Jump to ContentJump to Main Navigation
Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 30 March 2020

Kenya’s Industrial Development

Kenya’s Industrial Development

Policies, Performance, and Prospects

Chapter:
(p.72) 4 Kenya’s Industrial Development
Source:
Manufacturing Transformation
Author(s):

Dianah Ngui

Jacob Chege

Peter Kimuyu

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0004

Abstract and Keywords

This chapter reviews the history of manufacturing in Kenya, starting with the period immediately before independence in 1963, discussing industrial policies pursued by different regimes and their impact on Kenyan manufacturing. The chapter concludes with a reflection of factors that have shaped industrial development in Kenya. Like many developing countries, Kenya’s early years of independence pursued an import substitution strategy in which the government provided both direct support and tariff protection for the industrial sector. This strategy was a carryover from colonial policies, and its objectives were rapid growth of industry, reduced balance of payment pressure, more indigenous participation in the sector, and higher productivity and high-income employment. However, the import substitution policy failed to create much-needed employment and its high import content caused major balance of payment problems.

Keywords:   Kenya, manufacturing, industrial policy, import substitution, employment

4.1 Introduction

This chapter reviews the history of manufacturing in Kenya, starting with the period immediately before independence in 1963, discussing industrial policies pursued by different regimes and their impact on Kenyan manufacturing. There are also discussions on the structure of the industrial sector and its contribution to employment, and the different sectors’ future prospects; and on size distribution and factor productivity structured around ownership, legal status, and export participation. The chapter concludes by reflecting on the factors that have shaped industrial development in Kenya.

4.2 Evolution of Industrial Policies since Independence

4.2.1 Import Substitution Hangover, 1963–70

Like many developing countries, Kenya’s early years of independence pursued an import substitution (IS) strategy in which the government provided both direct support and tariff protection for the industrial sector. This strategy was a carryover from colonial policies, and its objectives were the rapid growth of industry, reduced balance of payment pressure, more indigenous participation in the sector, higher productivity, and high-income employment. However, the IS policy failed to create much needed employment and its high import content caused major balance of payment problems.

(p.73) Eventually, the IS phase and the policies that sustained it had mixed results. On the positive side, the country enjoyed a considerably higher rate of industrial growth during the first decade of independence with the manufacturing sector growing at an average of 8.0 per cent and was second only to agriculture in terms of employment creation during this period. Manufacturing output grew not only faster than the rest of the Kenyan economy but also faster than other industrial sectors in sub-Saharan Africa. Light industries accounted for the lion’s share of gross industrial production followed by intermediate industries (Kinyanjui 2013). Some industries expanded from a few establishments into industries with a wide range of products and a large number of employees. These included paper, textiles and garment manufacturing, food processing, leather tanning and footwear (Coughlin 1988; KAM 1989). The IS strategy was successful in establishing industries in textile and garments, and food, beverages, and tobacco (FBT) which are still dominant industries today. The strategy was implemented in an environment of generalized optimism that created a climate supportive of widespread economic performance.

4.2.2 Policies during External Shocks, 1970s

The 1970s were turbulent years in Kenya’s history, and were marked by a general deterioration in the country’s overall economic performance. The government increased its participation in the economy under the strategy of IS, promoting and financing new industrial projects. Industrial production for export markets slowed down substantially because the incentive structure favoured production for domestic markets, so creating an inward-looking industrial sector whose potential was severely limited by the size of the domestic market. The situation was compounded by the collapse in 1977 of the East African Community (EAC). In addition, there was erosion of fiscal discipline after the coffee boom of the late 1970s, which was aggravated by a deterioration in the country’s external terms of trade following the second oil shock in 1977 (Foroutan 1993). Under these circumstances, Kenyan products could not compete in export markets. Industries found it more profitable to produce for the highly protected domestic market resulting in an ‘anti-export bias’ (KNBS 1994).

Of particular importance to manufacturing in this period was the emergence of the informal sector supported by official recognition and pro-informal sector policies. The manufacturing outcomes of such policies were however eroded by selective implementation which made provision for exploitation of linkages between the informal sector and other sectors. Overall, the IS strategy penalized certain sectors such as the agricultural sector which suffered high input costs. But government continued to subsidize and guarantee industrial (p.74) expansion through foreign capital in ways that made it possible for African industrialists to penetrate large-scale manufacturing (Kinyanjui 2013).

