Does trade openness influence the performance of small and medium enterprises in Nigeria? A re-evaluation of the evidence

Abstract

The theoretical premises of open trade predict that open economies would benefit more from trade than those in autarky. Empirical findings for Nigeria are mixed both for macro-based studies and those devoted to sectoral investigations. In this paper, we re-evaluate the evidence on trade openness’s impact on the performance of small- and medium-scale enterprises (SMEs) in Nigeria. Existing studies in this area suffer from a twin restriction; one in scope, the other in methodology. We thus employ a two-pronged analytical framework on time series data spanning 1981 to 2019. First, the autoregressive distributed lag (ARDL) methodology is used to investigate the short-run and long-run effects of trade openness on SMEs’ performance. Second, the Toda-Yamamoto causality test provides additional evidence on the direction of causality among the policy variables. Our findings show that trade openness exerts a positive but insignificant impact on the performance of SMEs. Causality test results indicate that variations in exchange rate, infrastructure, labour force and foreign direct investment influence the performance of SMEs. The paper recommends the creation of enabling environments that guarantee formidable enterprise performance amidst open trade. Specifically, there is need, among other things, for significant improvements in infrastructure levels as well as stability in the exchange rate.