FIRM-LEVEL DETERMINANTS OF MANUFACTURING FIRMS’ GROWTH IN KENYA: 2002-2011

ABSTRACT
The growth of manufacturing firms in Kenya has stagnated in terms of the sector‘s contribution to GDP despite efforts by the government to improve on macroeconomics variables. Since major decisions that affect the performance and hence growth of the sector are made at the enterprise level, the study aimed at looking at the firms‘ level factors that determine the growth of manufacturing firms in Kenya. The objectives of this study were: to examine the effect of number of employees, leverage, capital stock, labour cost (wages) and energy cost on the growth of manufacturing firms in Kenya. The study used secondary data for 30 manufacturing firms captured by World Bank and other sources such as the Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya, UNIDO (United Nations Industrial Development Organization) and Institute of Policy Analysis and Research (IPAR) for the period between 2002 and 2011. The collected data was analyzed using panel fixed effects model. The study establishes a positive link between level of capital stock and the growth of manufacturing firms in Kenya. However, the study established a significant and negative relationship between leverage, wage bill, electricity cost and fuel costs and the growth of manufacturing firms in Kenya. The number of employees was found have negative but insignificant relationship with the growth of manufacturing firms. On the policy recommendation front, the study recommends government to formulate tax policies that make firms realize increased profit so that firms can reduce dependence on credit for investment. The central Government should ensure there is an anti-trust law restricting arbitrary increase in oil prices and also ensure there is good infrastructure especially roads. The government should also work to bring down the cost of living so that workers do not press for higher wages through their trade unions. Firms on the other hand should embrace capital intensive technique of production because capital was found to increase the growth of firms. The study recommends further research on effect of international policies on growth of manufacturing firms in Kenya and Africa.

CHAPTER ONE 
INTRODUCTION 
Background to the study 
Historically, since the dawn of the industrial revolution, manufacturing has been transforming both countries and companies. Those who could harness its power have achieved great prosperity and profitability. As a result of high paying middle- class jobs creation driven by manufacturing following World War II, major industrial powers emerged in North America, Western Europe and Asia with United States, Germany, and Japan evolving as major global manufacturing leaders. These countries were able to reap the reward of industrialization: steady GDP growth, a prosperous middle class and a rapidly growing service sector fuelled in large part by the multiplier effect of the manufacturing innovation ecosystem (World Economic Report 2012). 

Over the past several decades, a rapid globalization has occurred in the global manufacturing ecosystem driving more changes and impacting the prosperity of more companies, nations and people than at any time in the last 100 years. A significant portion of manufacturing has moved from rich nations to emerging economies and this has dramatically changed the competitive landscape for manufacturers. Nations around the world have taken part in and benefited from rapid globalization of industry and expansion of manufacturing. Globalization of manufacturing has been a key driver of high value job and a rising standards of living for the growing middle class in NICs including China, India, South Korea, Mexico and Brazil. Developed nations have benefited from lower cost products driven by lower wages used for production in emerging markets. According to World Economic Forum Report (2012), manufacturing has been immensely important to the prosperity of nations with over 70% of income variations of 128 nations explained by differences in manufactured products export data alone. 

The globalization of manufacturing has been possible due to a number of forces coming together concurrently. These include: significant change in geopolitical relations between West and East, the widespread growth of digital information, physical and financial infrastructure, computerized manufacturing technologies and proliferation of bilateral and multilateral trade agreements (Collins, 2010). 

These factors have enabled disaggregation of supply chain into complex global networks allowing a company to interact in the design, sourcing of materials and components and manufacturing of products from virtually everywhere while satisfying customers almost anywhere(World Economic Forum Report, 2012). 

In most of African economies, manufacturing plays a minor role often limited to small firms and simple products for example baked goods, apparel, basic furniture and so on. There are many reasons for this poor performance including uncertain macroeconomic environments, excessive regulation acting as brake on growth and poverty skewing domestic demand towards simple necessities (Maritz, 2011). 

King (2010) found that in the period between 1981 and 1994 overall GDP per capita in Africa fell by 0.6% a year. During the same period, manufacturing declined at a rate of 1% per year. Between 1995 and 2008 the performance of manufacturing sector somehow improved. It grew by 1.7 percent a year on per capita basis. Between 2001 and 2010; the average growth rate was 2% (World Bank, 2011). 

African manufactured exports have also been weak. While Sub Saharan Africa (SSA) is home to around 12% of world population; its share of world manufactured export is less than 1%. In the year 2008, there were only five countries in SSA-Mauritius, Madagascar, Cape Verde, South Africa and Angola- that exported more than US$ 100 of manufactured goods per capita. For most countries the figure was below US$10 per capita and only in three countries –Mauritius, Madagascar and Cape Verde – where manufactured goods constitute more than 30% of exports (King, 2010). 

