Science and Technology Policy Management	228	Yes	Emerald Group
12	Akanni et al. (2015)	HBRC Journal	30	Yes	Sciencedirect
13	Agburu et al. (2017)	Journal of Global Entrepreneurship Research	18	Yes	SpringerOpen
14	Nwokocha et al. (2019)	Production and Manufacturing Research	2	Yes	Taylor and Francis
15	Kaplinsky & Morris (2019)	Journal of Africa Trade	1	Yes	Sciencedirect

Source. Authors’ Analysis.

Reviews of Published Articles

Result of the analysis as stated in Table 2 shows that research in production subcontracting has been carried out and published in standard journals across the world. These journals in addition to attracting significant effulgence and spread, have also achieved substantial and increased citation rates. They were also found in the largest databases of abstracted information such as Google Scholar and Scopus.

Similarly, all listed journals representing 100% of the publications from where the journal papers for this research where gotten were Scopus indexed. The analysis of the papers also revealed that all the reviewed papers have obtained one citation in Google Scholar between the year 2001 and 2019. Furthermore, 10 journal articles have been cited more than once with 6 articles receiving an average of 10 citations in Google scholar between the years 2001 and 2019. At the subfield level, two of the papers were on environmental engineering with special focus on building and construction operations while 10 journal papers dealt with economics with a special focus on partnership, technology, and innovation among SMEs. Three journal articles dealt with geography with a special focus on industrial linkages and partnership among SMEs.

Significance of Production Subcontracting: An Appraisal of the Nigeria SME Sector

The significance of subcontracting in the Nigerian SMEs sector can be generally felt in three prominent areas. These are cost reduction, risk reduction, and accessibility of resources.

a. Cost Reduction

Cost reduction commonly known as transaction cost reduction in management research holds that firms collaborate with each other to reduce their production and management costs. This means that firms should be vertically integrated when faced with investments in specific assets or business areas to maximize their business opportunities (Gachengo & Kyalo, 2015). Following Coase’s (1937) seminal work, “activities would be subcontracted where the perceived costs of using the market were less than that of undertaking the activity in house” (Coase, 1937; Scott, 1988; Scott & Storper, 1990; Williamson, 1975, 1979, 1984).

In Nigeria, studies have shown that subcontracting arrangements between SMEs in Nigeria has led to transaction cost reduction (D. D. Ajayi, 2007; Arimah, 2001; Nwokocha, Madu, Ocheje, & Olerum, 2015; Ogbari et al., 2015). For instance the work of Nwokocha, Madu, Ocheje, and Olerum (2015) found that cost reduction was one of the benefits of subcontracting arrangement among SMEs in Onitsha Metropolises, Anambra State, Nigeria. This was such that SMEs outsourced production tasks and operations to other independent enterprises rather than developing additional capacity to perform such task in-house. This was also corroborated by the work of D. D. Ajayi (2007), which found that the benefits of production subcontracting include cost reduction and its ability to change the spatial pattern of industrial distribution. Similarly, the work of Ogbari et al. (2015) found that cost reduction, firm competitiveness, and process specialization were responsible for the adoption of production subcontracting by modern day SMEs in Nigeria.

On the contrary, Oyelaran-Oyeyinka (2005b) in his studies revealed that a number of the SMEs in Nigeria industrial clusters subcontract aspects of their noncore operations such as packaging, labeling, printing, and production of bulk materials. The study also found that while 68% of these enterprises subcontract to gain cost savings and greater efficiency of the SMEs, 10% subcontracted due to irregular demand. Recognition of the role of specialists and the lower wages paid to subcontractors also accounted for 16% of the additional reason why SMEs engage in production subcontracting.

b. Risk Reduction

The concept of risk reduction explains the strategic approach adopted by firms in their production operations. This strategic approach holds that “the partnership between firms is aimed at creating competitive and synergetic advantages which include risk reduction, economies of scale, cooperation in production and technological advancement which expand the firm’s resource base” (Dunning, 2015). In other words the use of production subcontracting strategy by SMEs is an avenue for generating resources capable of increasing the capacities of the member enterprises. In this regard, empirical research in Nigeria has shown that subcontracting arrangement among SMEs helps them to reduce, share, and hedge the risk of production. To lay credence to this, Belel and Mahmmod (2012) and Olusanya (2017) found that subcontracting was the least factor militating against risk management in the Nigeria Construction industry.

This supports the work of Abdullahi (2014) which opined that operations in the construction industries are largely subcontracted to SMEs due to their flexibility and ability to adapt to complex situations. Makinde et al. (2011) also found that 68% of all identified risk events from large-scale contractors were assigned to the small and medium scale subcontractor firms. The study also found that the top five risk events that were assigned in construction subcontracts were all potential events that lay within the scope of the subcontractors. Similarly, Ajayi et al. (2010) found that subcontracting provides SMEs with the framework for assessing and aligning contract risk with supplier risk in the supplier selection process. This enables them to eliminate or reduce significantly problems associated with low prices in production tasks.

Resource Accessibility

This approach involves the use of subcontracting by small and medium scale enterprise to obtain valuable resources from other enterprise (Das & Teng, 2000). Valuable resources here are usually physical items such as equipments, machines, and experts or nonphysical materials such as brand, knowledge, experience, and so on (Yasuda, 2005). The inadequacy/unavailability of these resources propel SMEs to engage in subcontracting so as to generate competitive advantage for their product.

