CHAPTER THREE MICRO, SMALL AND MEDIUM ENTERPRISES IN KENYA
Chapter 3 describes the study context and presents an overview of the state of business, the challenges faced within the MSMEs arena and the steps the government is undertaking to assist the sector.
The history of Kenya with respect to micro , small and medium enterprises
Kenya is a developing country situated in the eastern part of Africa. She got independence in 1963 after several years of British colonization. It’s within the period of colonization that business systems started. Several stages in the growth of the business sector in Kenya can be drawn. There is the pre-independence and post-independence period where business activities differ slightly (Sessional paper No. 1 of 1986 and the Sessional Paper No. 2 of 2005).
The post-independence is characterized by intense changes, some caused by internal as well as external factors. The first ten years recorded positive growth but in the next 10 years, the country was not spared by the world oil crisis whose effect has lasted todate. The 1990s multiparty dilemma dominated the political arena and this together with the call for structural adjustments saw the World Bank and International Monetary Fund (IMF) withdrawing every financial aid from the country. At some point, a compromise was reached resulting in economic sanctions and mass lay-offs. To make a living, many resulted in starting small businesses (inclusive of micro and medium enterprises) thus, the sector mushroomed employing over 74% of the individuals in workforce (Sessional Paper 2005) and contributing a significant 18% of gross national product (GDP).
Since 1986, the small business enterprise sector, as a means of strengthening Kenya’s economy, is highlighted in the Sessional Paper No. 1 of 1986, the Sessional Paper No. 2 of 1996 on industrial transformation to the year 2020 and Eighth National Development Plan (1997 – 2001). The Sessional Paper No. 2 of 1992 on small-scale and Jua Kali enterprise development in Kenya contains the overall policies and strategies in which essential activities could be implemented to promote small enterprise development. The vision of the policy statement is to promote a strong Kenyan economy, which the small enterprises are effectively integrated and able to make significant contribution in the production of goods and services. It also emphasizes the role, importance and benefits of small enterprises.
Despite the critical role played by the small enterprise sector, it is faced with numerous changes and constraints that include unfavourable policy access to financial services and markets, inadequate business know-how and linkages with large enterprises, gender inequality, job quality deficits, limited access to information, impact of HIV/AIDS pandemic, unsatisfactory occupational health and safety standards. These constraints have not been well-addressed resulting in a weak base for industrial take-off and sustainable development. Nevertheless, the field of small businesses still remains attractive because the creative enterprising individual likes to be independent and be in control of action and issuing instructions (Sessional Paper No. 2; 2005).
Training in micro, small and medium enterprises
According to a World Bank study (1995), 40% of all trainees acquired their skills through apprenticeship. Apprenticeship on-the-job-training in business setup has been found to be very efficient in terms of employment and cost since most of those trained are absorbed in the sector and also contribute to the cost of the training (Wellesly, 2000: 69-80). However, this kind of training is limited by low exposure to technology because the trainee can only learn using the available tools, by the ability of the artisan to impart the knowledge, and also by the time the artisan usually has to impart the knowledge and skills. There are several institutions in Kenya, both private and public, providing technical training. The institutions have been established with a strong vocational bias and with the objective of self-employment. There are three national polytechnics, 17 institutes of technology, 20 technical training institutes, over 600 youth polytechnics, the National Youth Service, Christian Industrial Training Centres, YMCA Vocational Training Centres and three Industrial Training Centres.
Despite the many institutions, only a handful (1.5%) of entrepreneurs reported having received any form of training (National Baseline, 1999). This formal training in the formal sector is compared with that in the informal sector (National MSE Baseline Survey 1999: 10-217) (See table 3.1 below).
The Control of small Enterprise to GDP
The sector contributes over 90% of new employments (See table 3.2 below). The government has undertaken several measures or policies as stipulated in the Sessional Paper No. 2 of 2005 geared towards encouraging the entire MSE sector in very specific ways as follows: First, the emphasis on the role of markets and making markets work. The government objective is to promote the number and competitiveness of MSEs by reducing the cost of doing business and generally creating a more favourable environment for businesses to thrive while improving the quality of employment in the sector. Second, the sector is to be integrated into the national economic grid. To achieve this integration, the new policy will promote the small businesses in the formal and informal economies including commercial small scale agriculture, in a policy framework that will encourage all forms of linkages. Third, improving the effectiveness of the existing institutions by strengthening the department of MSEs and establishing the national council for small enterprises and legislating an MSEs act. The aim shall be to strengthen policy coordination, implementation, and monitoring and evaluation, which have been largely lacking in previous attempts by government to promote the MSE sector. Fourth, partnership between key stakeholders including the citizenry and micro-small entrepreneurs, community, private sector, civil society, NGOs and development partners will be promoted through appropriate policy dialogue to harness the synergy for effective resource mobilization, utilization and overall development of the sector (strategic mgt); and lastly incorporation of a plan of action for policy implementation and a mechanism for monitoring and evaluation of the policies and their impacts (Sessional Paper No. 2, 2005).
