The external business environment is perceived to influence performance of small and medium enterprises (SMEs). Therefore, there is the need to examine and establish the effects of the external business environment on SMEs so as to contribute to existing studies, as well as to disseminate findings to enhance the regulatory environment of Lagos State, management practices, industry, government and the society.

The study employed survey design. The study population comprisedSMEs registered with Small and Medium Enterprise Development Agency of Nigeria in Lagos State with the total of 4,535. The Taro Yamane formula was used to obtain a sample size of 478. The owners/managers of these SMEs were selected through a multi-stage sampling technique which involves the stratified, proportionate, and simple random sampling method.The instrument validity was established through scrutiny and evaluation by the research supervisor and experts in the study area, and reliability was determined via Cronbach’s alpha coefficient computed from pilot study responses. By the use of instrument codes, responses were processed into quantitative data for descriptive and empirical analyses.

Result revealed that infrastructural facilities have a significant and positive effect on SME’s service quality (R2= 0.872: p= 0.000<0.05).The government taxation policy have a significant and positive effect on sales revenue (R2= 0.896: p= 0.000<0.05). On the government/institutional support variable, result shows that it have a positive but no significant influence on job creation (R2= 0.094: p= 0.879>0.05). The analysis of insecurity and market growth shows a negative and significant effectof insecurity on SMEs market growth potentials (R2= 0.011: p= 0.036<0.05).

In conclusion, infrastructural facilities, taxation policy, and insecurity had a significant effect on service quality, sales revenue, and market growth respectively, government/institutional support have no significant effect on job creation. It was recommended that in order to augment overall performance, SMEs should always ensure adequate scan of the external business environment to identify potential threats and opportunities within their operating environment, In addition the government should levy a lower tax to enhance increase in revenue base of SMEs. Also, infrastructural facilities in Lagos, Nigeria should be given proper attention, in the same vein, there is a need for the government enacts more effort in terms of policy formation and implementation. The research also recommends that the government, industry, and individual should ensure that contributions are made at all level to improve and better the state of Nigeria security.

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