Mini Research Project_Group One_The Impact of Credits to SMEs on Employment Generation

Mini Research Project



THE IMPACT OF CREDITS TO SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) ON EMPLOYMENT GENERATION



BY



GROUP ONE




BEING AN ABRIDGED RESEARCH STUDY PRESENTED TO THE DEPARTMENT OF BUSINESS AND ECONOMICS IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF A MASTER’S DEGREE

IN INTERNATIONAL BUSINESS AT LINCOLN UNIVERSITY CALIFORNIA, USA.


MAY 29, 2010


CERTIFICATION

I, the undersigned, certify that I approve this research work as being adequate in scope, depth and quality, in partial fulfillment of the award of a Master’s Degree (MBA) in International Business in the Department of Business and Economics at the Lincoln University, California.







________________________________

PROF. SYLVIA SCHOEMAKER

(Project Instructor)




TABLE OF CONTENTS

Title page- - - - - - - - - i

Certification- - - - - - - - ii

Table of contents - - - - - - - iii

List of Tables and Graphs - - - - - - iv

Synopsis- - - - - - - - - v



CHAPTER ONE - INTRODUCTION

1.1 Prologue- - - - - - - -

1.2 Background to the Study- - - - -

1.3 Statement of the Problem- - - - -

1.4 Relevance of the Study- - - - - -

1.5 Objectives of the Study - - - - -

1.6 Statement of Hypothesis- - - - -

1.7 Scope and Methodology of the Study- - -

1.8 Limitations of the Study- - - - - -

1.9 Organization of the Study- - - - -

CHAPTER TWO: SURVEY OF LITERATURE

2.1 Introduction- - - - - - -

2.2 The concept of Small and Medium Scale

Enterprises (SMEs)- - - - - -

2.3 The Concept of Finance-- - - - -

2.4 Generating Employment though Promotion of

Small Scale Industries- - - - - -

2.5 Expected Role of SMEs in Industrial

And Economic Development- - - - -


CHAPTER THREE: THEORETICAL FRAMEWORK AND

MODEL SPECIFICATION

3.1 Introduction- - - - - - -

3.2 Sources of Finance for SMEs- - - - -

3.3 The Roles of SMEs in National Development- -

3.4 Constraints of SMEs in Nigeria- - - -

3.5 Alternatives to SME Growth - - - -

3.6 Model Specification- - - - - -

CHAPTER FOUR: ANALYSIS AND INTERPRETATION

OF REGRESSION RESULTS

4.1 Presentation of Regression Results- - - -

4.2 Definition of Concepts- - - - - -

4.3 Interpretation of Results- - - - - -

4.4 Policy Implications- - - - - -


CHAPTER FIVE: OBSERVATIONS, RECOMMENDATIONS AND CONCLUSIONS

5.1 Observations- - - - - - -

5.2 Recommendations- - - - - -

5.3 Conclusion- - - - - - - -

Bibliography - - - - - - --

LIST OF TABLES AND FIGURES

TABLES

1 Investment and Employment Capacity

in Selected Countries- - - - - -

2 Data obtained for the Analysis- - - -



SYNOPSIS

This research work is an Econometric analysis of the impact of credits to small and medium scale enterprises on employment generation. Though, this credit provision particularly refers to those made by Banking Institutions. Since inception, it was revealed in this study that, SMEs in Nigeria have witnessed stunted growth and therefore deprived of development due to the unavailability of funding.

The study appraises the numerous efforts made by government and its agencies at developing SMEs. This includes the recent programme known as “small and medium scale industries equity investment scheme (SMIEIS) “all of which have yielded less than expected results. However, this study has depicted the various roles played by SMEs in developing economies like Nigeria.

On employment generation, the work shows that bank credits to SMEs cannot be held accountable for employment growth in employment in Nigeria; this is particularly due to its failure to meet with a priori expectation. It will also be discovered that in the specified model, there is no significant linear relationship existing between the explained (dependent) and explanatory (independent) variables. This goes to prove that the results obtained from empirical evidence are short of expectations.

Nonetheless, the reasons for embarking on this study are achieved particularly as it will be discovered that SMEs have the potential for sustaining growth and developing the Nigerian economy

In the course of the study, there were observations upon which recommendations are thereby made to ensure that the future of Nigerian SMEs is nothing short of expectations.