4.2.3 Structural Adjustment and Liberalization, 1980s and 1990s

During the 1980s, the government introduced a structural adjustment programmes (SAP) in order to, inter alia, strengthen competitiveness and reduce excess capacity in the industrial sector. Major restructuring of policies and institutional frameworks was initiated through the publication of a session paper on Economic Management for Renewed Growth (KNBS 1986). The policy measures in this study were aimed at removing the ‘anti-export bias’ inherent in past policies. The government also undertook to completely remove restrictive import licensing and tariffs. In 1993, import licensing schedules were abolished and in 1994 the capital and current transactions were liberalized. In the same year, Kenya joined the World Trade Organization (WTO) and the Kenyan economy was declared ‘open’. However, even though the SAP led to liberalization of the domestic economy and opened it up to international competition (Chirwa 2000), the industrial sector continued to be inward-oriented, excessively import dependent, capital intensive, and incapable of absorbing an adequate proportion of the rapidly increasing labour force (KNBS 1994; Swamy 1994).

The institutional and market oriented initiatives taken to redirect the economy away from the IS strategy to export promotion comprised the creation of a series of export platforms. Included were the Export Promotion Council established in 1993, the Export Compensation Scheme, Manufacturing under Bond (MUB), Export Processing Zones (EPZ), and import duty and VAT remission schemes that were intended to improve export producers’ access to imported inputs at world prices (Bigsten et al. 2010). These export platforms aimed to promote export oriented manufacturing through a systematic process of tariff reduction and through a variety of market incentives.1 For example the Export Compensation Scheme was designed to compensate exporters for government taxes on inputs, while the MUB programme was meant to encourage manufacturing for world markets. Other changes relevant to the manufacturing sector included the introduction of an Essential Goods Production Support Programme and the abolition of price controls in 1994. In the 1993/94 budget, the government also abolished the Export Compensation Scheme because of inherent problems in its implementation (ibid).2

(p.75) 4.2.4 New Millennium Policies

Further policy changes have occurred since the year 2000 that have had significant implications for industrial development and trade in Kenya. In that year, the United States government enacted the African Growth and Opportunities Act (AGOA), which allowed African countries to export textile and garments duty free and without import quota restrictions. Kenya signed up to AGOA soon after it was enacted, giving the EPZ a fresh impetus. The rise in exports of garments and apparel from Kenya from US$30 million to US$249 million between 2000 and 2005 has been attributed to export opportunities in the US fabric market.

The Kenyan Government’s efforts to improve the sector’s performance culminated in the drafting of the National Industrial Policy (NIP) that was finalized in 2007. The document takes stock of non-implementation of industrial strategies outlined in Sessional Paper No. 2 of 1997. The lack of harmonized and coherent industrial policy hindered the implementation of the policies in the sessional paper. The NIP proposed creation of institutions to coordinate and facilitate industrial development with clear targets and benchmarks.

Policy reforms since 2000 have been spelt out in three blueprints namely, the Poverty Reduction Strategy Paper, the Economic Recovery for Wealth Creation, and Kenya Vision 2030. Contained in these documents are many proposals targeting the productivity and general performance of Kenyan industry (Bigsten et al. 2010). Under Vision 2030, the objective is to develop a diversified, robust, and competitive manufacturing sector. This objective is to be realized through emphasis on local production, expansion in the regional markets, and identification of Kenya’s niche in global markets (Republic of Kenya 2007).

The building of a self-sustaining export oriented industrial sector has been the central focus of the country’s industrial development policy. Despite the structural reforms undertaken, a close analysis of the manufacturing sector shows that supply responses to the policies have been poor. In particular, the manufacturing sector has been experiencing poor total factor productivity growth rates. Lack of success in achieving significant export volumes as per expectations has been blamed largely on government failure to appreciate that there is a need to address other factors that hinder exports, such as inadequate infrastructure, increased crime, the spread of contraband, and rising trade costs due to corruption (Asanuma et al. 2008).

