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Capital investment decision making processes of SME clusters in Nigeria: A case of four major SME clusters in Lagos, Nigeria

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posted on 07.02.2022, 14:00 by Oluwaseun Sokan
The empirical evidence relating to the process of making investment decisions of small and
medium sized enterprises (SMEs) clusters submits that most SMEs usually fail within the
first 5 years of its establishment. This is majorly due to maladministration of finances which
in most cases is ordinarily as a result of unprofitable investments. Inefficient capital
investment decision making techniques, poor evaluation of capital investments and the failure
to incorporate risks before making decisions on capital investments will surge the likelihood
of scarce resources being distributed within projects that are not likely to yield optimum
earnings over the actual cost of capital. This will in turn affect the profitability and the
organization’s value as a whole adversely; thereby rendering the whole investment process
A cross-sectional study was adopted for the purpose of this research and this comprises a
final sample of 252 SMEs from four major SME clusters in Lagos, Nigeria. These SME
clusters are Otigba Information and Communication Technology cluster Ikeja, International
Music and Video Production cluster Alaba, Auto Parts and Mechanical cluster Ladipo,
Agribusiness Cluster, Lagos. The study adopted the Taro Yamane’s technique used in
determining relevant sizes of various samples. This study used a well-thought-out
questionnaire which was created by the researcher based on the objectives of the research
for data collection. This well-thought-out questionnaire was alienated into six sections:
The dependability of this research instrument was verified making use of two different
procedures - the Cronbach’s alpha and Split Half Techniques. These were adopted to
measure the inner stability of the research apparatus, by analysing the scale reliability of
the questionnaire. Descriptive statistics involving percentage scores, bar charts, frequency
counts and pie charts were used. Also, inferential statistics such as chi-square and
Independent Samples T-test was adopted in testing statistical connotation of the
association between the variables.
The findings of this research established that ranking of projects based on values to be
generated on each unit of venture (profitability index) was mostly used as a financial
factor in when deciding on capital investment propositions. This should not be surprising
since profit making is the major goal of every business and to remain operational, costs
must stay well below inflows. Capital investment appraisal was discovered as being
significantly linked to greater financial enactment of SMEs. This study concluded
however that there existed a substantial variance in the average financial performance
scores amongst the SME clusters who regularly used and those who did not use capital
investment appraisal techniques.





School of Management