The Kenyan government passed a micro-finance bill aimed at encouraging more effective channeling to SMEs in early 2007. SMEs have typically had very little recourse to traditional sources of capital. The 2006/2007 budget raised the VAT registration threshold from KSH 3 million to KSH 5 million to exclude SMEs from collecting VAT, which can be a tedious bureaucratic and costly process.
SMEs in any country do contribute to economic growth. However, there are challenges and opportunities that they face. This article presents the main opportunities: linkage with multinational companies, networks, diversification, enabling environment and franchising opportunities.
Kenya has a developing economy, agriculture being the chief economic activity. Most people in Kenya work in the agricultural sector. Some practice subsistence farming while a very small number practice large-scale farming. Some people work as wage laborers in coffee farms or tea plantations. They depend on the small wages and life becomes rather unbearable at times. For those who practice small-scale farming, their primary source of income is from the sale of farm produce. Some are in small businesses like the selling of agricultural goods in marketplaces, while others trade in livestock and the selling of milk. There are a wide range of small businesses operating within the agricultural sector.
SMEs (small and micro-enterprises) within the manufacturing industry have not seen much development since independence due to financial constraints and other factors that will be be discussed in this paper. The Jua Kali Sector, a Kiswahili term for a hot sun, is comprised of low-scale artisans who mostly apply appropriate intermediate technology. This sector, given all conditions for growth, can bring about industrial revolution in Kenya. The phrase itself tells it all.
There are many other areas where SMEs seem to be picking up well. For instance, with the development of information technology in the world, Kenya is slowly and steadily moving towards embracing the technology. It is evident everywhere in the major Kenyan towns with the rate at which cyber cafés and other information and communication technology businesses are coming up.
Networks involve a group of people who exchange information, experience and contacts for professional, business or social purposes. Shaw and Conway (2000) say that networks are important during the establishment, development and growth of small businesses. The network may include family members, friends or professionals. Networks are of growing importance to SMEs in any economy. To Africans, being notoriously social, networking becomes a vital tool for success of SMEs, like an “inborn trait” or opportunity that comes naturally.
Networking involves distance. From an Indonesian perspective, Tulus (2005) observes that clustering plays an important role in the growth of small businesses and governments should support it. Hence, close proximity is crucial to enterprise. From the context of Kenya, small enterprises like mitumba (selling of secondhand clothes), we find the business clustered in one place. This is aimed at creating a closely-knit network that ultimately increases the inflow of customers.
According to SMEs Lecture Notes by Muteti (2005), forging linkages between enterprises and foreign multinational corporations can hasten SME development in developing countries like Kenya. Linkages can be classified as either forward or backward. For instance, multinationals may forge forward linkages with local firms. One such linkage would be marketing outlets where multinationals outsource the distribution of brand new products.
An Enabling Environment
An enabling environment is an opportunity that should be utilized by the micro and small enterprises in Kenya. With changing governments come promises of a better tomorrow and the definition of new business policies, reconstruction of the economy and improvement of infrastructures and security. Small businesses are expected do well.
The legal and economic framework in which enterprises operate in is crucial to their performance. In the literature on enterprise development, it has been argued very forcefully that the legal framework of many countries serves as a barrier against enterprise. In many cases across Africa, the reduction of open hostility has been more important for smaller enterprises than any positive program of engagement from the state (King and McGrath, 2002).
But what constitutes an enabling economic environment? In theory, structural adjustment and trade liberalizations are supposed to bring benefits to micro and small enterprises. However, there is evidence across Africa of both negative and positive impacts of these policies on SME development. It can perhaps be said as a generalization that those with better skills and knowledge, and located in strong market niches, have benefited. On the other hand, those faced with low barriers to entry have seen a saturation of markets and growing poverty (King and McGrath, 2002).
According to Ngahu (2000), SMEs are obviously incapable of sourcing, evaluating and adapting technologies effectively. The government policy should, therefore, aim to develop these capabilities in SMEs through supportive institutions. Policy can encourage the development of assistance programs to facilitate SMEs’ access to resources, information, training and technology. Further, policy should promote the development of technologies appropriate for SMEs. Although it is possible to develop policies designed to improve the circumstances of SMEs, it may be more feasible to support the development of technologies compatible with the SMEs’ circumstances.
Policies, says Ngahu (2000), should aim to encourage and promote the development of local technologies. Emphasis should be on the promotion of the local tool industry to reduce reliance on imports. SMEs are said to face a “liability of smallness.” Because of their size and resource limitations, they are unable to develop new technologies or to make vital changes in existing ones. Still, there is evidence that SMEs have the potential to initiate minor technological innovations to suit their circumstances. However, for SMEs to fully develop and use this potential, they need specific policy measures to ensure that technology services and infrastructure are provided. Further, research and development institutions that are publicly funded should be encouraged to target the technology needs of SMEs.
Diversification inherently constitutes networking, reaching out in terms of services and products and/or having variations. A number of strategies may be employed. One such strategy is for a company to diversify its range of products. A firm may even become its own supplier of raw materials or services. Diversification may also include a firm moving into related new markets with new product. In the context of Kenya, an example would be small businesses like street trade, where one firm sells produce like fruits harvested from one’s shamba (farm). Another example would be a hotel, where one’s firm supplies foodstuffs.
A firm that produces a number of largely unrelated goods and services is said to be diversified. A diversified company might be offering services such as research, and at the same time selling computer accessories and printing. Diversification gives a company more financial security than it would have if it produced only one kind of product. Because a diversified company operates in various industries, it can usually offset declines in one industry with advances in another. Diversification is therefore an opportunity for growing small businesses in Kenya, for it ensures stability and continuity.
Franchising, according to Jim (2007), refers to an arrangement whereby a party (franchisor) who has developed a method of running a successful business system, licenses to another the rights to operate that system using either his/her trademark or name and/or other rights. The rationale behind franchising lies in acquiring support in the area of training, which includes building personnel, management and overall expansion of new horizons in the market place.
From a Kenyan perspective, the business environment (though not all that conducive due to the heavy cost of investment and production, partly because of heavy taxation and energy issues) has enabled a number of macro and micro enterprises to rise. More and more micro-enterprises are seeking support from the macro enterprises than ever before. This has partly facilitated their rapid growth.
Micro and small enterprises have the potential of boosting a country’s economy. Although they are faced with many challenges, they still have opportunities to grow. These include linkage with multinational companies, networks with other businesses, diversification of markets and products and providing an enabling environment and franchising opportunities. Such opportunities, if well-utilized by micro and small enterprises, can turn around the future of many developing countries.
By Evanson Gachoya Njoroge