The Small Business Environment in Kenya - Case Study Example

The Small Business Environment in Kenya Student’s Name: Course: Tutor: Date: The Small Business Environment in Kenya As a developing country in Africa, Kenya has a flourishing number of small and medium enterprises, generally referred to as small businesses in the context of this report. Most of the businesses have to compete with already established multinational companies and have to deal with numerous challenges enumerated hereunder. This report is written for purposes of shedding light on the challenges and opportunities that exist in Kenya’s small business sector. More so, it is meant to provide the Kenyan government and international donors with pointers about the specific areas that need attention in order to make it easier for small scale investors in the country to establish business and compete fairly with other larger enterprises in the country and if possible, elsewhere in the world. The Kenyan government categorises small business as all enterprises that have less than 250 employees (Mbithi & Mainga 2006, 5). This category is further sub-divided into micro enterprises (0-9 employees), small enterprises (10-50 employees) and medium-scale enterprises (51-249 employees). A different definition offered by Kimuyu and Omiti (2000) describe small businesses as labour intensive businesses which use high labour capital ratios to produce similar products which are produced by larger companies using technologically advanced techniques. The third definition offered by Kimuyu and Omiti (2000) suggest that small businesses are enterprises that involve minimal capital, and are usually started by individuals. As a result, their growth progress is much slower, while their access to financial support from mainstream financiers is limited. Synopsis of the small business setting in Africa In Africa, small businesses usually take the form of a family owned business, where the entrepreneur dedicates his/her own efforts in the growth of the business. Usually, some businesses exist without government registration and licensing. However, as different governments in the continent become more vibrant in regulating and offering assistance to small businesses, a lot more business owners are seeking government recognition by applying for operating permits and licenses (Wanyama 2005, 35). In the Kenyan context, small businesses started attracting government attention in the early 2000s. Before this, the sector was mainly known as the informal jua kali business sector (ibid, 35). In a bid to curb the rising unemployment rates, which had hit the 10 million mark in the country by 2005, the government of Kenya, with financial assistance from United Nations Development Program (UNDP) started upgrading the small business infrastructure in the country, while encouraging all small scale business owners to register their businesses. The life span for most small businesses in Kenya depends on whether a business is properly managed, grows and is able to put up with the competition. The GDP contribution of the same on the other hand was estimated to be approximately 13 percent (Daniels 1999, 55). General business environment The general small business in Kenya is characterised by low entry barriers, and a unique potential of employment creation (Kimuyu 2001, 3). These factors however have their positive and negative impacts on the survival and expansion prospects of the small businesses. As Kimuyu (2001, 3) observes, the low entry barriers means that a lot more small scale enterprises are willing to invest in specific businesses. This in turn creates stiff competition, which results in the ruin of poorly managed or less efficient businesses. Considering that most small businesses in Kenya are sole proprietorships, there is a great possibility of business failure where the proprietor has limited knowledge or lacks the capacity to engage in basic business survival tactics such as marketing. In regard to the small business sector’s potential to employment creation, Kimuyu (2001, 3) observes that the absence of vital information especially regarding the structure of small businesses in Kenya remains a curtailing factor since government or donor programs cannot effectively address the challenges or increase development in the small business sector without such information. Political Environment In the past, Kenya was seen as an oasis of peace in the East African region (Wanyama 2005, 35). This however changed after the 2007 when tribal violence that occurred after a contested presidential election. Small businesses were at the receiving end of the political upheaval as many, especially in urban centres were looted and vandalised (Turana 2009). Calm has already returned to the East African country but security issues continue to be among small business owner’s major concerns. The nation is constrained by obsolete laws and messy dysfunctional courts, hampered by wanting infrastructure and overly bureaucratic systems that limit the small business and the agriculture segment disproportionately, and tied to virtually unimpeded corruption (Turana 2009). The hard verdict offered on the political risk associated with doing business in Kenya is further made worse by the indication that even as the government encourages small business owners to acquire operating licenses, the registration process for business is laden with cumbersome process that opens up avenues through which corruption practices can be accomplished. The second major political factor affecting the small business environment in Kenya as observed by Gray (1996, 22) is the government inability to implement most of the recommendations it receives from independent researchers or donor organisations in regard to reforming the business environment. For example, despite the government promising to adopt a facilitative role in order to help small businesses grow as suggested by the international labour organisation in the 1990s, Gray (1996, 23) observes that measures such as tariffs and import quotas, price controls, regulation of interest rates, and reducing the taxation burden on small businesses still remain sore issues that need to be addressed. Legal environment All businesses in Kenya are required by law to have a single business permit and a trade license. The two must be renewed annually. For taxation purposes, every business must also have a Value Added Tax number and a Personal Identification Number (Mbithi & Mainga, 2006, 9). While the process of acquiring the business permit and trade license is rigorous, the annual fees required to renew the same act as a constraining factor for most small businesses. Mbithi and Mainga (2006, 2) further observe that the awareness of the legal requirements for doing business in Kenya is “confined to the elitist business leaders”. As a result, a sizeable percentage of the small business owners fail to adhere to laid down regulations often perceiving local authority personnel as people who are out to harass them. Since such businesses