The Focus on SMEs is a welcome Intervention

By Phyllis Wakiaga

50% of all new jobs are estimated to come from medium and large companies, despite them constituting only 20% of all firms in the manufacturing and services sectors. This is according to a World Bank report on High Growth Firms released this month.

Despite the huge role that SMEs play in driving the growth of our economy, it is estimated that their contribution to production is minimal, and many of them specialize in low-value addition. Essentially, many small businesses are part of a huge informal economy which may seem to offer relief for their short-term challenges but in the long run, minimizes their potential for growth, access to wider resources and markets – and ultimately limits their socio-economic impact.

Kenya’s Micro, Small and Medium Enterprises (MSMEs) contribute approximately 40% of the GDP with the majority falling in the informal sector.  While there are about 7.41 million MSMEs in Kenya, only 1.56 million are licensed whereas 5.85 million are unlicensed.

The high number of unlicensed SMEs is indicative that the time is ripe to create a conducive space for SMEs to be productive and profitable at local and regional levels.  President Kenyatta’s recent directive for relevant Ministries to devise SME-specific strategies is indeed timely and promises to unlock the potential for small businesses if implemented in the short and medium term.

There are several ways to go about this but some overarching things to focus on are;

First, there is an urgent need to formalize the informal segment of the SME sector through the promotion and simplification of business start-up operations. By formalizing these entities, many more people, particularly the youth would gain an identity and in the process, open themselves up for more business opportunities along their value chains.

Second, we need to develop and implement the SMEs subcontracting policy. This should aim at promoting the creation of strong linkages between large enterprises and SMEs whilst governing the contractual agreements between the two. This will not only boost the growth of the SMEs, but it will also result in the growth of the value chains, catalyzing a more vibrant economy.

Third, it is important that we foster SME innovation and patenting. The SME sector competitiveness and the exploitation of economies of scale are largely determined by the quality of products developed and the right pricing. While the presence of innovation, inventions and modifications signifies growth, very few (30%) companies have come up with new innovations within 3 years of their existence, according to a KAM study on Intellectual Property Rights. In this regard, it is critical that all 47 counties establish incubation centres for SMEs to resolve issues on product design, innovation and patenting.

Lastly, promoting market access of SMEs at both local and international levels. Unfair competition from cheap imports has continued to hinder the growth of the sector. Our domestic market is shared by a small portion of formal markets that has preference for high-quality products and at reasonable prices, yet it is too small to bring down the cost of production due to economies of scale. Unfortunately, low level of product development and innovation has allowed the importation of items that can be locally produced. Additionally, clear guidelines targeting SMEs for the smooth operation of the Buy Kenya Build Kenya Strategy are key. The government, being the largest consumer of goods and services, would be of great importance to SMEs especially in the procurement of their products.

As industry, we acknowledge our responsibility in supporting the growth of SMEs. Hence, we continue to support the development of an inclusive, innovative sustainable and competitive SME sector in Kenya and the region.

As part of our commitment to realizing the Big 4 Agenda, the Association is creating an SME Hub to provide strategic leadership and support to Manufacturing SMEs towards inclusivity and global competitiveness.

The writer is the CEO of Kenya Association of Manufacturers and the UN Global Compact Network Representative for Kenya. She can be reached at ceo@kam.co.ke.