CHAPTER ONE

INTRODUCTION

1.1 Prologue

The advent of the recent emphasis on the promotion and development of SMEs, was preceded by an unreasoned notion that only large scale enterprises are the bedrock of any modern economy. In Nigeria particularly, this ideology dominated the scene prior to the 1980’s, due to the basic tenets of “Economics of large scale production” and its attendant merits.

Then, small – scale industries (SSIs) were believed to be outmoded and an indication of the existence of technological backwardness, so much that the rapid decline in the existence of SMEs for large scale industries became an index for industrial progress.

1.2 Background to the study

It is evident that the economic conditions that prevailed in Nigeria during the 1970s and the early 1980s required the adoption of industrialization strategies based on large scale production. This derives from the fact that numerous large scale industries were set up during the rehabilitation programme of the post – war era. These industries tended to be capital intensive. The capital requirement and technical manpower were largely imported and this impacted negatively on Nigeria’s Foreign exchange earnings.

Therefore, in respect of the weaknesses associated with large scale industries in Nigeria, the government has of recent sought to promote the small – scale industry as a panacea strategy for a self – reliance and sustained economic growth. This must have been the reason why the third National development plan clearly incorporated the development and promotion of small scale industries particularly for the objective of creating employment opportunities.

1.3 Statement of the problem

This research work was based on the paucity of funds and credit availability to help develop small and medium scale enterprises and sustain existing ones.

1.4 Relevance of the study

This research work is necessitated by the fact that all institutions concerned need to realize the important roles SMEs can play in economic growth. The study is an attempt to enlighten and sensitize stakeholders that the inherent lapses and complexities associated with large scale businesses should encourage interest in SMEs.


1.5 Objectives of the study

On the one hand, this research work, seeks to analyze;

1) What a small and medium scale enterprise means.

2) The roles played by SMEs in a developing economy.

3) By empirical evidence, the effect(s) of credits to SMEs on employment generation.

4) The problems and prospects of SMEs.

On the other hand, this study seeks to assess;

(i) The efforts made by banks and non – bank financial institutions at promoting and sustaining SMEs in Nigeria.

(ii) The rate of credit availability to SMEs in Nigeria.

Moreso, this study shall make observations and necessary recommendations based research findings.

1.6 Statement of hypothesis

The findings to be arrived at in this research work shall be on the basis of the hypothesis formulated as follows:

H0: Bank credits to SMEs generate employment in Nigeria.

H1: Bank credits to SMEs do not generate employment in Nigeria.

Notes:

H0: Is the null hypothesis, a tentative statement that this work seeks to validate or invalidate.

H1: Is the alternative hypothesis, which in automatically accepted once the null hypothesis is rejected.


1.7 Scope and methodology of the study

1.7.1 Research methodology

This study shall be based on multiple regression analysis using the Ordinary Least Square (OLS) method of estimation. The data input for the analysis shall be secondary and shall be obtained from relevant institutions.

1.7.2 Scope of the study

This research work covers small and medium scale industries in Nigeria, the credit provision for SMEs shall be restricted to those provided by commercial and Merchant Bank between 1991 and 2000. It shall also be based, mainly, on post – Structural Adjustment Programme (SAP) period particularly with regards to the data input for the regression analysis so as to enhance the manageability and reality objective of the econometric study.

1.8 Limitations of the study

This study may be short of its expectations due to the inevitable nature of evident constraints in the study. Foremost, time insufficiency shall be a major factor that will hamper the heights intended for this research work. So also is the paucity of funds may also impede effectiveness of outcomes

Finally, the results of this study may fall short of expectations due to the unavoidable presence of some errors; pertaining to errors of model misspecification, omission, randomness and measurement.

1.9 Organization of the study

The study has been broken down into five chapters earmarked as follows.

1) Chapter one introduces the study, defines the scope, identifies the relevance, stipulates the research methodology to be used and sets the goals and objectives of the study.

2) Chapter two attempts a review of existing literature by assessing and evaluating the study within the framework of previous research works.

3) Chapter three is the theoretical framework of the study, which also embeds the specification of econometric models for an empirical analysis of the study.

4) Chapter four seeks to proffer a meaningful explanation and interpretation of results obtained from the econometric analysis.

5) Chapter five makes observations, recommendations and proffers some solutions to the problems encountered in the course of the study.



CHAPTER TWO

SURVEY OF LITERATURE
2.1 Introduction

To ensure a proper evaluation of the requirement of this project work, a review of existing literature was deemed necessary.

2.2 The concept of small and medium scale enterprises (SMEs)

The definition of what an SME is varies among individuals and regions.