Small Enterprise Policy in Kenya
As far as small-scale enterprises are concerned in Kenya, little has been done to incorporate it in the country’s multi-sectoral development planning. In the past two decades starting from the time the International Labour Organization (ILO, 1972) carried out a detailed study on the sector in the country, a lot of literature has been added to it, but the sector only received some government attention during the current national development plan which was based on the Sessional Paper No. 1 of 1986. On the contrary, before the paper was published, the MSEs especially suffered from a relative negative public image despite the fact that the sector has so many positive characteristics and a vital role to play in Kenya’s economic development.
Policy Survey Independence
The Kenya Government strategy for industrialization after independence was based on the need for an expanded overall output – industrial development policy was for the formal sector especially those industries that were viewed to support the then policy of import substitution. (Industrial Review, October 1988). At a lower scale, the government established the Kenya Industrial Estates to look into ways of financing and giving technical aid to medium sized enterprises. The small-scale enterprises were not included anywhere within the government policy system.
The 1970-1974 Development Plan
The 1970-74 Development Plan laid emphasis on the development of medium-sized industries as a major strategy for the alleviation of the employment problems. The main focus of such a policy was to provide the opportunity to “Kenyanise” commerce and industry, a view that was held to be quite important for the future economic development of the country. As such, small-scale enterprises used in this study were not included within the official policy framework. In 1972, the International Labour Organisation (ILO) conducted a detailed study of the small-scale enterprises in Nairobi. The report detailed out how this sector could promote growth of income and employment of the developing countries.
The Government of Kenya in 1973 reacted to the ILO report in an accommodating manner in their Sessional Paper on Employment (GoK 1973). The paper accepted the views of ILO and promised that the “government will in future devise policies that will promote the growth and development of the informal sector” so that it could play its rightful role in economic development.
1974-1979 Development Plan
In this plan (1974-1979), the government policy stressed the need for laying emphasis on the promotion of small-scale enterprises. This government policy outline was to be strengthened through the establishment of industrial estates, rural industrial development centres and the promotion of indigenous African entrepreneurs, within the small-scale enterprises. To achieve the above objectives, the policy as outlined by the development plan was to take three forms; first, the government was to review central and local government regulations that were unfriendly to small-scale enterprises. Second, the government was to direct assistance to small-scale business enterprises all over the country and lastly, to establish an organization that was well-equipped to administer and provide extension services to the small-scale enterprises. In the Development Plan (1974-1979), the Government “was to review all general industrial and commercial policies as well as regulations with references to their impact on small scale enterprises.” Built in such reviews was to see how certain aspects of the sectors for example manufacturing could be reserved mainly for small enterprises.
On the quality, quantity and coordination of services to the small business, a new corporation to be known as Small Business Development Corporation was to be established. The aim of such an organization was to coordinate all extension services, research and development as would have been required by the small-scale enterprises. However, it should be noted that up to now, no such organization exists. Even if it would have existed, it was geared towards medium sized enterprises, rather than the small- scale enterprises included in this research. The Development Plan (1974-1979) further observes that Kenya Industrial Estates would be strengthened to cover all small-scale enterprises in even smaller urban centres but this is noted not to have been successful as detailed in the International Labour Organization (ILO) evaluation report of 1984.
The 1979-1983 Development Plan
The 1979-83 Development Plan just like the one preceding it recognized the potential role of the small-scale enterprises in promoting economic growth throughout the country. Therefore, the plan outlined a set of policy guidelines to be undertaken for the implementation and promotion of the sector.
This included first, a massive expansion of KIE services at least one facility in each of the 43 districts by the end of the plan period; second, a fund of Kshs. 50 million to assist the informal sector (where most MSEs were found) to enable them to take advantage of the facilities available with KIE network and other industrial development agencies. Third, the government advocated for a programming and evaluation sector within the Ministry of Commerce and Industry, to assist the District Development Committees in the preparation of coordinated programmes for MSEs manufacturing drifts. Fourth, the government advocated the centralization of the tendering system to districts so that small-scale enterprises in the various localities could get priority of supplying required goods and services within their areas. Fifth, a wide variety of training programmes such as village polytechnics, management training advisory centres, etc. To be offered by the government to small business entrepreneurs. Sixth, the government was to provide the establishment of credit guarantee schemes for loans given by commercial banks to small-scale enterprises.
Despite the fact that all the above could have helped the small-business enterprises, apart from the first and the second, the rest were not fully implemented. Thus, the policy did not at the end of the day achieve its desired objectives.
The 1984-1988 Development Plan
The 1984-88 Development Plan, apart from stressing the above (as 1979-1983 Development Plan), had the government commitment, “to the establishment of a full-fledged small-industries division in the Ministry of Commerce and Industry to monitor the implementation of small industries development programme and to provide assistance to the industrial extension services in collaborations with the project studies division.” As it stands today, the division exists but the effectiveness is yet to be ganged.
