Why Most Small Businesses Struggle with Stuck Growth

The reasons limiting their development include low investment outlays by micro, small and medium-sized enterprises (SMEs) and their reluctance to do business with the government.

The latest Kenya Economic Outlook (KER), published by the state-funded think tank, also revealed that SMEs are not trading with larger corporations, which have larger scale operations and therefore larger profits.

Furthermore, these businesses operate largely informally, without any contractual arrangements, which can make their operations unstable.

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A report by the Kenya Institute for Public Policy Research and Analysis (Kippra) indicates that small businesses play a key role in the economy, especially in the wholesale and retail sectors, and also facilitate the operations of larger corporations.

The study highlights the importance of these enterprises under President William Ruto’s Grassroots Economic Transformation Agenda (BETA).

Kippra executive director Dr Rose Ngugi says the failure of the MSE to trade with the government deprives it of a ready market.

“If you look at the MSE and who they trade with, it’s individuals or with each other. There’s very little that happens with the government and the medium and large enterprises,” she said at the report’s launch.

The Government, under the Access to Public Procurement Act (AGPO), prioritises businesses run by disabled people, young people and women.

Most of these companies are small businesses. They are entitled to 30 percent of government tenders.

However, according to the report, which refers to the 2016 Kenya National Bureau of Statistics (KNBS) MSME Survey, only 0.26 percent of micro enterprises transact with the government. The figure is 1.82 percent for small enterprises and 2.78 percent for medium enterprises.

The report notes that this low level of interest indicates that SMEs have a significant opportunity to increase sales by becoming more involved in government processes.

“The wholesale and retail sector is dominated by SMEs, most of which operate informally. This limits their access to government support and supply services, such as AGPO, that provide a ready market,” the report says.

The report indicates that 87 percent of SMEs sell their products directly to individual consumers.

“What is the benefit of trading with medium and large companies? It is a fact that you can even have some technology transfers. What is the benefit of trading with the government? It is a fact that you have a ready market. You produce and you know that there is a ready market through AGPO,” Dr Ngugi said.

Another advantage detailed in the report is the fact that SMEs participating in public procurement demonstrate higher levels of productivity than those selling to individual consumers.

“This reflects the requirements they have to meet to deliver under AGPO. However, challenges such as pending bills, bureaucratic processes and limited access to finance continue to limit these engagements,” the report said.

Productivity also increases with the injection of capital investment. According to the report, micro-enterprises have low capital injection. Capital injection, as Kippra claims in the report, improves labor productivity.

The report shows that medium-sized enterprises have higher capital expenditure per employee compared to small and micro enterprises, 295,879 shillings, 169,563 shillings and 56,756 shillings respectively.

“Financial investment in small firms increases labor productivity by 15.8 percent, so these firms experience greater improvements in labor productivity when there is an increase in capital per worker. Small firms are more labor-intensive compared to micro firms, so larger initial capital investments per worker are crucial to increasing labor productivity,” the report reads.

The report added that in microenterprises, increasing financial capital investment results in a 9.1% increase in productivity, while increasing capital per employee translates into increased labor productivity, but to a lesser extent than in small enterprises.

“This is because microenterprises have insufficient investment in intangible capital, which includes investment in research, development, training and organizational capital, necessary to increase labor productivity and competitiveness,” the report explains.

According to the report, SMEs are an integral part of the wholesale and retail sector, as they facilitate the distribution and exchange of goods within local communities and between regions.

They also play an important role in driving the economy, using their proximity to consumers to meet diverse market demands.

“SMEs trade extensively among themselves, with 13 per cent of them trading within themselves and creating a network of intra-SME transactions that support local economies and promote entrepreneurship,” the report says.

The study also links contractual arrangements to productivity performance, as well as cost management, predictability, supply chain optimization, resource allocation and improved quality and consistency among other benefits.

“All of these benefits combine to increase productivity within the company,” the report says.

Contractual arrangements

It has also been documented that non-SMEs, including larger enterprises, also participate in contracts with SMEs, but this relationship is mainly dominated by

“Intermediaries play a role in facilitating contracts for SMEs. Around 4.3% of microenterprises, 5.9% of small enterprises and 12.5% ​​of medium-sized enterprises receive inputs or orders through formal contracts with intermediaries,” the report reads.

The report indicates that the presence of supply contracts has a significant impact on productivity levels, finding that companies with supply contracts have higher productivity.

“This suggests that the use of input contracts plays a key role in increasing productivity in firms. Structured contracts are important in increasing operational efficiency and production levels in firms,” the report says.

Kippra says that companies that have contracts with government bodies have the highest productivity at 74,732.34, while companies that do not have any contracts have a lower productivity level at 19,083.84.

“These results underscore the importance of contractual arrangements in increasing productivity across different types of entities, placing emphasis on the role of structured agreements in increasing efficiency and performance levels across sectors,” the report reads.