Description
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
As a major force behind innovation, job creation, and economic growth, small and medium-sized enterprises (SMEs) are widely recognized as the backbone of many economies across the globe. SMEs contribute significantly to GDP in both developed and developing nations, promote entrepreneurship, reduce poverty, and advance inclusive economic development (Morenikeji et al., 2012). According to the World Bank, SMEs account for over 90% of businesses worldwide and more than 50% of job opportunities. Since they sustain a significant section of the population and contribute to the growth of industrialization, they are particularly significant in developing countries. However, their development and sustainability are frequently threatened by macroeconomic variables, of which fluctuations in the foreign currency (FX) rate are especially worrisome (Morenikeji et al., 2012).
The foreign exchange rate is the value of one currency relative to another. It is an important consideration in international trade, financial transactions, and investment decisions. The global economy is interconnected, and countries that heavily depend on imports, exports, and foreign capital inflows are most affected by fluctuations in exchange rates (Obokoh, 2018). The profitability of SMEs, which can lack the financial stability of bigger enterprises, can be positively or negatively impacted by fluctuations in foreign currency rates. For instance, when the local currency depreciates, SMEs that import raw materials, machinery, or technology face higher manufacturing costs. However, when foreign buyers perceive their products to be relatively cheaper, exporting companies may become more competitive abroad. However, the enterprise’s structure, degree of import and export dependence, and currency risk management skills all affect the total impact (Obokoh, 2018).
In many emerging economies, such as Nigeria, Ghana, Kenya, and other sub-Saharan African countries, exchange rate volatility has become a recurring macroeconomic problem. Nigeria’s economy, for example, is heavily reliant on oil exports, and fluctuations in the price of oil throughout the world have an instant impact on the value of the naira. Because of the high cost of imported products, currency weakness, and inflationary pressures, Nigerian SMEs have struggled throughout the years. The devaluation of the local currency usually lowers the profit margins of SMEs since many of them rely on imported raw materials, equipment, and replacement parts. Furthermore, the volatile currency rate discourages foreign investment and limits SMEs’ access to regional and international markets (Obokoh, 2018).
Historically, economic growth and the rise of the private sector have been associated with stable exchange rates. When there is monetary stability, SMEs may more confidently expand their operations, secure long-term contracts, and effectively plan and predict. But unpredictable fluctuations often undermine business trust, deter investment, and restrict access to funding. Exchange rate volatility may have a negative impact on SMEs’ profitability and can also result in inflation, a reduction in consumer buying power, and higher borrowing costs. Therefore, understanding the connection between exchange rate volatility and SME performance is crucial for policymakers, entrepreneurs, and financial institutions seeking to support sustainable firm growth (Okoye et al., 2023).
SMEs are particularly vulnerable to the impact of foreign exchange rates due to their structural limitations. Unlike large international corporations, SMEs usually lack access to sophisticated financial tools that might lower currency risk, such as forward contracts, swaps, or hedging methods. Their limited capital base, dependence on local financial institutions, and less capacity to bargain in international markets make them even more susceptible to currency fluctuations (Okoye et al., 2023). Furthermore, it is challenging for SMEs to raise prices without losing clients in highly competitive sectors. According to Okoye et al. (2023), this makes research on the impact of foreign exchange both relevant and essential for enhancing SME resilience in uncertain economic environments.
The issue is exacerbated by the globalization of supply networks. SMEs that do not directly trade internationally may be indirectly impacted by changes in exchange rates through their suppliers or rivals. For example, a small manufacturing business that sources raw materials locally may nonetheless see price increases if local suppliers import their own supplies from outside. In a similar vein, SMEs in the retail or service sectors may see shifts in demand as consumers adjust their spending in response to inflation caused by currency fluctuations. Thus, the foreign exchange rate becomes a cross-cutting issue that impacts nearly every facet of the SME landscape, according to Okoye et al. (2023).
Numerous empirical studies throughout the years have highlighted the importance of exchange rate stability for economic development and private sector success. Despite their importance, SMEs have received very little academic attention; instead, the majority of the emphasis has been directed on large firms, multinational corporations, or the economy as a whole (Omotosho et al., 2015). This research vacuum makes it more challenging to create efficient policy responses that are tailored to the particular needs of SMEs. For instance, in order to maintain the macroeconomy, central banks usually enact monetary and exchange rate policies, but they may not fully consider how these measures will impact small businesses on a micro level. Understanding these mechanisms is essential to creating an environment that supports SMEs’ growth despite fluctuations in currency rates (Omotosho et al., 2015).
