GOVERNMENT POLICIES AS A TOOL FOR CREATING A BUSINESS ENVIRONMENT

CHAPTER TWO

REVIEW OF LITERATURE

INTRODUCTION

Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.

Precisely, the chapter will be considered in three sub-headings:

• Conceptual Framework
• Theoretical Framework

2.1 CONCEPTUAL FRAMEWORK

Government Policies

Writing on the origin of policies, Micheal and Jones (1973) identified government as one of the major sources of policy – formulation saying that: “ Policies may originate in response to problem encountered in organizational operation or both with respect to various interest groups associated with the firm sometimes referred to as the” claimants on the operation”. Continuing, Micheal and Jones (1973) stated “That government at various levels is an important claimant of, anti-trust and labour laws, product labeling requirements, taxation and various other kinds of government regulations and control”. Ibekwe (1984) stressing the importance of policy making at government level writes “the objectives of policies of a country as often stated are increase of output, reduction of inflation, reduction of employment, diminution of economy inequality and trade balance creation”. Ahiazu and Nwokoye (1984) stated that business legislation (policies) made by government are aimed at including acceptable behaviour from individuals, groups and corporate entities in a civilized society and at imposing sanctions on deviant behaviour s. Business legislation has a wide range of objective including:

1. Furthering national economic goals such as curbing inflation, stimulating the economy or conserving foreign exchange.
2. Enhancing competition among business entities by prohibiting monopolistic tendencies and unfair method of competition by firms.
3. Ensuring that contracts are entered into and executed with justice done to the parties to the contracts.

To ensure feasibility and implementation of set objectives, government make sure policies are on fiscal, monetary, agricultural and rural development, industrial etc. The1989 Central Bank of Nigeria Annual statement of accounts gave an insight into the contexts of some of there policies i.e. that the aim of fiscal policies can be classified into three groups.

1. Those aimed at increasing revenue.
2. Those designed to guarantee effective protection to domestic industries.
3. Those directed towards the promotion of research and development. Example of fiscal policies are exercise duty, sales tax, import duties and withholding tax. The monetary policies are designed to influence and control the level of money, relatively to the level of prices, savings and investments such as interest rates, are normally used in monitoring and controlling money policies on the other hand, these policies made by government have multifarious objectives or targets. For example, fiscal policy targets are:
4. To provide suitable price incentive for agricultural and industry.

(2) To encourage or stimulate the expansion of agriculture and industry.

(3) To encourage and direct investment into priority area as well as promotion of experts disposed of industries, development and use of local imputes.

Policy And Its Functions

A policy is a guide for making administrative decision, (Kator, 2008). Much earlier, Griftin and Elbert (1999) has defined policy as an organizations manner of doing business and directing management actions. Essentially, a policy is an internal administrative law governing effective actions within the organization. Since policy is a guide to action for the total organization, it follows that its formulation, implementation and decision implications will tend to affect the total organization. Internally and its external environment, this is because every organization is a system made up of various subsystems made up of various unit or sections. Each sub-system must of necessity be in harmony with the others and with the total system to avoid friction and to prevent operational managers from working at cost purposes. Amongst others, the major functions of policy include;

1. It classifies management viewpoint with and philosophies within designated areas of operation.
2. It provides a pattern within which delegations of authority may be expedited and controlled.
3. It establishes latitude and guide with which authorized persons may make administrative decisions and effect action.
4. It anticipated future conditions and situations and resolves how they will be dealt with.
5. It fosters a feeling of confidence in making administrative decision.

From the foregoing, government policies are those points of views and established manner by which government carry out its business and direct managerial actions to the good governance and well being of the state. Policies that are formulated by government have a tremendous influence. Government policies attest issues like the rate of inflation the quality and the rate of infrastructural development, the level of peace and security, the rate of human capital development amongst others. One major bone to the positive influence of government policies, according to Ogunbor (2003), is the mode of policy implemented, when policies are not appropriately implemented, no matter how good the formulation, they tend to have no positive effect on the society. This inordinate implementation, used to measure the growth of progress of a business enterprise is the rate of expansion of the organization. Expansion can be seen in terms of development and increase in personnel, capital case, assets, and establishment of other branches of outlets (Osuala, 1995). Government policies have far-reaching effect, on the growth of business. This is because the policies formulated and implemented by government affect every aspect of the operating costs and effectiveness of the businesses. Some of these policies and how they affect businesses will be highlighted in the following subheadings:

• Government Policy on Taxing:

Cost of product has a tremendous effect on the growth of business. Lower costs encourage growth while higher operating costs constitute impediment to growth and expansion. The operation of a business is not cost effective when the business is not making enough profit in relation to money spent. This tetrads business growth and may result in output collapse. (Manser and Schwartz, 1982). The National Bureau of Economic Research (2000) says plainly that when an organization’s marginal tax rates goes up; the rate of growth of its business enterprise goes down. Ur lower taxes increase a business cash flow which helps with liquidity constraints during economic slowdown and could increase the demand for investment and labour. Usman (2000) claimed that the Nigerian government has evolved some fiscal policy measures and incentive designed to offer support for the growth and development of business.

