Project – Exchange Rate Volatility, Input-Cost Uncertainty and Business Survival Among Import-Dependent SMEs: Evidence from Selected Enterprises in Lagos State.

CHAPTER ONE

 INTRODUCTION

1.1 Background to the Study

Small and medium-sized enterprises (SMEs) are important contributors to economic development because they support employment creation, entrepreneurship, income generation, innovation, and the distribution of goods and services. In developing economies such as Nigeria, SMEs operate across retail trade, manufacturing, wholesale distribution, information technology, hospitality, and other service sectors. Their contribution to economic activity depends partly on their ability to obtain inputs, maintain adequate working capital, control operating expenses, attract customers, and remain profitable under changing market conditions. However, SMEs often operate with limited financial reserves and have less access to affordable credit and sophisticated risk-management instruments than larger firms. These constraints can make them vulnerable to economic shocks that increase costs or disrupt supply. The International Finance Corporation (2017) highlights the importance of SMEs to private-sector development and employment, while the World Bank (2020) identifies access to finance and a supportive business environment as important conditions for firm growth and resilience.

Exchange rate volatility refers to fluctuations in the value of one currency relative to another over time. Such fluctuations matter to businesses that purchase raw materials, machinery, equipment, spare parts, packaging materials, finished products, or digital services from foreign suppliers. When the naira depreciates against the currency used for payment, an importer may need more naira to obtain the same amount of foreign currency, increasing the domestic cost of purchasing imported goods. Even when the exchange rate does not move continuously in one direction, uncertainty about its future movement can complicate procurement decisions, inventory planning, pricing, and budgeting. Businesses may struggle to determine whether to purchase inputs immediately, delay orders, raise selling prices, or reduce their stock levels. Goldberg and Knetter (1997) explain how exchange rate changes affect prices through exchange-rate pass-through, while Campa and Goldberg (2005) demonstrate that the extent of pass-through to import prices differs across products and market conditions.

The consequences of exchange rate movements can be especially significant in economies that depend on imported intermediate goods and capital equipment. When domestic producers and traders rely on foreign supplies, currency depreciation can increase production costs, replacement costs, and the amount of working capital needed to maintain operations. Businesses may face higher prices from foreign suppliers, increased shipping and insurance expenses in domestic-currency terms, and pressure to revise their selling prices. If customers cannot afford the resulting price increases, firms may be forced to absorb some of the additional costs through lower profit margins. If firms transfer the entire increase to customers, demand may fall and inventories may remain unsold. These outcomes can create a difficult trade-off between profitability and market competitiveness. Zubair, Okorie, and Sanusi (2013), in their study of exchange-rate pass-through in Nigeria, found that exchange-rate changes affect domestic prices, although the degree and speed of transmission vary. Campa and Goldberg (2005) similarly show that exchange-rate movements do not pass through uniformly, making the effects on individual businesses dependent on market conditions and pricing behaviour.

Input-cost uncertainty is closely related to exchange rate volatility but is not identical to it. It refers to the difficulty businesses face in predicting the future prices and availability of the materials, goods, equipment, and services required for their operations. Exchange rate changes can contribute to this uncertainty, but other factors—including international commodity prices, freight charges, import duties, supplier decisions, energy costs, and domestic inflation—may also affect procurement expenses. For an import-dependent SME, uncertainty about the next shipment’s cost can make it difficult to prepare a realistic budget, negotiate prices with customers, determine suitable inventory levels, or estimate future cash requirements. When the cost of replenishing stock rises unexpectedly, a business may find that the money received from earlier sales is insufficient to purchase the same quantity of goods again. Pindyck (1991) explains that uncertainty can influence investment decisions by increasing the value of waiting when commitments are costly to reverse. This perspective is relevant to SMEs that must decide whether to expand, restock, or defer purchases while future costs remain uncertain.

