1. SMALL ENTREPRISES, BIG OPPORTUNITIES

Small and Medium Enterprises (SMEs) play a vital role in driving economic growth and development. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income, measured in terms of GDP, in emerging economies. These numbers are significantly higher when informal SMEs are included. A National Economic Survey report by the Central Bank of Kenya (CBK), for instance, found that SMEs constitute 98% of all business in the country, create 30% of the jobs and contribute 3% of the country’s GDP. As such, they form a significant contribution to the government’s medium and long-term development goals.

Nevertheless, even if a vibrant and expanding small business sector can be a major catalyst of inclusive growth, a survey by the Kenya National Bureau of Statistics indicates that approximately 400,000 micro, small and medium enterprises do not celebrate their second birthday while few reach their fifth birthday leading to concerns of sustainability of this critical sector.

Buy why is this happening? According to a report Deloitte Kenya Economic Outlook 2016, SMEs are hindered by inadequate capital, limited market access, poor infrastructure, inadequate knowledge and skills and rapid changes in technology. Corruption and other unfavorable regulatory environments present other bottlenecks to this vital cog of the economy. Moreover, as the economic effects of the lockdowns worldwide begin to solidify, Kenyan businesses are collapsing and small ones lack resources to absorb even short-term losses. The government introduced a series of stimulus measures for Micro, Small and Medium Enterprises (MSMEs) including reducing value-added tax and corporate tax, however, this does not seem to be enough.

In order to take advantage at macro level of the opportunities offered by a sound productive environment, it could be advisable for the Government and other stakeholders find sustainable and long-term solutions to SME groups such as mentoring, training and capacity-building. The creation of steady network and the transfer of managerial and financial skills as well as the possibility for SMEs to exchange experiences and good practices will accelerate their growth and make the entrepreneurs more conscious of their social, economic and environmental impact. Financial institutions and governments should be looking at the impact SMEs will have not only on the economy, but on society and the environment. This also encourages start-ups and SMEs to build their business model around sustainable inclusiveness, thereby increasing their chances of receiving funding and public support.

2. OPENING UP TO FOREING CAPITAL. THE CONVENIENCE OF FOREING DIRECT INVESTMENTS

There are at least three major types of FDIs. The market-seeking FDI usually serves local and regional market and involves the replication of production facilities in the host countries. The resource or asset-seeking FDI is another type of FDI and involves the relocation of parts of the production chain to the host country. This is usually driven by the availability of low-cost labour and is often export-oriented. This type of FDI is also attracted to countries with abundant natural resources such as oil and gas. The third type of FDI is the efficiency-seeking type where the firms gain from common governance of geographically dispersed activities in the presence of economies of scale and scope. The idea here is to take advantage of special features such as labour costs, skills of the labour force and quality of infrastructure.

Most developing countries are interested in FDI as source of capital for industrialization. This is because FDI could involve a long-term commitment to the host country and contribute significantly to the gross fixed capital formation. By the way, it has been suggested in numerous papers that foreign firms are able to positively affect the levels of productivity and growth rates in the industries they enter and to also promote skill upgrading, increase employment and increased innovation (Blomström, 1986; Blomström and Persson, 1983; Görg and Strobl, 2001; UNCTAD, 2005).

However, by focusing solely on local cheap labour and raw materials, FDI may lower or replace domestic savings and investment, transfer low level or inappropriate technologies and even inhibit the expansion of indigenous firms thereby limiting growth. FDI may also lead to less than optimal corporate taxes where they are provided with liberal tax concessions and excess investment allowances and other incentives. In a distorted market, FDI can lead to negative value-added at world prices coupled with repatriation of profits and dividends.

Kenya has had a long history with foreign firms. From independence of 1963 through the 1970s and part of the 1980s it was one of the most favored destinations of FDI in the Eastern Africa. However, over the years the Country has lost its appeal and, nowadays, the FDI flow remains relatively weak considering the size of its economy and its level of development. According to the figures from UNCTAD’s 2020 World Investment Report, FDI flows in Kenya decreased by 18% to USD 1,3 billion in 2019 (compared to USD 1,6 billion in 2018), despite several new projects in information technology and health care. In recent years, the ICT sector has attracted the most FDI. The other sectors targeted by FDI are banking, tourism, infrastructure and extractive industries. The United Kingdom, the Netherlands, Belgium, China and South Africa are the main investors in Kenya.

Studies on Kenya’s inability to attract FDI have identified such factors as macroeconomic instability, corruption and bad governance, inconsistencies in economic policies, deteriorating public service and poor infrastructure. Despite massive efforts by the government to implement reforms such as trade reforms, the country continues to lose its competitiveness for FDI to Uganda and Tanzania. The Investment Promotion Act enacted in 2004 is a key policy initiative aimed at promoting foreign direct investment in the country. It provides incentives and promotes foreign direct investments that earn foreign exchange, provide employment and promote backward and forward linkages and transfer technology. The Act, however, took away some of the benefits through imposing compulsory investment certificates and high minimum capital requirements, thus creating a legal barrier to and administrative burden for FDI thereby discouraging both domestic and foreign investment.

Causality between FDI and growth is still unclear. The impact they could have on Kenya’s economy will depend on the type of investments the Country will be able to attract (for instance, the size of investment is by no means an indicator of “seriousness” and benefits to the economy since at times large foreign investments may crowd out small national investors’ as much as more modest foreign investments) but also on local conditions such as the level of education and the development of local financial markets. Human capital, government expenditure and openness of the economy are vital for the growth of the economy and therefore policies that can enhance these factors would be needed. It is clear that the role of government would be crucial in creating an encouraging environment for FDI inflow and, above all, in favoring only the ones which can bring actual improvements for the local economy and population.

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