According to the United Nations Industrial Development Organization (UNIDO) 1987, there is no rigidly universally acceptable definition of a small scale industry. These variations arise from differences in the industrial organization in countries at different levels of economic development.

Therefore, it becomes quite obvious that defining SMEs will be a subjective exercise in that it will be subject to domestic economic conditions prevailing within a given country or territory. (Ogbe N. E.) 1995.

However, various authors, entrepreneurs and agencies have attempted a definition of a small and medium scale enterprise (SME).

Scarborough and Zimmerer (1985) defined a small scale enterprise as a business, which is independently owned and operated, and it is not dominant in its field of operation. To them, small scale businesses employ 500 people or less and must meet the following criteria.

1) Independent management.

2) Capital is supplied and owned by few individuals.

3) Area of operation is mainly local but market need not be local.

4) Size of turnover is relatively small.

Baumback (1982) sees an SME as that in which owners and managers are able to recall names of employees. Olabiyi (1994) asserts that an SME may or may not be incorporated. The central bank of Nigeria (CBN) circular No. 28 of 1998 defined a small scale enterprise as that in which total investment will not exceed N 500,000 and the annual turnover will not exceed N 5,000,000.

2.3 The concept of Finance

Foremost, finance as a discipline is not new. Though, it used to be a part of Economics. By definition, finance entails the acquisition and effective utilization of funds in order to enable a firm attain its business objectives which may include; output maximization, profit maximization, cost minimization, cost minimization (Eriki, P. O.) 1999.

2.4 Generating employment through the promotion of SMEs

The 1989 industrial policy instigates that the major policy tool through which government plans to enhance employment is the promotion of SMEs. A lot of measures have been put in place by government, these include the establishment of NDE in 1986 and maximizing private sector employment through the creation of such organs as industrial development centers (IDCs) and industrial training Fund (ITF).



CHAPTER THREE

THEORETICAL FRAMEWORK AND MODEL SPECIFICATION

3.1 Introduction

The issues pertaining to the small and medium scale enterprises have witnessed emphasis short of expectations. The SME’s sector is no doubt a vibrant sector that has the potential of eliminating or at least reducing the structural rigidities inherent in the macro economy.

3.2 An evaluation of some SMEs financing programs in Nigeria

In order to encourage the growth of small and medium scale enterprises, successive administrations have over the years employed; monetary, fiscal and industrial policy measures at the macro level and financing arrangements at the micro level, to assist the development of SMEs in Nigeria. These, inter alia, include;

1) Providing local finance through its agencies such as the Federal Ministry of Industry, Central Bank of Nigeria (CBN), Nigerian Industrial Development Bank (NIDB), and Nigerian Bank for Commerce and Industry (NBCI), Nigerian Export Import Bank (NEXIM), etc.

2) Facilitating and guaranteeing external finance through the World Bank, African Development Bank and other multilateral institutions willing and capable of assisting SMEs.

3) Setting up the National Economic Reconstruction Fund (NERFUND), which was a source of medium to long term local and foreign loans to SMEs.

Generally, the outcome of these funding arrangements in support of SMEs in Nigeria are reviewed and appraised below.

3.2.1 Small scale industries credit scheme (SSICS)

The Federal Government under the auspices of the federal Ministry of Industry, in 1971, set up a small industry development scheme (programme) to provide technical and financial support for SMEs.

3.2.2 Central Bank of Nigeria (CBN)

The apex regulator of the banking system plays a crucial role in this area


3.2.3 The small and medium industries equity investment scheme (SMIEIS)

This happens to be the most recent development with regards to financing SMEs, where all banks in Nigeria are required to set aside 10 percent of their annual profit before tax for equity investments in small scale industries (SSIs). Likely impact of the initiative are;

1) Boosting or elaborating SME financing

2) Facilitating access to the capital market

3) Stimulating activities in the sub-sector

4) Improving operations management practices

5) Reducing the rate of default.


3.2.4 The Bank of Industry (BOI)

This is the recent result of the conglomeration of the three major institutions that aid the funding of industries. As a result of the problems that bedeviled NERFUND, NIDB, and NBCI in the 1990s, the federal government under the auspices of the federal ministry of industry has succeeded in restructuring these institutions. The outcome of which is a merger into a new organization known as the Bank of industry (BOI) in 2002. The institution has made tremendous contribution to the SME sector since its inception


3.2.5 The Capital Market

The Nigerian capital market was overhauled to deal with the bias associated with the market in favour of large enterprises. This led to the establishment of the second tier security market (SSM) in 1985 to assist small and medium sized indigenous enterprises to access the capital market for long term funds.

