FACTORS AFFECTING THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN THE JUA KALI SECTOR IN NAKURU TOWN, KENYA

ABSTRACT
Interest in the role of small and medium-sized enterprises (SMEs) in the development process continues to be in the forefront of policy debates in developing countries. The role of finance, management skills, macro-environment factors and infrastructure have been viewed as a critical element for the performance of small and medium-sized enterprises. Therefore, this study sought to evaluate the factors affecting the performance of SMEs in the Jua Kali sector in Nakuru town. The specific objectives included to; investigate the extent to which access to finance by SMEs affect their performance, determine the effect of management skills on the performance of SMEs, examine the extent to which macro-environment factors affect the performance of SMEs and determine the effect of infrastructure on the performance of SMEs in Jua Kali sector. The study adopted a survey research design and employed a stratified random simple sampling. Primary data was collected from 262 study respondents using structured questionnaires. Data was analyzed with the help of the Statistical Package for Social Sciences computer software. Descriptive statistics such as frequencies means and percentages analyze and present the data. Inferential statistics such as correlation and regression analysis were used to test the relationship between independent variables (factors) and dependent variable (performance). Results of data analysis supported the following key findings that access to finance had the potential to positively affect performance of SMEs although they were yet to be fully utilized to the advantage of the SMEs in the study area. Management skills were found to positively and significantly affect performance of SMEs yet had only been marginally adopted by the SMEs in the study area. Macro environment factors were found to significantly affect performance of the SMEs in the study area. Infrastructure did not significantly affect performance of SMEs in the study area. The study recommends that SMEs should improve access to finance through negotiations for better lending terms and conditions and collateral requirements. The study results indicated that as number of years in operations increased the performance increased. The SME businesses should focus on acquiring appropriate management skills such as financial, marketing and entrepreneurial skills. SME businesses should effectively strengthen the macro environment in order to increase their performance. The infrastructure especially in terms of electricity and roads should be improved in order to increase their performance.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Interest in the role of small and medium-sized enterprises (SMEs) in the development process continues to be in the forefront of policy debates in developing countries. The advantages claimed for SMEs are various, including: the encouragement of entrepreneurship; the greater likelihood that SMEs will utilize labour intensive technologies and thus have an immediate impact on employment generation; they can usually be established rapidly and put into operation to produce quick returns; SME development can encourage the process of both inter- and intra- regional decentralization; and, they may well become a countervailing force against the economic power of larger enterprises. More generally the development of SMEs is seen as accelerating the achievement of wider economic and socio-economic objectives, including poverty eradication. 

Staley and Morse, (1965) identify a ‘developmental approach’ to SME promotion which has as its objective the creation of ‘economically viable enterprises which can stand on their own feet without perpetual subsidy and can make a positive contribution to the performance of real income and therefore to better living levels’. This approach emphasizes the importance of efficiency in new SMEs. Small producers must be encouraged to adopt new methods, move into new lines of production and in the longer-run, wherever feasible, they should be encouraged to become medium- or even large-scale producers. More recent concerns associated with the performance and efficiency of smaller enterprises has also become prominent (Mazumdar, 1997). Using the case of Northern Italy, Piore and Sabel (1984) have argued that small enterprises are more efficient because they have adopted a flexible specialization approach. Correspondingly, there has been growing interest in whether this model has or can be replicated in developing countries (Schmitz, 1989; Pederson, 1994; Schmitz and Musyck, 1994; Schmitz, 1995). 

Small and medium sized firms dominate both developed and developing economies in terms of employment and number of companies, yet their full potential remains untapped. These trends need to be changed. The ability of smaller firms to create jobs is clearly a major attraction for governments in the short term. SMEs must be encouraged and supported to flourish. This is important so that economic objectives (economic growth and development, favourable balance of trade and payment and employment) and social objectives (poverty alleviation and improving standards of living) can be realized. 