Since independence, the Kenyan economy has remained predominantly agriculture, with industrialization remaining an integral part of the country‘s development strategies. The industrial sector‘s share of monetary GDP has remained about 15-16% while that of manufacturing sector was about10% in the period between 2010 and 2012(Economic Survey 2013). This shows that Manufacturing activities account for the greatest share of industrial production output and form the core of industry. 

By the year 2008, Kenyan manufacturing sector had 2,308 firms, 87% were active and majority was Kenyan family owned and operated. The top three manufacturing subsectors accounts for 50%of sector GDP, 50% of exports and 60% of formal employment. These subsectors are Food, Beverages and tobacco, metal and Allied subsector and leather products and footwear subsector (Osano, 2008). 

Manufacturing sector in Kenya has seen the best and worst of times. In early years of independence, the policy for industrialization was the import substitution strategy which was pursued in 60s and 70s. This strategy was a continuation of colonial administration industrial strategy of protecting infant industries. The initial impact of this policy on the growth of the sector and economic growth was positive. On average the growth rate averaged 6% in the 60s and 4% in 70s while in the 1960s manufacturing value added was 11.7% per annum and 4.9% in 1970s. However, excessive government control mechanism put in place to support this strategy shifted further economic growth. This was because these controls were too much inward looking inhibiting external competition. The collapse of EAC in 1977 further compounded the problem by making smaller the domestic market for manufacturing goods. This resulted in under-utilized capacity and was clear indication that import substitution strategy was not achieving its objective of creating employment and poverty alleviation (Ronge and Nyangito, 2000). 

In 1986 the government came up with Sessional paper No.1 on economic management for renewed growth which spelled out strategies to remove distortions, created by import substitution policies. This Sessional Paper laid down policies for trade liberalization. Example of such policies included the adoption of competitive exchange rate and export promotion incentives such as manufacturing under bond, the ―green channel system‖ for administrative approval, export processing Zones and export compensation schemes. By 1989, these incentives to export had not become fully operational. Their effectiveness was hampered by the lack of fiscal discipline which resulted in macroeconomic imbalances which had a negative impact on investments. Nevertheless there was an increase in manufactured exports between 1985 and 1990(Government of Kenya, 1986). 

During the 1990s, weaknesses in implementing the reform reversed all the previous achievements in the manufactured export sector. The growth in manufacturing value added fell from 5.2% in 1990 to 1.2% in 1992 while GDP growth fell from 4.2% in 1990 to 0.4% in 1992. The decline made government to undertake far- reaching reforms in 1993 which had been agreed upon with donors. Such policies included tariff reductions, liberalization of foreign exchange market and privatization of public enterprises. In the period between 1994 and 1996, the reforms seemed to work. The growth of the manufacturing value added rose from 1.2% in 1992to 1.8% in 1993 and 1.9% in 1994. In 1995 and 1996, manufacturing value added grew by 3.9% and 3.7% respectively while total GDP grew by 4.8% and 4.6% respectively (Ronge and Nyangito, 2000). 

By 1997, poor governance caused a decline in the achievements already made. Infrastructure deteriorated and rent seeking was rampant. This increased unit cost of manufactured products and increased competition from imports seriously hurting manufacturing sector. The problem was further compounded by IMF withdrawal citing lack of transparency in the reform process (Ronge and Nyangito, 2000). 

The Kenyan economy started showing signs of recovery in 2003. Between 2002 and 2005, economic growth rate averaged 3.6% and the average growth rate of manufacturing sector was 2.45%.In the period between 2006 and 2012, the economy grew by an average rate of 3.9% while manufacturing sector on average grew by 4.2 % (Economic Survey 2012). 

In the year 2012, there was a net increase of 6244 new formal manufacturing sector jobs compared to 3656 new jobs generated in 2011.The value of output increased by 2.6% from 1015.5 billion in 2011 to 1042.2 billion in 2012. Total employment in the sector was 277900 people which represented 13% of the total employment in the economy with additional 1.6 million people employed in the informal side of the industry (Economic Survey 2012). 

In the Kenya‘s Vision 2030, the government aims at transforming manufacturing sector into a robust, diversified and competitive sector to support the country‘s social economic development agenda by creating jobs, generating wealth, and attracting Foreign Direct Investments (FDI). In addition, the sector will continue to provide impetus towards achievement of the Millennium Development Goals (MDGs) in both the medium and long term, particularly the goal on Eradication of Extreme Poverty and Hunger and goal on Global Partnerships for Development. Over the Medium Term Plan (MTP) period 2008–2012, the overall goal of the sector has been to increase its contribution to Gross Domestic Product (GDP) by at least 10 per cent per annum. These objectives were to be achieved by: Strengthening production capacity and local content of domestically-manufactured goods; increasing the generation and utilisation of Research and Development (R&D) results; raising the share of products in the regional market from 7 to 15 per cent; and developing niche products for existing and new markets (Government of Kenya, 2008).

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Item Type: Kenyan Material  |  Attribute: 55 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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