3.3 Sources of Finance for SMEs

SMEs can access funds from both the money and capital markets

3.3.1 Employment Generation

The flexibility and adaptability of SMEs to changes and challenges of the Nigerian economy coupled with the fact that they are predominantly privately owned, makes the SMEs a major sector for sustainable growth and employment generation in the economy. They provide employment opportunities more than the large firms and they can account for up to 90% of employment in most economies of the world including Nigeria.

3.4 Model specification

This research work seeks to analyze the impact of SMEs’ funding on the generation of employment. To carry out the empirical evidence, the model to be utilized is presented as follows:

EMPL = F¬ (CBCR, MBCR, GDP).

Specifying the model in natural log form:

InEMPL = InB0 + B¬1¬ InCBCR + B2 InMBCR + B3 InGDP+ 

B01 > 0 B11 > 0 B21 > 0 B31 > 0

Where EMPL = Employment rate

CBCR = Growth in Commercial Bank

credit to SMES

MBCR = Growth in Merchant Bank

credits to SMEs

GDP = Growth in Gross Domestic

Product

 = Stochastic term



CHAPTER FOUR

ANALYSIS AND INTERPRETATION OF REGRESSION RESULTS

4.1 Presentation of Regression results

Based on data between 1991 and 2000, using the OLS method of estimation, the regression results obtained appeared spurious and suggested the presence of autocorrelation. The estimated results are presented as follows:

InEMPL = 1.13 – 0.14 InCBCR – 0.037 InMBCR +

(3.91 (–3.85) (–0.54)

0.38 InGDP

(2.51)

R2 = 0.791

F (5, 2) = 6.302

SEE = 0.032

Mean of Dependent Variable = 1.079


U = –0.29*  - 1 + 0.443* u – 2 + E

(–0.53) [0.624] (1.14) [0.317]

4.2 Definition of concepts

R2: This is the coefficient of multiple determination. It reveals the proportion of the explained or dependent variable that is explained by the explanatory or independent variables in the model.

F – Statistic: - This is used to test for the overall significance of the model. It depicts how much the explanatory variables taken together have affected the explained variable.

T –Statistic: - These are used to test for the individual significance of the explanatory variables.

SEE: - This is the standard error of estimate revealing the deviation of actual values from the expected values.


4.3 Interpretation of results

The three explanatory variables have been able to explain 94% of the systematic variations in employment rate during the 1991 – 2000 period. This proves that model has a good fit. The F – Statistic of 6.302 is statistically different from zero both at 1% and 5% levels of significance. The result implies that there is no significant linear relationship existing between the explained variable and the explanatory variables.

The signs of two of the explanatory variables are not in conformity with a priori expectation. However, the slope coefficient of GDP is in conformity with a priori expectation in that a 10% change in GDP results in a 4% change in employment rate, the result is fairly elastic. The t – statistic shows that GDP has a significant impact on employment generation at 5% levels of significance. GDP also passed the test at 10% levels. The Durbin Watson result of 1.75 shows the absence of serial correlation among the explanatory variables. Finally, an assessment of the predictive power of the model, using the ratio of SEE to the mean of dependent variable, shows that the model is a weak predictor of employment rate.


4.4 Policy implications

From the regression results, it can be deduced that funds provided by commercial and merchant banks to small and medium scale enterprises (SMEs) cannot, in its strict sense be held accountable for increase in employment rate. Given this, government should embark on strict policy measures that will generate employment. For instance, the equity Investment Scheme (SMIEIS), which requires banks to invest 10% of their annual pre-tax profits on Equity investment of SMEs is a good one. In addition, government should ensure output is raised throughout the economy by encouraging business investment and embarking on viable expenditure programs that will increase economic output (GDP) since it has the potentials of enhancing employment based on results obtained in the study.


CHAPTER FIVE

OBSERVATIONS, RECOMMENDATIONS AND CONCLUSION

5.1 Observations

This research work has analyzed the existence of a relationship between employment rate and growth rate in commercial bank credit, merchant bank credit and gross domestic product as explanatory variables. From the results obtained, it was observed that there is no strict linear relationship between the explained variable and the explanatory variables. Though the model passed the goodness of fit test. From observations, it can be deduced that credits by merchant and commercial banks cannot be held accountable for increase in employment. Nonetheless, the Gross Domestic product, from the results impacts significantly on the increase in employment rate.