Nigeria’s foreign exchange environment makes these issues particularly relevant to businesses that depend on imported inputs. Changes in exchange-rate arrangements, movements in the value of the naira, and difficulties in predicting the cost and availability of foreign currency can affect procurement and day-to-day operations. The Central Bank of Nigeria’s economic reporting has also documented the interaction between exchange-rate pass-through, inflationary pressure, rising input costs, and business activity. For example, the CBN’s November 2024 Economic Report associated persistent inflationary pressures with elevated energy costs and exchange-rate pass-through, while reporting that rising input costs and output prices contributed to weaker business activity and consumer demand (Central Bank of Nigeria [CBN], 2024). Research by Osazevbaru (2021) also examined the relationship between exchange-rate volatility, interest-rate volatility, and the performance of Nigerian SMEs, demonstrating the importance of considering currency instability within the wider macroeconomic environment affecting smaller businesses.

Lagos State provides a significant setting for investigating these relationships because it is a major commercial and industrial centre in Nigeria, with extensive trading, distribution, manufacturing, and service activities. Enterprises operating in markets and commercial districts across Lagos may depend on imported finished products, electronic components, machinery, fashion goods, vehicle parts, industrial materials, cosmetics, or other goods sourced through international supply chains. However, import dependence varies by enterprise and sector, meaning that the consequences of exchange-rate movements are unlikely to be uniform. A business with local substitutes, substantial working capital, flexible suppliers, or the ability to adjust prices may respond differently from a smaller enterprise that relies on foreign products and faces strong price competition. Ola-Oluwa (2024), in a conceptual study of exchange-rate fluctuations and import-dependent businesses in Nigeria, discusses the effects of currency instability on operating costs, pricing strategies, and profitability, particularly for smaller businesses with limited capacity to manage currency risk. These considerations make selected enterprises in Lagos State an appropriate setting for examining how exchange-rate volatility and input-cost uncertainty relate to business survival.

Business survival refers to an enterprise’s ability to continue operating over time despite financial, market, and operational pressures. Survival may be reflected in a firm’s continued operation, ability to meet recurring expenses, maintenance of adequate cash flow, capacity to replenish inventory, retention of customers, and avoidance of prolonged operational interruption or closure. Exchange-rate volatility may threaten survival when increased procurement costs consume working capital, reduce profit margins, weaken customers’ purchasing power, or prevent firms from replacing stock. Nevertheless, the effects are not necessarily the same for all SMEs. Some businesses may adapt by changing suppliers, increasing inventory when exchange conditions are favourable, sourcing local alternatives, renegotiating payment arrangements, or gradually revising selling prices. Monday, Obokoh, Ojiako, and Ehiobuche (2017) examined exchange-rate depreciation and the performance and development of manufacturing SMEs in Nigeria, finding that SME performance and operating costs were highly sensitive to exchange-rate fluctuations. More recent Nigerian research by Obiukwu and Adurogoboye (2025) also reported a significant relationship between exchange-rate fluctuations and SME performance, while highlighting the destabilising effect of currency movements on purchasing power and output. Against this background, the present study seeks to investigate how exchange-rate volatility contributes to input-cost uncertainty and how these pressures relate to the survival of import-dependent SMEs in selected enterprises in Lagos State.

1.2 Statement of the Problem

Exchange-rate volatility has become an important business concern for Nigerian SMEs that depend on imported goods and materials for their operations. When the naira depreciates or its future value becomes difficult to predict, import-dependent enterprises may need substantially more domestic currency to purchase the same quantity of foreign goods. This situation can increase procurement expenses, raise the amount of working capital required for restocking, and make it difficult for businesses to maintain previously established prices. For smaller enterprises with limited financial reserves, the resulting cost pressure may threaten their ability to continue operating. Although exchange-rate fluctuations affect businesses differently depending on their sector, supply arrangements, and financial capacity, the vulnerability of SMEs is a significant concern. Monday et al. (2017) found that exchange-rate depreciation was closely associated with the operating costs and performance of manufacturing SMEs in Nigeria, while the Central Bank of Nigeria (2024) documented the interaction between exchange-rate pass-through, rising input costs, and weaker business activity. The problem is therefore not merely that exchange rates fluctuate, but that such fluctuations may create cost pressures that smaller import-dependent enterprises struggle to absorb.

