EFFECTS OF BUSINESS FORMALITY ON THE CAPACITY OF SMALL AND MEDIUM ENTERPRISES (SMEs) IN POVERTY ALLEVIATION: EVIDENCE FROM ADO-ODO LOCAL GOVERNMENT AREA, OGUN STATE, NIGERIA

Apart from the fact that there is no consensus on the role of business registration in the SMEs capacity to alleviate poverty in developing countries, most existing studies have not considered whether high cost of business registration has actually posed serious challenge to SMEs growth and performance. The broad objective of this study is to investigate the factors that influence the poverty alleviation capacity of SMEs in Ado-Odo Ota Local Government Area, Ogun State Nigeria. Specifically, the study analyzed the characteristics of SMEs and examined how the factors could affect the contribution of SMEs to poverty alleviation through income generation and employment creation. It will also assess the impact of business formality on income generation and employment creation of the SMEs in the study area Model specification The factors influencing the capacity of SMEs to alleviate poverty will be examined by estimating a Probit model. The model regresses the probability of whether SMEs is able to alleviate poverty on a set of both economic and non economic factors. These include the characteristics of business owners such as ownership structure, age, nature of business level of edu cation, activities undertaken before establishing their current business, businesses size, registration and licensing, sources of initial capital and raw materials, and the types of technology used among others. Probit regression will be used to develop the predictive models for whether performance improves or not. The probit model is a simple approximation to other probability model. The probit model is known to produce statistically sound results. The model is also known to produce results that can be easily interpreted and the method is simple to analyse in economics applications. Furthermore probit model is one of the most popular binary response model used in empirical analysis. The probit model for this study is specified as follows: y= α_0+α_1 x_1+α_2 x_2+α_3 x_3+α_4 x_4+α_5 x_5+α_6 x_6+α_7 x_7+α_8 x_8+α_9 9+e_1…3.1 In a more compact form, equation (3.1) can be re-written as y_i=∑_i^n▒α_i x_i+e_i……………….………………………………………………………3.2 Where: y_i = Poverty measures (profit, turn over owners satisfaction,). If the probability of making profit is high, 1 and otherwise, 0. x_1 = Age (years); 1 for above 5 years and 0 for otherwise x_2 = Gender; 1 for male and 0 for female x_3 = Education; 1 for post secondary and 0 for otherwise x_4 = Source of start up capital (N); 1 for personal and 0 for otherwise x_5= Sources of raw material; 1 for local and 0 for imported x_6 = Business size; 1 for micro and 0 for otherwise x_7 = Business Registration and licensing; 1 for registered and 0 for otherwise x_(8 ) = Nature of factor Intensity, 1 for Labour intensive, 0, otherwise x_9 = Nature of Business, 1 for trading, 0, otherwise α_0= Constant (A); α_i = Regression Coefficients; e_i = Error term. Expected Outcome The study is expected to identify the factors that influence the contribution of SMEs to poverty alleviation. The study also aims at assessing the effects of the business formality on the poverty alleviation capacity of SMEs in terms of income generation and employment creation in Ado-Odo Ota Local Government in Ogun State Nigeria. This will serve as a guide for policy formulation on business formality and how this can influence the contribution of SMEs to poverty alleviation.