Growth and survival of small and medium-scale enterprises in Kenya – an empirical case study of Nairobi County

Muzenda, Tigere

Growth and survival of small and medium-scale enterprises in Kenya – an empirical case study of Nairobi County

Master Thesis

2019

Abstract

The main objective of this research was to determine which factors constrain the growth and survival of small and medium-sized enterprises (SMEs) in Nairobi County, Kenya. It is reasonable to expect that SMEs would be keenly supported financially and otherwise, given the worldwide consensus that such businesses are engines of economic growth. In studies around the world by Beck (2007) and Ayyagari, Demirguc-Kunt and Maksimovic (2011) report that SMEs constitute about 95% of all businesses in an economy, create over 60% of all jobs, contribute between 60% and 70% to a country’s gross domestic product (GDP), foster industrial innovation and growth, and help to increase provision of services that meet local demand. However, statistics produced by the Kenya National Bureau of Statistics (KNBS) indicate that 71% of registered small businesses collapse within three years after starting operations; 72% of the owners use their own or family savings as sources of capital for starting their business while only 5.6% have access to formal bank finance. Given the apparent lack of support for SMEs and their reported rate of failure, this study used stratified random sampling to survey a multi-sector representative sample of 179 SMEs in Nairobi County to determine the exact causes of their demise. More specifically, this project sought to establish if poor infrastructure, failure to access formal finance, weak or absence of collateral, equity injection, poor provision of electricity, limited managerial skills, prevalence of crime or political instability could be the factors constraining growth and survival of SMEs. Data collected were mostly qualitative but converted to quantitative by use of dummy variables. Equity injection was quantitative, measured by the growth of equity from that at inception to the third year of operation. Employing multiple regression, the study established that lack of access to finance, level of equity injection/equity growth and crime were statistically significant explanatory variables. The study recommends that the government should strengthen its fight against crime and corruption, and work closely with development partners to facilitate the training and education of SME owners to embrace modern corporate governance practices. There is need for financial sector players to devise more innovative, risk-mitigating but business-friendly financial products that are accessible to SMEs. In addition, the government is advised to set up a specialist financial institution whose mandate is to provide financial and non-financial support to SMEs.

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