As a result, it is observed that merchant and commercial bank credits are not very good assessment tools of growth in employment. Therefore, to really measure the percentage change in employment rate, some other variables can be introduced into the model as a co-explanatory variable with the GDP.

5.2 Recommendations

1) A critical survey of SMEs in Nigeria should be carried out so as to identify the problems pertinent to them. An appropriate feasibility study should be conducted to identify the prospective areas for the SMEs

2) Introduction of business incubator schemes as obtained in other parts of the world.

3) Government should research and development (R & D) initiatives.

4) Government should ensure consistency in policy formulation.

5) The business owners should develop an orientation devoid of financial indiscipline.

6) An accessible financing window in form of a “venture capital fund” should be established.

7) The level of infrastructure should be upgraded in the economy

8) It may be expedient exploring creative ways of linking SMIEIS with the emergence of venture capital institutions designing new vehicles for investment in the SMEs equity market.

9) Government should ensure the existence of an enabling environment that will facilitate the sustenance of SMEs and other classes of business in Nigeria. Doing this entails ensuring internal and external macroeconomic stability.

10) To open opportunities for job creation, every local and state government should actively promote SME clusters in the areas where potentials exist at the grassroots level.

11) There is need to collaborate with Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to put in place a well planned “incubator – industrial park” transition program to effectively address existing problems often experienced in the existing technology incubator schemes.

12) All for forms of regulatory barriers particularly with respect to direct and indirect taxes should be eliminated in order to encourage investment in the industrial sector as a whole and SMEs sector in particular.

13) Funding by banks and other institutions should be enhanced given that the credit allocated to SMEs is insignificant with respect to generating employment. Therefore, there is need for an overhaul of the financial sector to ensure that medium and long term funding are made available to SMEs to facilitate their development and sustenance.

14) Fund providers must ensure that the use of such funds is appropriately monitored to prevent mismanagement and misappropriation of such funds. To make this easier, the users of funds need be enlightened on the appropriate use of funds to ensure the growth of their businesses and national economy.

5.3 Conclusions

By way of conclusion, there is need to strengthen private investments, creative and innovative entrepreneurship and economic growth. This requires the elimination of conflicts, reducing corruption, enforcing laws on property and contracts and implementing sound and consistent macroeconomic policies and programs. All hands must be on deck to give the SMEs sector the attention it deserves at this point of national development. Any deliberate effort to eradicate poverty in the country must be addressed through the SME initiative because it has the enormous potential to enhance economic growth and development. Therefore, there is an urgent need for a comprehensive SMEs policy for the nation to promote rapid and sustainable growth of the sector and the economy.

Besides, it is essential that the new and present dispensation create more opportunities for private sector involvement by accelerating the privatization of government enterprises. Privatization opens opportunities to attract foreign investments and it also opens opportunities for SMEs to grow via linkages with the industrial sector. Government is hereby advised to focus diligently and decisively on the privatization exercise. Also, the private sector must synergize and adopt consistent, coherent and transparent programs for the development of SMEs. There is also a need for the private sector to harmonize efforts and adopt complementary strategies in tackling the numerous problems confronting the Small and Medium Scale Enterprises (SMEs) sector in Nigeria.



BIBLIOGRAPHY

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Nigerian Economy (NISER, Ibadan, 1987).



Adekanye, E. (1986) Elements of Banking in Nigeria F and. A

Publishers Ltd. (3rd Edition).



Aluko, S. A. A Survey of Small Scale Industries in Lagos,

Nigeria (1973)



Anyawu, C. M. Efficient Administration of Credit to Small

Scale Industrial Development in Nigeria. Bullion Vol. 25, No. 3, CBN pages 12 – 14.



Baumback, C. (1982) Basic Small Business Management

(New York: Prentice Hall).



CBN Bullion. Budget of Renewal (1995) vol. 19, No. 1,

January / March 1995.



Eriki, P. O. Basic Business Finance, Benin City.



Inyang and Ukpong (1992) Strategies for Promoting SMEs in

Nigeria.



Iyoha, M. A. (2000) Macroeconomics: Theory and Policy

Mindex Publishers, Benin City.



J. Sanai and Oshagbeni, T. A. (NISER Ibadan 1987) on “the

Motivating factors towards the development of SMEs.



M. L. Jhingan “Macroeconomic Theory 10th Revised and

Enlarged Edition 2000

Nigerian Bank for Commerce and Industry (NBCI, 1982)



Nigerian Council on Industry (NCI – 13, July 2001).



Nigerian Industrial Development Bank (NIDB, 1989).