A second problem concerns the uncertainty surrounding the future cost of business inputs. Import-dependent SMEs may find it difficult to estimate how much naira will be required to pay foreign suppliers, clear incoming goods, replenish inventory, or replace equipment. This uncertainty can complicate financial planning, pricing decisions, and the management of cash flow. When businesses increase their selling prices to reflect rising procurement costs, customers may reduce their purchases or move to cheaper alternatives. However, when firms retain their previous prices to protect market share, their profit margins may decline. Either response can weaken the financial resources needed for restocking, rent, salaries, transportation, and other recurring expenses. Goldberg and Knetter (1997) and Campa and Goldberg (2005) demonstrate that exchange-rate changes can influence import prices and that the extent of price adjustment varies across markets. Nevertheless, the precise manner in which input-cost uncertainty affects the daily operations and financial decisions of import-dependent SMEs in Lagos State requires closer investigation.

A third problem is that the capacity of SMEs to withstand currency-related cost pressures differs considerably. Enterprises with stronger cash reserves, access to credit, flexible supplier arrangements, or opportunities to substitute locally sourced inputs may be better positioned to respond to exchange-rate shocks. In contrast, enterprises that depend heavily on imported finished goods or specialised materials may have fewer alternatives when procurement expenses rise. Smaller firms may also lack access to formal currency-risk management instruments and may rely instead on price increases, reduced stock purchases, delayed payments, or the use of personal funds to sustain their operations. These coping responses may offer temporary relief but can also reduce competitiveness and weaken the firm’s long-term financial position. Osazevbaru (2021) examined exchange-rate and interest-rate volatility in relation to the performance of Nigerian SMEs, while Ola-Oluwa (2024) discussed the cost and profitability challenges confronting import-dependent businesses. The research problem is to establish how these pressures are experienced by selected enterprises in Lagos State and whether differences in their exposure to imported inputs and capacity to manage costs are associated with their prospects for survival.

The fourth problem is the need to examine business survival specifically, rather than treating business performance, profitability, or output as equivalent to continued operation. An enterprise may experience lower profits for a period and still remain operational, while another may face persistent cash-flow difficulties that eventually force it to reduce its activities or close. Although existing studies have investigated exchange-rate movements and SME performance in Nigeria, additional evidence is needed on the relationship between exchange-rate volatility, uncertainty in input costs, and the continued operation of import-dependent SMEs in Lagos State. For example, Obiukwu and Adurogoboye (2025) investigated exchange-rate fluctuations and SME performance in Nigeria, while Eromosele (2025) reported that naira devaluation had a negative short-run effect on SME performance through increased imported-input costs. These findings establish the relevance of the issue but do not, by themselves, determine how the selected enterprises in Lagos State experience input-cost uncertainty or how it relates to their survival. This study therefore seeks to examine the relationship between exchange-rate volatility, input-cost uncertainty, and business survival among import-dependent SMEs in selected areas of Lagos State.

1.3 Aim and Objectives of the Study

The main aim of this study is to examine exchange-rate volatility, input-cost uncertainty, and business survival among import-dependent small and medium-sized enterprises in selected areas of Lagos State.

The specific objectives are to:

1. Examine the extent to which exchange-rate volatility affects the procurement costs of import-dependent SMEs in selected areas of Lagos State.

2. Assess the relationship between exchange-rate volatility and input-cost uncertainty among the selected enterprises.

3. Determine how input-cost uncertainty affects the financial stability and continued operation of import-dependent SMEs.

4. Examine the relationship between exchange-rate volatility, input-cost uncertainty, and business survival among the selected enterprises in Lagos State.