A common indicator of Nigeria’s and other developing countries’ economic health is the performance of SMEs. Government initiatives such as the creation of SME development agencies, loan programs, and capacity-building initiatives are frequently supported as a component of broader economic development initiatives. For these measures to have a major effect, however, the macroeconomic environment—particularly exchange rate stability—must encourage business expansion. Continued exchange rate volatility discourages entrepreneurship in addition to undercutting these measures. Entrepreneurs, who are frequently risk-takers, may become risk-averse when confronted with unpredictable currency changes that might wipe out their gains overnight (Omotosho et al., 2015).
Another facet of the issue is credit and funding availability. Many SMEs depend on bank loans to finance their operations or development ambitions. In economies with unstable currency rates, interest rates are usually high, and banks usually have stringent lending restrictions to limit their exposure to personal risk. SMEs thus struggle to secure affordable financing, which subsequently diminishes their resilience to currency shocks (Wattanapruttipaisan, 2022). If the value of their native currency drops, SMEs who take up foreign currency loans also risk having to pay more for service. These financial constraints show the relationship between exchange rate fluctuations and the survival of SMEs (Onugu, 2025).
The success of SMEs may be assessed using a variety of indicators, including profitability, productivity, job creation, innovation, and market growth. Exchange rate volatility affects each of these factors, either directly or indirectly. Profitability is immediately impacted, for instance, by rising input costs or declining sales as a result of increased consumer pricing. Productivity may suffer if SMEs are unable to invest in new technology due to higher import costs (Rasaq et al., 2023). Employment creation may also be hampered if businesses scale back their growth plans to address exchange rate worries. Even innovation is not exempt for SMEs with low resources, since they may not be able to invest in R&D or adopt new business methods. Lastly, SMEs’ capacity to significantly contribute to national growth is significantly impacted by the fluctuations of foreign exchange prices (Rasaq et al., 2023).
Globally, there are lessons to be gained from other countries’ experiences. The growth of SMEs in Asian nations such as China and India has been facilitated by relatively stable exchange rate regulations, which have enabled them to participate in international commerce. SME industries, on the other hand, usually face stagnation in nations with continuously volatile currency rates, which lessens their capacity to compete globally. Africa, and Nigeria in particular, are concerned about creating a stable macroeconomic climate that protects SMEs from excessive currency volatility and encourages integration into global markets (Rasaq et al., 2023).
Research on the impact of foreign currency rates on SMEs is therefore important from an academic and practical standpoint. Policymakers, entrepreneurs, financial institutions, and development partners would all benefit from a deeper comprehension of how currency changes impact SME results. By investigating the relationship between exchange rates and SME performance, this study aims to fill a major knowledge gap, provide evidence-based insights, and support the creation of policies and initiatives that increase SME resilience (Udechukwu et al., 2023).
The issue of exchange rate volatility has drawn more attention in Nigeria since the structural adjustment program (SAP) led the foreign currency to fluctuate against the naira. This is because every economy wants to have a stable exchange rate with its trading partners. Nigeria began devaluing in order to promote exports and stabilize the currency rate, but this goal was not achieved there (Uremadu et al., 2023). In the event that this objective was not met, the Nigerian SMES sector was confronted with the challenge of a constantly fluctuating exchange rate. The depreciation of the naira did not necessitate this; rather, the sector was boosted by its weak and restricted base of output and rising import prices. To halt this tendency and ensure a stable foreign exchange rate, the monetary authority put in place a number of foreign exchange rate measures (Uremadu et al., 2023).
However, the foreign currency rate stabilization effort was not very successful. Exchange rate policy is an essential instrument in macroeconomic management as changes in the exchange rate have a significant effect on a country’s balance of payments situation, income distribution, and growth. Consequently, problems with exchange rate fluctuations have continued. This is not unexpected as its activities are believed to affect the actions of many other macroeconomic variables (Oyejide, 2015). This is especially true for Nigeria, whose economy has grown quickly and has therefore become heavily dependent on imports.
In the contemporary economy, the small and medium-sized enterprise (SME) sector plays a catalytic role and provides a number of dynamic benefits that are critical for economic development. In many respects, small and medium-sized enterprises are a leading industry in developed countries (Uremadu et al., 2023). It aims to increase productivity in relation to import substitution and export growth, generate foreign exchange earnings capacity, boost employment, promote investment growth more quickly than any other sector of the economy, and build stronger and more comprehensive connections between different sectors (Fakiyesi, 2025). On the other hand, Nigeria’s economy is under-industrialized and uses its potential poorly.
