Small and Medium Scale Enterprises Development and Economic Growth Nexus in Nigeria: The Role of Institutional Quality

Despite the acknowledged role of small and medium scale enterprises (SMEs) in driving economic growth, Nigeria continues to experience institutional weaknesses and financial constraints that limit the sector’s effectiveness. Poor governance structures, corruption, and restricted access to credit remain critical barriers to SME-driven development. This study addresses these challenges by examining the nexus between SME development and economic growth in Nigeria 2000-2024, with a particular focus on the moderating role of institutional quality. Using the AutoRegressive Distributed Lag (ARDL) model, the analysis draws on annual time series data to explore both short-run dynamics and long-run relationships. In the short run, credit to SMEs (CRTSMEs), gross fixed capital formation (GFCF), and inflation (INF) have significant positive effects on real gross domestic product (RGDP), while institutional quality, measured by the Corruption Perception Index (CPI), and its interaction with SME credit (CRTSMEs_CPI) show marginal negative effects. The error correction term is appropriately signed and statistically significant, indicating a convergence toward long-run equilibrium. In the long run, SME credit, institutional quality, and capital formation exert positive and statistically significant impacts on economic growth, whereas inflation and the interaction term negatively affect RGDP. These findings highlight the critical importance of SME financing and sound institutional governance in fostering sustainable economic growth in Nigeria. The study recommends that policymakers strengthen institutional frameworks and improve credit access to SMEs to fully harness their growth-enhancing potential.