Accessibility of resources has become one of the main benefits of subcontracting arrangement in the Nigeria industrial sector (Ajayi, 2007; Alarape, 2007; Arimah, 2001). This was exemplified by the work of Aigboduwa and Oisamoje (2013) which found that subcontracting gives SMEs access to funds in the form of credits and overdrafts, while protecting them from being exploited. Similarly, Nwokocha, Madu, Ocheje, and Olerum (2015) found that one of the motivations behind the use of subcontracting arrangement by SMEs is the accessibility of resources. These resources range from machineries, technical knowhow, and finance. On the contrary, Arimah (2001) and D. D. Ajayi (2007) found that accessibility and utilization of these resources are usually felt in areas of maintenance, training of workers, database management, marketing, and product design and development. Alluding to this, Mambula and Sawyer (2004) found that subcontracting enables manufacturing SMEs to have access to other manufacturers’ resources by subcontracting out tasks to other SMEs. This is usually obtainable when machines are broken down, during periods of high workloads, and when working to meet with customer order deadlines.

In view of this, Alarape (2007) opined that a well developed subcontracting and networking strategy would increase the fecundity and capacity of SMEs as well as improving the general development of the sector. Consequently, this analysis agrees with the proposed model of this paper which advanced that production subcontracting as was defined by this research enables small and medium scale enterprises to engage in disaggregation of production process so as to achieve reduction in cost and risk of operation as well as acquiring external resources. This ultimately helps them to sustain their activities in the current turbulent economic environment in Nigeria.

Another emerging area of research where production subcontracting has added to the development of small and medium scale enterprises in Nigeria is in firm performance (Agburu et al., 2017; Akewushola & Elegbede, 2013; Akinbola et al., 2013; Nwokocha & Madu, 2015). For instance, the work of Nwokocha and Madu (2015) found that SMEs in Nigeria engaged in subcontracting arrangement have encountered changes in the performance of their enterprises. This study revealed that enterprises using subcontracting arrangement in Nigeria have gained increased performance in the area of profit growth and market share while posting lower performance in return to assets. Similarly, Agburu et al. (2017) found that deconcentration of production tasks and supporting tasks has a remarkable result on organizational profitability of small and medium scale enterprises.

Implications of Production Subcontracting for Geography and Geographic Research in Nigeria

Subcontracting is an important topic in industrial geography. This is because; it deals with one of the fundamental aspects of the discipline, which is industrial linkage. In Nigeria, geographic research on the subject of subcontracting has been carried out in different parts of the country. These include places like Lagos, Onitsha, Nnewi and Abuja (Adebowale & Oyelaran-Oyeyinka, 2012; D. D. Ajayi, 1998, 2000, 2001, 2003, 2007; Nwokocha & Madu, 2015; Nwokocha, Madu, Ocheje, & Olerum, 2015; Nwokocha, Madu, Ocheje, Olerum, & Nwosu, 2015; Ogbari et al., 2015). The efforts of Nigerian geographers in this area of research is quite modest, however, it could be consolidated. Subcontracting as an academic research and real-world policy issue offers several potential opportunities to geographers.

Academically, subcontracting provides practical and right set of circumstances for research to geographers in Nigeria. This is because of the apparent manifest of fascination in the growth and development of the industrial sector by development agencies. Subcontracting also provides government and its institution at various levels policy framework with which to drive and stimulate industrial growth and development in the under-developed economies of the world. Although much of the work on subcontracting in Nigeria have focused on SMEs, geographers could as well examine the impacts, influence, and constraints of production subcontracting on other sectors—agriculture, electricity, construction, services, information and communications technology (ICT) among others. This would provide more insight about the character and importance of production subcontracting across the Nigerian industrial space. Subcontracting could also be used to study interfirm linkages between large-scale industries and small businesses firms, innovation, and entrepreneurship as well as small business sustainability. Results of these studies can reinforce existing evidences on the need to incorporate production subcontracting strategy into the economic development programs of Nigeria.

Limitations of the Study

Production subcontracting as an industrial strategy can sustain the growth and development of the small and medium scale enterprises. This strategy therefore can potentially diffuse throughout the Nigerian industrial sector with huge implications for national and industrial development planning in Nigeria. Consequently, it is important to note that, this article was restricted to the review of production subcontracting and the recent development in the SMEs sector of Nigeria. This made it difficult to examine the impact of subcontracting on other sectors (large scale industries, micro and macro scale enterprises). Subsequent studies therefore should be directed toward assessing the impacts, strengths, and weaknesses of subcontracting on other industries. These include large multinational industries, micro, and macro scale enterprises. This is to have a balanced assessment of the impact of production subcontracting across the Nigeria industrial space.

Conclusion

This paper has shown that production subcontracting strategy has played significant roles in the operations of SMEs in Nigeria. The article showed that studies on subcontracting have enjoyed some degree of recognition as was shown by their high standard of publications. It also showed that subcontracting arrangements can help SMEs to achieve production cost reduction, risk reduction and resources accessibility outside of their boundary. Consequently, following the prospects of SMEs in the area of economic growth and development, the integration of subcontracting strategy as a policy framework in the Nigeria industrial sector becomes imminent. This is due to the numerous failed attempts (policy programs) by successive government to regenerate the sector. The adoption of production subcontracting strategy in the Nigerian industrial sector would lead to the development and sustainability of SMEs as well as providing the right policy framework that would reinvigorate the entire industrial sector of Nigeria.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Victor Chukwunweike Nwokocha

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