• Government Policy on Infrastructural Development

Creating an enabling operating environment according to Muomah (2003) is also a factor that would reduce operating costs and accelerate the growth of business. Enabling environment includes the provision of basic infrastructures such as uninterrupted power supply, goods roads and other basic amenities.Adebowale (2004) stated that infrastructures is the bone of industry in Nigeria environment is harsh and has not significantly encouraged the emergence of new businesses as well as the survival and growth of existing ones. Nwankwo (2003) observed that most businesses have to strive to provide most of the facilities for themselves. Facilities like water, electricity and roads are provided by these companies who had it difficult to grow and expand. Adequate and better managed infrastructure will eliminate the problem or constant disruption in production activities resulting in increasing output and lower cost. The improvement in telecommunication brought about lay the global system on mobile (GSM) revolutions, impacts positively on the operations of businesses and reduces communication cost (Bala, 2000).

• Government Policy on Inflation Matters.

In the recent years inflation has been a particularly serious problem for businesses because it tends to compound all of the other operational problems. For example, inflation boost cost of the small retailers inventory, as well as all operation cost and pushing up capital requirements. Many businesses find it difficulties to cope with high level of inflation for extended periods. Ohuabunwa (1998) stated the evidence abound that the naira does not change in value with the passing of time but in its producing power which has been so drastically weakened by inflation that survival and growth of businesses is hard to achieve. Ajibade (2000) asserts that this has been unstable and inadequate government policies concerning industrial activities in Nigeria encourage inflation. These policies which are already in place should be aborted and reformatted.

• Government Policy on Safety and Security

Security and economic investment are inseparable twins. It takes safe and well-secured environment to guarantee business growth. In a study carried out by the World Bank (1997) cam and theft were listed as serious problems that subsequently increased the cost of doing business in many developing countries including Nigeria. Almost 80 percent of the entrepreneurs reported a lack of confidence that the authorities would protect their person and properly from criminals or crime. Over 70 percent said that judicial unpredictability and corruption were major problems in their business operations. Crime control and prevention cost business organizations a lot of money. Many thieves make a good living stealing from the business that employ them but burglary constitute the robbery account for only a small position of business loses. It is pertinent to note that crime prevention should constitute a major policy of government in order to create a conducive environment for business. For example, the provision of streetlight as part of government policy on security by the Delta State government has enormously helped to protect businesses at night from thieves had previously taken advantage of darkness of perpetuate crime.

• Government Policy on Human Capital Development

For effective and economic planning and regulation, as well as the execution of operations of enterprise, efficient workforce is involved in judgment and decisions in determining plan and in using data to control performance and progress against plan; the personnel (labour) is involved in carrying out the operations of the enterprise (Breach, 1997). However, for human capital to spawn an appreciate impact on development, a nation needs to have a minimum critical mass of at least seventy percent of more literate and healthy population. If the people are literate and healthy, at least with basic education, it opened up the minds of the masses, the more enlightened workers and perhaps, institutes some element of discipline in them. In Nigeria, human capital development is largely hinged on the policies formulated by the government. For sustainable development of human capital, the government has to focus on the health and the educational sector, (Ajibade, 2000). Health care facilities have to be established and functional to keep the work force in perpetual good health condition. The establishment and proper use of educational facilities and skill acquisition centers should also be ranked high in government programmes. Where policies do not encourage the establishment and functionality of these facilities, human capital development cannot be adequately guaranteed and this can have a far reaching effect on the growth of businesses.

Business Environment

The term enterprise refers to any social activity whose primary goal is to offer services or produce goods within the framework of a community or society. The exact type of business that takes place in a given society is largely determined by the attitudes, needs and beliefs of members of such community. In real life scenario, the society makes demand on the business and vice versa. The term business environment refers to the interrelationship that exists between the community and the business establishments that operate within the community. Nevertheless, it is imperative to note that the support and specific business environment varies from one geographical location to another. So while some business environments may be hostile, others can be very favourable for the growth of business. The conceptual meaning of the term business environment is quite complex. Thus, business environment ought to be dynamic, so that it can be compatible with the independent actions of all organizations and institutions as well as individuals that have both direct and indirect effects on business operations (Olson 1987). Furthermore, Olson (1987) identified the various stakeholders that are involved directly or indirectly in the country’s business environment as follows:

•  The Individuals, which include customers that are in needs of the services or goods offer by a business organizations; employees that provides the necessary entrepreneurial skills required for the provision of services and production of the goods. 
• The business establishments, which are primarily responsible for supply of services and input necessary for production, distributions and subsequent retailing of the goods and services. Most time, these stakeholders also act as competitors in the market. 
• The state, which includes regulators of the economy, employers, producers and consumers of services and goods etc.