The Informal sector is increasingly viewed as an important engine for employment creation and economic growth. This has been necessitated by the increasing awareness within the government that large projects in the industrial sector are less likely to generate the requisite employment opportunities, given the high capital-intensity of output in the sector. Experience in Kenya, as is the case in the rest of the world, has shown that SMEs are more flexible and responsive to changes in the market, require relatively less capital, and therefore have the potential to generate significant levels of employment for skilled and semi-skilled labour (Kapoor, Mugwara & Chidavaenzi, 1997). Kenya must respond to the needs of SMEs as they form an important component of the economy (Schlogl, 2004). With the advent of the economic reform programmme for Vision 2030, there has been a significant change in the Kenyan government’s attitude towards the SME sector. In the Kenya Government’s 1992 Sessional Paper, ‘small enterprise and Jua Kali development in Kenya’ elevated the Micro and Small enterprise (MSE) sector to apriority position in the policy agenda. 

Jua Kali industry is encouraged in Kenya because it requires less capital to establish since it is made up of small scale units. “Jua Kali” refers literally to those who work, without shelter, under the “hot sun” (the meaning in Kiswahili). In the popular mind, “Jua Kali” is equivalent to “informal sector.” It creates employment for the growing labour force. It produces mainly for the local market thus the country saves foreign exchange. It requires less expensive machinery since production is manual. It facilitates decentralization of industries since it spreads easily thus checking rural-urban migration. It produces relatively cheap products that are affordable by many and improving the quality of living. It uses locally available and recycled raw materials thus reducing the cost of imports and conserves the environment. It imitates the products that are already in the market thus spreading technological skills. It operates at grass roots level thus uses locally available skills. It empowers the people to initiate projects thus reducing reliance and dependence on the government, donors, etc. Many Kenyans consider the Jua Kali to be the predominant – and most important – economic sector in Kenya, the one in which they all work. This is not far from the truth. According to the Economic Survey published by Kenya’s Central Bureau of Statistics, employment within the sector increased from 4.2 million persons in 2000 to 5.1million persons in 2002, accounting for 74.2% of total employment. The sector contributes 18.4% of the gross domestic product and provides goods and services, promotes creativity and innovation, and enhances entrepreneurial culture. A common statement heard throughout Kenya is “We’re all Jua Kali nowadays (Kenneth K. 1996).” 

The role of finance has been viewed as a critical element for the performance of small and medium-sized enterprises. Previous studies have highlighted the limited access to financial resources available to smaller enterprises compared to larger organizations and the consequences for their performance and development (Levy, 1993). Typically, smaller enterprises face higher transactions costs than larger enterprises in obtaining credit (Saito and Villanueva, 1981). Insufficient funding has been made available to finance working capital (Peel and Wilson, 1996). Poor management and accounting practices have hampered the ability of smaller enterprises to raise finance. Information asymmetries associated with lending to small scale borrowers have restricted the flow of finance to smaller enterprises. In spite of these claims however, some studies show a large number of small enterprises fail because of non-financial reasons (Liedholm, MacPherson and Chuta, 1994). Study by Tushabonwe-Kazooba, (2006) revealed that poor record keeping and lack of basic business management experience and skills are major contributors to failure of small business. Researchers have also identified lack of access to external finance and weak capital base, inexperience in the field of business, particularly lack of technical knowledge plus inadequate managerial skills, lack of planning and lack of market research as causes of small business failure (Lussier 1996; Murphy, Shleifer and Vishny 1996; Van Stel and Storey 2004). The solution for solving problems of economic growth in developing countries often resides in the performance of small scale industries. The establishment of those industries has been the centerpiece of industrial development of many countries such as India, Malaysia, Pakistan, Indonesia and Nigeria to mention a few. It is expected that the gains to be 

derived from the establishment of small-scale industries will be translated into the generation of employment at a low investment cost. These industries will also be able to harness raw materials locally and serve as raw inputs to the large-scale industries. The focus of the study is on the factors which affect the performance of Small and Medium Enterprises (SMEs) in the Jua Kali sector of Kenya, a case of Nakuru Town.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 94 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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