1.4 Research Questions

The study will be guided by the following research questions:

1. To what extent does exchange-rate volatility affect the procurement costs of import-dependent SMEs in selected areas of Lagos State?

2. What relationship exists between exchange-rate volatility and input-cost uncertainty among the selected enterprises?

3. How does input-cost uncertainty affect the financial stability and continued operation of import-dependent SMEs?

4. What relationship exists between exchange-rate volatility, input-cost uncertainty, and business survival among the selected enterprises in Lagos State?

1.5 Research Hypothesis

The following null hypothesis will be tested at the 0.05 level of significance:

H₀: There is no statistically significant relationship between exchange-rate volatility, input-cost uncertainty, and business survival among import-dependent SMEs in selected areas of Lagos State.

1.6 Significance of the Study

This study is significant because it examines the pressures created by exchange-rate volatility and input-cost uncertainty and their possible implications for the survival of import-dependent SMEs. Its findings may be useful to the following groups.

SME owners and managers: The study may help business owners understand how exchange-rate movements can affect procurement costs, pricing decisions, inventory management, working capital, and business continuity. The findings may encourage more systematic budgeting, supplier diversification, cash-flow monitoring, and contingency planning when the cost of imported inputs is uncertain.

Government and policymakers: The findings may provide evidence for policymakers concerned with foreign-exchange management, SME development, trade facilitation, and the stability of the business environment. Understanding how currency movements affect the operating costs of smaller enterprises may inform policies aimed at improving access to foreign exchange, supporting local alternatives to imported inputs, and strengthening the resilience of SMEs.

Financial institutions: Banks, microfinance institutions, and other providers of business finance may benefit from understanding the relationship between input-cost uncertainty and SME survival. The findings could inform the design of working-capital facilities, suitable repayment arrangements, and financial products that respond to the cash-flow pressures faced by import-dependent enterprises.

Business associations and SME support organisations: Chambers of commerce, trade associations, and enterprise-development organisations may use the findings to identify the challenges confronting import-dependent businesses. The study may support training programmes in financial planning, procurement management, supplier diversification, and risk management.

Consumers: The study may indirectly benefit consumers by drawing attention to the cost pressures faced by enterprises supplying imported products. A better understanding of these pressures may contribute to discussions about pricing, product availability, and the conditions required for businesses to maintain a reliable supply of goods.

Researchers and students: The study may contribute to the literature on exchange-rate volatility, input-cost uncertainty, and SME survival in Nigeria. It may provide a basis for further research comparing import-dependent and locally supplied enterprises, different business sectors, and alternative strategies for managing currency-related risks.

1.7 Scope of the Study

The study focuses on exchange-rate volatility, input-cost uncertainty, and business survival among import-dependent SMEs in selected areas of Lagos State.

Content scope: The study covers exchange-rate fluctuations, procurement costs, uncertainty surrounding imported inputs, pricing decisions, cash-flow management, financial stability, and the continued operation of SMEs.

Geographical scope: The study will be conducted among selected enterprises in Lagos State. The specific locations and enterprises should be identified in the research methodology according to the study’s sampling framework and the availability of eligible import-dependent SMEs.

Population scope: The study will focus on owners, managers, finance officers, procurement officers, or other knowledgeable representatives of SMEs that depend substantially on imported finished products, raw materials, components, equipment, or other business inputs.

Conceptual scope: Exchange-rate volatility and input-cost uncertainty are the principal explanatory variables, while business survival is the outcome of interest. The study will investigate their relationships without assuming that exchange-rate changes are the sole determinants of business survival.

Temporal scope: The study will examine respondents’ experiences over a clearly defined period to be specified in the methodology. The period should be sufficiently clear for respondents to report exchange-rate changes, procurement costs, and business-continuity experiences consistently.