In his study, Aluko (1983) identified two broad categories of business environment. These are internal business environment and external business environment. According to him, the internal business environment comprises of technologies and tools that are used by organization for normal business operations. Examples of components of the internal environment include control procedures, administrative procedures, production system, products, service, marketing procedures and the market itself. On the other hand, Aluko (1983) listed some components of external business as follows: government regulatory system, ethical system, technological system, social system, economic system, legal system, political system, customers and competitors in the same business environment. But most importantly, Aluko (1983) pointed out that the business is strongly related to its environment. In other words, the two are somewhat interdependent. As a developing country, Nigerian business environment is constantly changing. Such change, whether negative or positive, can either offer more opportunities or generate more threats for the existing businesses. This partly explains why the decision taken by many business organizations are greatly influenced by various elements of external and internal business environment. It also explains the interdependence between business and its environment. Ajayi and Adebisi (2006) observed that this interdependence is essential for adequate understanding of how business functions as well as how policies are being formulated. Base on the above assertion, Isimoya (2005) affirms that the business operations involved two basic institutions namely: the market environment and the company. In this case, the company is mainly responsible for dispatching services, goods and information (communication) to the market. In return, the market generates feedback and sales (money) for the company. In his study, Obikoya (1995) pointed out that the existence of other elements, which are very much capable of influencing the company and market. According to him, such elements are the primary determinants of the exact services which the company has to offer in the market, and ultimately attain success. He identified competitive environment, which consists of intermediaries and industry, as the first of such element. For example, the company’s level of success in its normal business operation is primarily determined by the materials, capital, efficiency of suppliers/distributors and competitiveness for labour in the industry. Obikoya (1995) also pointed out that the second levels of environmental elements are found mainly in the micro-environments. In this context, macro-environments simply refer to independent institutions that can enhance the operations of a business organization. Typical examples include market intermediaries, insurance firms, financial institutions, members of the public. The last and most general level of environmental forces identified by Obikoya (1995) is the macroenvironment. The various elements of the business environment can have considerable effect on the firm’s performances, conduct and structure. In fact, it is practically impossible for any business to operate effectively without them. This is one of the major reasons why it is very essential for every business to establish operational structures that will enable them adapt to any changes in the market. The success of any business organization depends largely on the extent, to which it is fine-tuned to its environment. The term innovative is generally used to describe any firm that take advantage of the opportunities that comes with change, and overcome any threats that come with such change. Thus, a business can only be prosperous, if it is innovative and adaptive. This is illustrated by Amuda (2006), as he strived to revealed the inter-dependence between the company and its environment, and went further to explain the open system concept.

