The manufacturing sector is slowing down due to SMEs?

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      The slow expansion of the manufacturing sector has been attributed to the dominance of micro and small businesses.

      A government thinks tank found that the business environment does not favor small businesses and that the manufacturing sector in Kenya is not growing as quickly as the government would like.

      According to a report by the Kenya Institute for Public Policy Research and Analysis (Kippra), the separation of these companies from the industry is unproductive because they are the ones using outdated or subpar technology, insufficient innovation methods, and inadequate skill sets.

      Additionally, these companies struggle to find reasonable financing, deal with subpar infrastructure, and take the worst hit from rare occurrences like the Covid-19 pandemic.

      The most recent Kenya Economic Report 2022, under the theme “Building Resilience and Sustainable Economic Development in Kenya,” was published by Kippra and includes these specifics.

      According to the report, manufacturing accounts for respectively 47.7% and 54.7% of the formal industrial Gross Domestic Product (GDP) and employment.

      Also Read: Digital Advertising platform that empowers SMEs

      Poor Performance 

      Additionally, it accounts for 95,5% of businesses, 96,2% of jobs, and 75,4% of the total value added in unofficial industrial activity.

      The Covid-19 epidemic caused a 0.1% decline in manufacturing in 2020, but it recovered in 2021 with a 6.9% growth.

      The report states, in part, that manufacturing’s contribution to national gross domestic product (GDP) “remains below the 15% target despite its ability to contribute to economic development.”

      “The industry is subject to serious risks on the downside, including droughts, election cycles, global recessions, and spikes in oil prices. Additionally, a significant concentration of unofficial micro and small businesses (MSEs) weakens the manufacturing sector’s resilience.

      An MSE is regarded as a small business with fewer than 50 employees.

      According to the report, “Firm size has implications for business resilience through channels like access to human and material resources, market diversification, and access to lifeline infrastructure, including transportation facilities and utilities like electricity, water, telecommunication network, and sanitation.”

      According to a study by the United Nations Industrial Development Organization (UNIDO) on developing and emerging economies, MSEs were more severely impacted by the Covid-19 pandemic than major corporations. Kippra cites this study.

      As an illustration, it is stated that whereas micro and small businesses suffered losses of 19 to 29%, large businesses with over 100 employees reported a reduction in sales of just 2% as a result of the epidemic.

      According to Kippra, “the MSEs were more severely impacted.”

      The difficulty with these businesses extends to luring in the appropriate talent to fuel their expansion. This is based on data showing that, while MSEs make up 83.4% of the 6,038 formal manufacturing businesses, they only account for 30.1% of the sector’s employment.

      The policy think tank continues, “This suggests that the majority of manufacturing businesses remain owner-operated, with no scale to absorb workers outside of family labor.”

      MSEs in the industrial sector encounter a number of significant difficulties related to the horizontal infrastructure that, in an ideal world, the government would provide as a means of encouraging MSEs.These are roads, electricity, and water. They might also include access to social amenities and garbage disposal facilities.

      Next, what?

      These difficulties were identified in a 2016 Kippra assessment on the county business climate for MSEs in Kenya, and some of them have been mentioned in the most recent report.

      “The 2016 MSME survey reveals that while 81.6 percent of the manufacturing MSEs mostly engaged in the informal sector report having access to electricity, a lower percentage (74.0 percent) report actually being connected; the main barriers being high electricity costs, perceived inefficiencies of electricity supply, and onerous connection procedures,” the report states.

      If the government can put some of the recommendations the study makes for MSEs into practice, manufacturing might account for 15% of GDP.

      Kippra advises hastening the adoption of the Sessional Paper No. 5 of 2020 on MSEs Policy because MSEs are disproportionately affected by shock and stressors. This paper offers strategies that are crucial for constructing resilience, such as improving skills, infrastructure, financing, technology, and innovation.

      Kippra also suggests using financial (incentives) and financing research and development investments to encourage industrial diversification into mainstream and high-technology enterprises. Another component of the sector that needs to be reconsidered in order for it to reach its full potential is how to get raw resources. In the report, Kippra points out that 62% of MSEs import raw materials, compared to 71% of medium- and large-sized businesses.

      The paper asserts that MSEs are more vulnerable to local shocks and stressors than medium-sized and larger businesses, which are vulnerable to regional and international supply chain disruptions. In contrast to medium and low-technology production, high-technology manufacturing is noted to be relatively reliant on foreign materials.

      Also Read: What makes outsourcing investment attractive for SMEs

      Under-developed value chain

      It goes on to explain that low-technology manufacturing businesses only spent 30% of their raw material budgets on imports, compared to over 45% for medium and high-technology manufacturing.

      According to Kippra, this indicates that the local value chain for high-technology manufacturing is underdeveloped.

      Therefore, compared to low-technology manufacturing, which tends to source raw materials from domestic markets, high-technology manufacturing in Kenya is likely to be more susceptible to external shocks that disrupt global supply networks of raw materials.

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