Oyejide (2015) asserts that changes in the world exchange rate, including those in Nigeria, are caused by the breakdown of the Brelton Woods system. Mubanmwen (2015) claims that this has three detrimental implications on import capacity. Devaluation, which exacerbates the situation, hasn’t significantly improved economic performance in Nigeria (Ojo, 2020). The impact of the foreign currency rate on the production of small and medium-sized enterprises has not received adequate attention. The purpose of this article is to raise awareness of the issue.
1.2 Statement of the problem
Small and medium-sized enterprises (SMEs) are widely recognized as the backbone of innovation, economic expansion, and job creation in Nigeria. SMEs contribute significantly to the nation’s labor market and GDP, but they still face several challenges that keep them from expanding and being sustainable (Yusuf et al., 2023). One of the most pressing and persistent issues is the volatility of the foreign exchange (FX) rate. Nigeria’s SMEs are vulnerable to changes in the value of the naira in relation to other currencies, particularly the US dollar, euro, and pound sterling, because of its significant reliance on imports for machinery, raw materials, and other essential inputs (Yusuf et al., 2023).
The Nigerian foreign currency market has seen unprecedented volatility in recent years due to a variety of factors, including inflation, diminishing foreign reserves, fluctuating monetary policies, and declining oil earnings. These swings have increased the cost of imported commodities and manufacturing inputs, making it difficult for SMEs to maintain competitive pricing, ensure profitability, and continue operations (Uremadu et al., 2023). For many SMEs, especially those involved in manufacturing, trade, and service delivery, the rising cost of doing business caused by exchange rate volatility has led to lower output, lower revenues, job losses, and in some cases, firm closure.
A number of variables, including as inflation, depleting foreign reserves, shifting monetary policies, and falling oil profits, have contributed to the Nigerian foreign currency market’s recent exceptional volatility. It is becoming more difficult for SMEs to maintain competitive pricing, guarantee profitability, and carry on operations due to these fluctuations in the cost of imported commodities and manufacturing inputs (Uremadu et al., 2023). The growing cost of doing business brought on by exchange rate volatility has resulted in poorer output, fewer revenues, job losses, and in some cases, firm closure for many SMEs, particularly those engaged in manufacturing, trade, and service delivery.
Despite several government measures to support SMEs and calm the forex market, little is known about how foreign exchange volatility affects SME performance. Since SMEs constitute the backbone of grassroots economic activity, the majority of current research focuses on macroeconomic effects in general and pays little attention to how they are adapting and coping (Okoye et al., 2023). Examining the extent to which foreign exchange fluctuations impact SME development, profitability, survival, and overall performance is clearly necessary in the Nigerian context (Okoye et al., 2023).
This study attempts to bridge this gap by examining how foreign currency rate volatility affects the operations of SMEs in Nigeria. Policymakers, stakeholders, and entrepreneurs need to fully comprehend this link in order to develop targeted strategies and policies that can increase SME resilience, promote equitable economic growth, and ensure long-term sustainability in a changing economic climate.
1.3 Aim and Objectives of the study
The main objective of this research is to examine how fluctuations in foreign exchange rates impact the performance of SMEs using La Sien Bottling Company LTD in Port Harcourt, Rivers State, Nigeria, as a case study. La Sien Bottling Company LTD is one of the SMEs in the manufacturing industry. SMEs play a critical role in innovation, job creation, and economic growth, but they are also highly susceptible to macroeconomic variables, especially shifts in the foreign exchange rate. Because La Sien Bottling Company LTD depends on imported machinery, raw materials, and international commerce, changes in the exchange rate may directly affect their costs, profitability, and long-term viability. The following goals will be accomplished at the conclusion of the study:
- To assess how La Sien Bottling Company LTD’s performance is impacted by changes in foreign currency rates.
- To conduct an empirical investigation on the impact of fluctuations in foreign currency rates on raw material imports by La Sien Bottling Company LTD.
- To ascertain if La Sien Bottling Company LTD’s performance is impacted by the ongoing fluctuations in the foreign exchange rate.
1.4 Research questions
- How much does La Sien Bottling Company LTD’s performance get impacted by changes in foreign currency rates?