The Effects Of Government Policy On Performance Of Business Organizations

In every country, the existing governmental policies have the potential to affect the operation as well as performance of every business. Such impacts can be explained from the technical point of view. Base on this perspective, the specific governmental policies that can have direct or indirect effects on businesses include taxation, subsidies, interest rates and exchange rates. The government taxation policy has been widely recognized as one factor that can affect the performance of every business. For instance, the imposition of high taxes on specific imported products will ultimately encourage local businesses to produce more of such goods. But if the taxation on raw materials required for local production is high, then the local entrepreneurs may be discourage to commence or continue production. Any increase on corporation tax will have the same impact as rising production cost. In order to cover such costs, business owners may be forced to increase the price of their finished products. Other taxes that can have the same effects include: value added tax (VAT) and environmental taxes. Even though VATs are specifically for the final consumers, the business may incur considerable costs when administering the VAT system. The government’s financial policy and banks’ interest rates can also have considerable effects on economy as well as the business environment (Okojie, 2013). For instance, if the bank’s lending rate is high, then businesses will be discouraged to borrow from the financial institution. Unfortunately, such trend will result to a considerable fall in the rate of investments, as companies will not have enough money for more investments. It is important to note that the government is primarily responsible for the creation of frameworks and rules that guide business operations in the country. Such rules are not always constant, and may change from time to time, thereby forcing entrepreneurs to change how they operate their businesses. Thus, government policy can have huge effects on the operations as well as performance of business establishments In every country, the government’s contribution to the nation’s economy remains the most essential aspect of its economic policy. After the Second World War, several governments of the world became increasingly involved in the economy, through the establishment of state run industries. Many of these industries exist in form of public corporations. But the 1999 saw an era of massive privatization, as many private investors took over the government owned corporations. Nigeria is not left out in this trend. However, these private acquisitions make the business environment to become even more competitive (Okojie, 2013). The interest rate is another prominent aspect of economic policy that depends largely on the government’s specifications (Ocampo and Vos, 2008). In Nigeria, this responsibility is overseen by the Monetary Policy Committee, which has monthly meeting with the primary objective of determining the exact level of interest to adopt in the country’s economy. Unarguably, whatever decision they take will be felt instantly by entrepreneurs that operate in the country. For example, any increment of interest rates will result to a complementary rise in the costs of doing business. It can also have considerable negative impacts on the consumers’ purchasing power, thereby triggering massive fall in the volume of business sales. The government’s spending policy is another factor that can have significant impact on business operations (Wallace, 2000). Generally, increased governmental spending on a specific sector will ultimately trigger more business activities in such sector, as enterprises that supply inputs in such sector will experience a substantial increase in their income. Furthermore, the provision of subsidies for some business activity can also trigger more economic activity in a given sector. Typical examples include introduction of tax holiday, provision of petroleum subsidy, removal of excise duties etc. A number of authors have conducted empirical studies on the impact of inflation (government’s monetary policy) on business performance. In one of such studies, Spyros (2001) carried out an investigation on the exact effects of government’s monetary policy on volume of profits generated in Greece stocks. The study, which involved the use of VAR model, revealed no considerable relationship between inflation and returns on stock. In another similar study, Floros (2004) carried out a study aimed at establishing how returns on assets are influenced by inflation. Like in the previous case, the author observed no significant relationship between the two variables of study. These studies suggest that the government’s monetary policies may not actual have significant impact on the business performance A number of studies have also been conducted on fiscal policy. In one of such researches, Unegbu and Irefin (2011) investigated the effects of value added tax (VAT) on economic and human developments. The study, which is based on relevant data between 2001 and 2009, was carried out strictly in Adamawa state, Nigeria. The result indicated that up to 91.2% of the variations in the expenditure pattern of the state was attributable to VAT allocations. In another study, Symons, Howlett, and Alcantara (2011) investigated the effect of VAT compliance on business system. The authors used the 2008 tax information from 183 economies for this study. The findings identified three indicators that could be used as measures of compliance as follows collection rate, compliance burden and cost of taxes. According to the results of this study, companies tend to comply more with VAT than corporate income tax. The research also revealed that the discrepancies in the exact amount generated by each country from VAT depend largely on specific administration approach employed by each of the country. The impacts of VAT on Nigerian economy were also studied by Umeora (2013). In this case, the results showed that VAT correlate positively with the Nigerian economy, but have negative effects on businesses that operate in Nigeria.

2.2 THEORETICAL FRAMEWORK

Practical theory

Practical theories are discursive approaches to entrepreneurial learning, which are typically derived from the actual experience and story of entrepreneurs. Practical theory is “tacit, intuitive, implicit and situated resource of practice”. Unlike other abstract, explicit and generalized theories, practical theories are very easy to prove and verified”(Rae, 2003). Base on these postulations, Rae (2003) defined practical theory as a living body of learning that originated from the tacit and intuitive resource of practice, but used in combination of combined thinking and acting in personal praxis. But for Olugbenga (2012), practical theory are mere analytic tools that enable people to observe and understand the relationship between several aspect of their lives, and consequently take account of their respective actions. Some practical theories are offshoot of social constructionism, which is framework that allows entrepreneurs to establish relationship between general abstract principles and “what we do” concept. The fact that majority of SMES are entrepreneurship based, makes this theory highly relevant for this academic study. Furthermore, Rae (2003) notes that practice based theory influence important features like problem solving skills, decision-making skill, routing of managing relationship with others and dealing with recurrent situations. Coincidentally, these characteristics are inherent traits of very successful entrepreneurs.

Dependency Theory

This theory originated as a refutation to the Western Filter Model of development - a school of thought which argues that the backwardness of Africa is as a result of its traditional pattern of life and activity. The dependency theory which is based on the Marxian principles, postulates that low level of development in poor countries is actually in a dialectical relationship development of developed countries. The dependency theory blamed imperialism as the major factor responsible for the underdevelopment of African nations. Of course, this postulation is clearly in line with the current situation confronting Africa, which it illustrates as the macrocosm, while that of Nigeria is microcosm. Despite critics opinion that the African problems should be attributed to bad and corrupt leadership, the theory maintained the political and economic dependence of African nations on the developed world, remains the main factor that promote underdevelopment in the region. Thus, to solve the issues confronting Nigeria and other Africa countries, it is very important to minimize these regions’ dependence on developed countries. According to Olugbenga, (2012) this economic independence should be the most main target of Africa. He says; "what needs to be created is an integrated African economy oriented not to the needs of the west, but to the needs of Africa as defined politically by the African people. Anything short of that will prove incompatible with our aspirations for political and cultural autonomy." This should also reflect in Nigeria economy, where the private sector needs to be absolutely free from the government’s control. However, it is still important for the government to retain its intervention in the areas of policies and funding.