As the implementation of the 1984-1988 Development Plan was taking place, the government came out with a publication- Sessional Paper No. 1, 1986 on economic management for renewed growth. The Sessional paper makes it clear that “secto. (informal) will feature more prominently in the country’s future development strategies and that it will shoulder a much heavier responsibility than hitherto”, in trying to make the sector play its rightful role in economic development. In the Sessionbal paper, the government notes that in order to stimulate growth of informal sector enterprises, then macro-economic policies have to be instituted aimed at the economy as a whole. The government paper therefore, recognizes “that farm productivity and incomes, for example, must be raised so as to stimulate the demand for goods and services provided by the informal sector”. The idea is that since the sector tends mainly to cater for the needs of low income groups in both rural and urban areas, increased incomes would ensure effective demand for informal sector goods. Second, macro-economic policy that the government outlines as important for the sector is the lowering of tariffs on raw materials, semi- processed goods and inputs, with a bias towards those used widely by the informal sector. The lowering of tariffs would ensure that the cost of production would remain reasonably low for the low-income consumers and thus, ensuring a constant effective demand.
The third macro-economic policy that the government intends to follow has to do with investment incentive. As outlined in the Sessional paper (GoK 1986), the government has opted for an “investment incentive structure, that encourages the substitution of labour for machinery and will thus, boost small-scale activities that are characteristically labour-incentive”.
The Kenya Government (1986), the policy further outlines that macro-economic policies will be complemented by efforts to provide direct assistance to individuals and small-scale businesses. To this end, the government policy still recognizes the need for financial assistance. As a result, initiatives are now being undertaken to expand access to credit facilities for informal sector business. Also, efforts are being undertaken to disseminate information on market opportunities and appropriate production methods for small-scale manufacturing. Further, efforts being undertaken by the government include the expansion of Youth Polytechnic Training and focus on appropriate skills and management on informal sector activities. (GoK 1986).
On technical and vocational training at all levels, the paper notes that “there is need to correct the inverted pyramid in Kenya labour force, where university trained managers are supported by too many unskilled workers and too few well-trained technicians and artisans. To this end, the policy advocates for the expansion of technical training at all levels.
The Government of Kenya for the last few years has an educational policy that is geared towards providing the youth with vocational and technical education through the 8-4-4 system of education (8 years of primary, 4 years secondary and 4 years University education) to be self- supporting. (Industrial Review, October, 1988).
In its 8-4-4 education policy, the incorporation of technical training is hoped to achieve the following objectives, first, the provision of increased opportunities for school leavers that will enable them to be self- supporting; second, that it will allow the development of practical skills and attitudes which lead the trainees to income-earning activities; third, that it will allow for the provision of technical knowledge and vocational skills necessary for the manpower development; and lastly, that it will allow for the production of persons who can translate scientific knowledge into solution of environmental problems.
TABLE OF CONTENTS
Table of Contents
List of Tables
List of Figures
1.0 CHAPTER ONE: INTRODUCTION
1.6Significance of the Study
1.7Research design and methodology
1.8Permission to conduct research
1.9Delimitations of the study
1.10Outline of the thesis
2.0 CHAPTER TWO: LITERATURE REVIEW
2.4Roles managers play
2.5The Human resource management skills
2.6Success and Failure Models
2.7Factors affecting Business Performance
2.8The conceptual framework
3.0 CHAPTER THREE: MSMES IN KENYA
3.2The History of Kenya with respect to MSMES
3.3Training in MSMES
3.4The Control of MSE to GDP
3.5Small Enterprise Policy In Kenya
3.6The 2030 Strategic Plan
3.7Existing MSE & SME Programme in Commercial Banks
3.8The Missing Middle
4.0 CHAPTER FOUR: RESEARCH METHODOLOGY
4.8Reliability of the Instruments
4.9Operationalisation of the Dependent of Independent Variables
4.10Data Analysis Method
4.11Results from pilot study
5.0 CHAPTER FIVE: DATA ANALYSIS AND FINDINGS
5.2Data Analysis and interpretations
6.0 CHAPTER SIX:TEST OF HYPOTHESIS AND CONCEPTUAL MODEL RESULTS
6.2Model inferences and checking
6.3Multiple Logistic Models with Biographical Variables
6.4Factors that contributed to Financial Growth
6.5Impact of external environment
6.6Establishing Critical Management Factors
6.7Verification and Confirmatory Tests
6.8Log linear analysis
6.10 Focus Group Discussion
7.0 CHAPTER SEVEN: SUMMARY, CONCLUSION AND RECOMMEDATION
7.6Recommendations for further research
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AN INVESTIGATION INTO MANAGEMENT STRATEGIES AFFECTING PERFORMANCE OF MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs) IN KENYA