1.8 Limitations of the Study

One potential limitation is respondents’ access to financial records. Some SME owners may be reluctant to disclose procurement costs, revenue, profit margins, or cash-flow information. To address this challenge, the researcher should assure respondents of confidentiality and collect only the information required to meet the study’s objectives.

A second limitation is recall bias. Respondents may find it difficult to remember the precise exchange rates, input prices, or timing of procurement decisions over the study period. The researcher may reduce this limitation by using clearly defined time frames and, where respondents consent, consulting available purchase records, invoices, or other business documents.

A third limitation is differences among business sectors. Exchange-rate volatility may affect an electronics retailer differently from a pharmaceutical distributor, manufacturer, or fashion-goods trader. The study should document the sectors represented in its sample and interpret the findings in light of differences in the type and degree of import dependence.

A fourth limitation is other economic influences. Inflation, electricity costs, transportation expenses, interest rates, consumer purchasing power, and changes in demand may affect business survival independently of exchange-rate movements. The study should acknowledge these factors when interpreting its findings and avoid attributing every reported business difficulty solely to exchange-rate volatility.

Finally, geographical and sampling limitations may restrict the extent to which findings can be generalised. Evidence from selected enterprises in Lagos State may not fully represent all SMEs in Lagos State or Nigeria. The researcher should clearly describe the sampling procedure, selected locations, and characteristics of the enterprises included.

1.9 Operational Definition of Terms

Exchange Rate Volatility: The degree to which the value of the naira changes against foreign currencies used to purchase imported goods and business inputs over a specified period.

Input-Cost Uncertainty: The difficulty faced by an enterprise in predicting the future cost of raw materials, finished goods, equipment, components, and other inputs required for its operations.

Business Survival: The ability of an enterprise to continue operating over time, meet recurring obligations, maintain essential business activities, and avoid operational closure despite financial and market pressures.

Small and Medium-Sized Enterprises (SMEs): Business enterprises classified as small or medium-sized under the applicable Nigerian classification framework. The study should state the operational criteria used to identify eligible enterprises.

Import-Dependent SMEs: Small and medium-sized enterprises that rely substantially on imported finished goods, raw materials, machinery, equipment, components, or other inputs for their business operations.

Procurement Cost: The total cost incurred in obtaining business inputs, including purchase prices and relevant expenses associated with transportation, shipping, clearing, duties, and delivery.

Naira Depreciation: A decline in the value of the naira relative to a foreign currency, such that more naira is required to purchase a unit of that currency.

Financial Stability: The capacity of an enterprise to maintain adequate cash flow, meet its financial obligations, fund recurring operations, and withstand cost or revenue shocks.

Working Capital: The funds available to support day-to-day business operations, including the purchase of inventory, payment of suppliers, and settlement of short-term obligations.

Input-Cost Management: The strategies and decisions used by a business to monitor, plan, control, and respond to changes in the cost of its operational inputs.

1.10 Organisation of the Study

The study is organised into five chapters.

Chapter One presents the introduction, background to the study, statement of the problem, aim and objectives, research questions, research hypothesis, significance, scope, limitations, and operational definitions of terms.

Chapter Two reviews relevant literature on exchange-rate volatility, input-cost uncertainty, business survival, and the challenges facing import-dependent SMEs. It examines the theoretical framework, reviews relevant empirical studies, and identifies the research gap addressed by the study.

Chapter Three presents the research methodology, including the research design, population, sample size, sampling techniques, research instrument, validity and reliability procedures, data-collection methods, and techniques for analysing the data.

Chapter Four presents and analyses the data collected from the selected enterprises. It addresses the research questions, tests the hypothesis, and discusses the findings in relation to the study objectives and relevant literature.

Chapter Five presents the summary of the findings, conclusion, recommendations, limitations of the research, and suggestions for further studies.

Project – Exchange Rate Volatility, Input-Cost Uncertainty and Business Survival Among Import-Dependent SMEs: Evidence from Selected Enterprises in Lagos State.