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SMEs in Nigeria, CBN Billion, Volume 15,

No. 3 1991.



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On “Promotion of SMEs in Nigeria. 1985.



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Development Process. Business Times,

May 15, 1989.



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(Nigeria: Paumark Nig. Ltd.)



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(Longman Publishers) 1988.



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Nigeria (NISER Ibadan (1987)



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Source: CBN Annual Report (Financial Statistics)

2000.

Summary on Video_Time Management

Time Management

The following questions are asked in addressing this subject

• Why do some people do better than others?

• Why do some people do things differently?

• Why are some people better time managers?

Time management is concerned with:

a. Life management

b. Personal management

21 – Time management ideas: Note – the key to time management is discipline

1. Goals – most important of all ideas. Self development goals are key to accomplishing tasks and goals must be written down for their achievement. The following questions are crucial in setting goals…

a. Who am I?

b. Where am I going

c. What is my purpose?

2. Organized plan of action: taking your goals and objectives and putting them together in form of a plan

3. Analysis: make a list of activities, engage in thinking and feeling of accomplishment

4. Set priorities: distinguish between relevant and irrelevant tasks. Focus on most valuable and important tasks and assess the impact of selected tasks on your future

5. Concentration: handle a task at a time

6. Set deadlines: ensure there is a lot of room adjustments and endeavor to beat deadlines

7. Use a time log: keep track of activities by writing to understand how your time is being spent. Recording also help in your analysis

8. Procrastination: there are positive and negative procrastination. Always endeavour to deal with procrastination by developing a strong sense of urgency

9. Delegate: clarify the following; what has to be done, who can do it, how it will be done, keeping track and do checks

10. Meetings: have a purpose for your meetings, set an agenda and always start the meeting on time

11. Interruption: Avoid using the phones often or staying too long on the telephone. Also, be careful with people-related distractions

12. Focus on key result areas: ask yourself the following questions for guidance; why am I on the payroll? What results are expected of me? What are my core functions?

13. Batching tasks: Engaging in similar and related activities at the same time or in a sequence

14. Neatness: leveraging on the TRAF system. That is; Task, Refer, Action and File

15. Getting chunks of time: some 60 minutes or more break can be very helpful. Distinguish between creative work and admin work

16. Transaction time; Learn more, earn more, keep important articles for reference and read all the time

17. Telephone: Get on it and get off it fast. Always keep good notes of telephone conversations

18. Punctuality: always endeavour to be there on time. Perhaps a Lombarty time of 15 minutes earlier is recommended

19. Work simplification: systemization of the work process can be very helpful. Follow the following approach to ensure you get more work done. Work longer, work faster, work on fewer but more important things, work on things you are better at, make fewer mistakes, do things as a team

20. Saying No: this may be useful when they concern activities that do not contribute to you most important goals

21. Balance: Despite work, try to enhance and improve the quality of your life. Pursue good health, great relationships etc.

Summary on Video_Negotiation

Summary on Negotiation Video


We negotiate in every activity in life

A gambit is any maneuver for advantage

Rules of negotiation

• Never jump at a gambit

• Never jump at the first offer

• Always negotiate to make the other party feel some competition

• Do not negotiate when it is too risky

Types of gambit

1. Flinching the gambit – in pretence.

a. Lower the expectation of the other party

b. Find out the hidden agenda

2. Reluctant buyer gambit – don’t show enthusiasm

3. Nibbling gambit – asking for more after winning or getting one thing. Always ask for more at the end of a negotiation

4. Counter gambit – makes the other party feel cheap

5. Vise gambit – makes you do better than the other party

a. Fear of titles – get away from this quickly when the negotiator presents this

b. Fear of punishment – this is also the fear of humiliation

c. Promise of reward

d. Influence of power

e. Control of charisma

f. Intimidation by withholding information

6. The “good guy”, “bad guy” gambit – two people ganging up with one of them pretending to be on your side

7. Set aside gambit – negotiate based on a small item/issue and then bringing up the bigger item/issue subsequently

8. Splitting the difference gambit – expressing disappointment after all efforts to make the other party come down

9. Trading off gambit – always asking for something in return for giving up one thing in a negotiation. Trading off stops the other party from asking for more

Principles of negotiation

• Value of acting dumb – people will try to help you in this instance

• Power of walking away – be really prepared to walk away if it really gets tough

• Put it down in writing – People tend to agree more easily to written statements

• Always set the following in the course of bargaining: a) determine a walk-away point, b) set a target point.