remain informal, they cannot benefit from government incentives offered to small businesses, consequently hampering their growth and expansion potential. Social-cultural environment Generally, Kenyans are an enterprising lot. However, the government has in the recent past raised concerns that too many young are maturing into the labour market at a rate that neither the government nor private sector employers can absorb them. In turn, this raises security issues to growing businesses because the unemployed youths are more likely to engage in social crimes such as theft, vandalism and looting (Ombati, 2009). The high unemployment rate also means that the level of disposable income will be low, thus limiting consumer products (Ombati, 2009). Seeing that small businesses in Kenya rely on ordinary consumers to purchase their products, this would affect the businesses negatively. Economic environment While the large business in Kenya have huge turnover, access to technology, and can access both financial services such as credit and government support more easily, the same cannot be said about small businesses. The technology use din small business if any is very simple, the capital investment low, and their technological capacity limited. More to this, the small business cannot access credit from financial institutions or government support as fast as the big business players would (Gray, 14). This in turn means that the potential for growth in such businesses is much slower. The second economic environment factor affecting small businesses in Kenya is identified as the susceptibility of such businesses to poor performance of the economy. Due to their limited nature, small businesses rely on direct consumers for their profitability. Their distribution network is limited and their marketing capabilities and source for raw materials just as limited (Gray ,15 ) As a result, any upheaval in the economy caused by either low exchange rates, poor weather, or slow domestic demand has a major influence on the businesses performance. Technological environment According to Wanjohi (2009), the technological environment presented mixed fortunes to the small business sector in Kenya. Business owners who can afford to invest in technology and train themselves and their staff members in the same are getting tremendous benefits from the same. However, those who lack the skills or the capital required to invest in technology are loosing out because the business environment is becoming too competitive for them. The second technology related factor regards the disconnect between the urban and rural areas in Kenya. While most technology use requires electricity to operate, electricity supply in Kenya is mostly concentrated in urban areas. This then means that the small businesses in the rural areas have to ignore technology altogether or invest on power generators, which increase the cost of doing business thus affecting their competitiveness (Wanjohi, 2009). International environment Cheap imports are among the major international environmental factors affecting the small businesses in Kenya. A case in point is the second hand clothes imports which flood the Kenyan market often driving small scale clothes designers out of business (Okello, 2005, 38). The second international environmental factor regards the inaccessibility of international markets by small scale businesses. With the advent of certification standards, small businesses especially in the agriculture sector have to meet stringent rules on quality and freshness. This often requires the businesses to invest in equipment and staff members who are trained in the certification process. Without the capital to do this, many small businesses loose out and end up selling their products to established businesses thus loosing out on significant profits (Fairtrade Foundation 2010). Recommendations Having established that small businesses in Kenya face technological, legal, economical, social-cultural, and legal challenges, the Kenyan government should dedicate efforts into researching the various needs and challenges faced by this sector. Through the research findings, the government will be better positioned to come up with a wholesome solution that will address the overall small business environment. More specifically however, the government needs to encourage small businesses to adopt the use of technology. Where financing is a hindrance, the government should work with local financial institutions or donors to present the small businesses with financial solutions that will enable the businesses to grow. The government further needs to expand its information networks in order to enlighten the small business entrepreneurs on the need to register their business, the different sources of financial assistance, and government projects specifically intended to boost the performance of small businesses. The government of Kenya further needs to establish training centres, where small scale entrepreneurs can enrol in courses that will enable them manage their businesses more effectively. In addition to this, the regulatory policies in Kenya should be streamlined to be friendlier to the small businesses. Since affordable electric power is such a crucial factor for most business, especially those that could benefit from technology use, the Kenyan government also needs to work with other stakeholders in order to spread power to more areas in the country. References Daniels, Lisa. 1999. The role of small enterprises in the household and national economy in Kenya: a significant contribution or a last resort? World Development 27(1):55-65. Fairtrade Foundation. 2010. Homegrown Kenya Ltd: Vegetable & flower producer, Kenya. http://www.fairtrade.org.uk/producers/vegetables/homegrown_kenya.aspx(accessed August 02, 2010) Gray, Kenneth, R. 1996. Entrepreneurship in Micro-enterprises: A strategic analysis of manufacturing in Kenya: textiles, woodwork, and metalwork. New York: University Press of America. Kimuyu, Peter & John, Omiti. 2000. Institutional impediment to access to micro and small scale enterprises in Kenya. Institute of Policy Analysis and Research. Discussion paper series DP No. 026/2000. Kimuyu, Peter. 2001. Micro-level institution & enterprise productivity: Insights from Kenya’s small business sector. Institute of Policy Analysis and Research 1-25. Mbithi, Mary and Jamuhuri Mainga. 2006. Doing Business in Kenya: procedures and regulations, opportunities, sources of finance and incentives. A handbook for local Investors. http://www.un-kenya.org/InvestorsHandbook.pdf(accessed August 02, 2010) Okello, Rosemary. 2005. Weaving a secure future. Mambo Magazine: The true Kenyan Story 2(1): 38. Ombati, E. 2009. Unresolved crime in Kenya. People against poverty, unemployment, corruption and insecurity. http://www.papucai-international.org.uk/index.php?option=com_content&task=view&id=34&Itemid=31b (accessed August 02, 2010) Turana, J, O. 2009. Political woes put Kenya at risk of loosing business. 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