- How much does La Sien Bottling Company LTD’s importation of capital goods and inputs are impacted by fluctuations in foreign currency rates?
- Does the quality performance of La Sien Bottling Company LTD, located in Port Harcourt, Rivers State, get impacted by changes in foreign exchange rates?
1.5 Formulation of hypotheses
The study’s hypotheses comprise the alternative hypothesis, represented by “H,” and the null hypothesis, represented by “H0.”
H0: La Sien Bottling Company LTD’s performance is unaffected by changes in foreign exchange rates.
H1: The performance of SMEs, such as La Sien Bottling Company LTD, is significantly impacted by fluctuations in foreign exchange rates.
H0: Imports of capital goods and inputs are unaffected by changes in foreign currency rates.
H1: Imports of capital goods and inputs are impacted by changes in foreign currency rates.
H0: The quantity and quality of goods sold by La Sien Bottling Company LTD are not significantly impacted by changes in foreign exchange rates.
H1: La Sien Bottling Company LTD’s quality performance is significantly impacted by fluctuations in foreign exchange rates.
1.6 Significance of the study
The research will identify the regions most affected by exchange rate volatility, weigh the benefits and drawbacks of exchange rate management and policy, and provide the public with enough information regarding foreign exchange transactions and their effects on Nigerian SMEs’ performance. The study typically benefits the following:
First and foremost, the research is essential for SMEs’ owners and managers. A greater understanding of how exchange rate fluctuations affect the cost of imported machinery, raw materials, and operational expenses can help business owners develop strategies that will help them reduce foreign exchange risks. This might entail procuring resources more locally, diversifying, or using hedging strategies. The study’s findings will enable them to make more informed financial and operational choices that support the long-term survival and growth of their business.
Second, this study will provide policymakers and government agencies with valuable information. Policymakers may utilize the findings to create effective monetary and fiscal policies that stabilize the exchange rate and enhance the business environment for SMEs. It also highlights the need for improved access to foreign exchange for productive sectors and the importance of strengthening indigenous industry to reduce dependency on imports.
Additionally, this research will benefit financial institutions and investors. The financial hardships that SMEs face due to foreign exchange volatility will be better understood by banks and lending institutions. This may lead to the development of tailored financial products and support systems that address the unique needs of SMEs operating in a currency-volatile environment.
The study contributes to the existing body of information on SMEs and foreign exchange management in developing countries, particularly as it relates to La Sien Bottling Company LTD, from an academic perspective. It establishes the framework for additional research and provides chances for comparative studies with other emerging countries tackling similar problems.
Last but not least, this study is crucial for understanding the relationship between foreign currency rates and SME performance. It also provides recommendations for how businesses, the government, and financial institutions should collaborate to build a strong SME sector in Nigeria. A stronger SME sector ultimately leads to a more resilient and inclusive economy, which is essential for the growth of the country.
1.7 Scope and limitations of the study
In order to examine how fluctuations in foreign exchange rates impact the performance of SMEs, specifically manufacturing SMEs, this study uses La Sien Bottling Company LTD, situated in Port Harcourt, Rivers State, Nigeria, as a case study. Only SMEs that import raw materials and are harmed by exchange rate fluctuations, either directly or indirectly, are included in the research. The study focuses on the effects of exchange rate fluctuations on the main performance indicators of SMEs, such as profitability, sales growth, operational expenses, investment decisions, and the overall viability of the business.
Geographically, the study is restricted to Port Harcourt, Rivers State, Nigeria, due to its thriving foreign currency market and the crucial role SMEs play in its economic development.
The scope include the fixed and variable rate eras as well as the regulatory deregulatory exchange rate phase. The study’s goal is to evaluate the Nigerian exchange rate as the primary gauge of economic development and expansion. This study’s only emphasis is on how the foreign exchange rate affects the operations of La Sien Bottling Company LTD, which is based in Port Harcourt, Rivers State, Nigeria.
1.8 Definition of terms
- Exchange rate: This represents the value of one nation’s currency relative to another.
- Foreign exchange: The currencies of other nations that are easily accepted for use in settling international transactions make up foreign exchange, which is a method of payment for such transactions.
- Dutch auction System (DAS): This system uses auctions to determine the exchange rate, with bidders paying based on their bid rates.
- Exchange control: Under this foreign exchange system, the government is the sole source from which foreign exchange may be lawfully acquired and purchases all incoming foreign exchange.
