The automobile parts cluster in Nnewi (Nigeria) is an example of the effect of SMES on the large scale industry which has transformed the sector to manufacturers of automobile parts.

Taxation is a field of government activity that has significant impact on SMEs. Tax policies include investment and tax incentives, taxes applying to starting and operating a business, capital based and income based taxes

Taxation can be used to stimulate one area of economic activity(through tax incentives) or limit another area (import duties to limit taxes. foreign competition).

There are 3 ways that taxation affects the transaction cost of SMEs:

• Complexity: This involves four factors; number of tax, timing of tax reporting and payment, the tax base and exemptions. This complex system force SMEs into hiring expensive external accountants to prepare their tax returns.
• Enforcement: The transactions costs imposed on SMEs by a country’s tax complexity will be unavoidable where enforcement is strong. However, tax avoidance introduces additional cost by promoting bribery, corruption and informality.
• Stability: In countries where the rules of taxation are continually changing, SMEs incur a lot of transaction costs in leaving and complying with new systems.

BIG VERSUS SMALL

• In Nigeria, the organized manufacturing sector is made up of 95% SMEs whereas 5% represents the large corporations.
• The rapid growth of SMEs has resulted in local sourcing of raw materials and export drive without which larger corporations are handicapped.
• In many developed countries, more than 98% of all enterprises belong to the SME sector. 80% of the total industrial labour force in Japan, 50% in Germany and 46% in the USA are employed by smaller firms
• In the USA, small businesses contribute nearly 39% to the National income. Figures in many developing countries are even higher.
• The bulk of commercial bank lending to industries is working capital but it goes to well entrenched blue-chip enterprises who have bargaining power to negotiate better borrowing terms rather than small scale enterprises (SSEs)·
• The negative bias against the SMEs was demonstrated by commercial banks’ preference to pay penalty rather than meet the 20% target lending to SSEs by making risky investments when the central bank’s credit guidelines were in force.