4.3 Key Industrialization Episodes and Turning Points

Although Kenya’s manufacturing enjoyed relatively rapid growth in early post-independence years, it has generally been sluggish without dramatic (p.76) shifts in performance. However, its performance has been shaped by some notable developments. The first of these is the carry forward of the IS policy that was begun during colonial rule and adopted by the independent government. This policy served the purpose of ensuring availability of basic products in the domestic market. However, such products were overpriced and the policy distorted the evolution of industry by encouraging the excess capacity and generalized inefficiency that undermined the ability of Kenyan products to penetrate external markets. A change came when in the mid-1980s the government eventually recognized the need to shift focus towards export promotion. However, immediate efforts to encourage exports were overshadowed by macroeconomic challenges and externally driven SAPs that were implemented half-heartedly and opportunistically.

The recognition in 1972 of the importance of the informal sector following the International Labour Organization (ILO) led not only to a reduction in the harassment of informal firms by state organs but also the enactment of policies and administration interventions supportive of the sector. Since then, the informal sector has grown to become an important contributor to entrepreneurship, employment, and wealth creation (ILO 1972). Informal firms are ubiquitous in Kenya and provide a base for the country’s private sector. Although these are often dismissed in the development literature, research has shown some growth and formalization opportunities for informal manufacturing firms in Kenya (Kimuyu 2010).

The liberalization of the Kenyan economy in the early 1990s through the dismantling of foreign exchange allocations and price controls was a turning point for the overall economy and for industrial development. Although this policy played havoc with inefficient industries, those that survived were more able to participate in export markets. Manufacturers relying on imported material were better able to plan their import and production plans, maintain product export schedules, and pursue their entrepreneurial dreams.

Table 4.1 Policies, institutions, and laws enacted to promote industry in Kenya

Year

Policy/act/institution

Purpose

1954

Industrial and Commercial Development Corporation

To increase industrial capability by encouraging participation of indigenous Kenyans in industry and commerce

1958

Protective tariff regime

To support import substitution industrialization

1963

Development Finance Company of Kenya

A government owned investment company established to promote post-independence industrialization

1964

Foreign Direct Investment Act

To permit issuance to foreign owned firms with a ‘Certificate of Approved Enterprise’ which permitted repatriation of profits, loans, and interest on loans as well as ‘an approved proportion of the net proceeds of sale of all or part of the approved enterprise’

1967

Trade Licensing Act Kenya Industrial Estates

To secure specific types of trade and trading zones for retail and wholesale for African businesses;

to encourage the entry of indigenous firms into manufacturing

1968

New Projects’ Committee

To serve as a bargaining forum between the government and multinational enterprises on investments

1971

Capital Issues Committee

To deal with all issues of capital stocks in order to stamp out potential capital flight occasioned by the threat of nationalization

1973

Industrial Development Bank

To advance industrial and overall economic development by promoting, establishing, expanding, and modernizing medium- and large-scale enterprises

1974

Export Compensation Manufacturer’s Act Kenya Bureau of Standards

To promote export of non-traditional products under the industrialization strategy;

to promote the competitiveness of manufactured goods, both locally and internationally, by increasing their quality

1979

Kenya Industrial Research Institute

To promote industrial innovativeness through the development of a sufficiently national capacity in embodied and disembodied industrial capabilities for self-sustaining industrialization

19812

Replacement of quantitative restrictions with equivalent tariffs, tariff reduction, and rationalization

To promote freer movement of manufactured goods

1983

Establishment of the Investment Advisory Centre

To replace the 1968 New Projects Committee and attract FDI

1986

Manufacturing under Bond Investment Promotion Centre

To promote exports;

to promote investment in Kenya and replace the Investment Advisory Centre

1990

Export Processing Zones

To promote export oriented industrial development

1992

Export Promotion Centre

To formulate market strategies, promote an export culture, and identify regional and global export opportunities;

(p.79) Export Programme Office

to operate a form of duty drawback scheme administered by the national treasury

1993–4

Dismantling of import licensing and price control

To liberalize the Kenyan market and make it more competitive and give Kenyan products a chance to compete in external markets

2000

The (American approved) Africa Growth and Opportunities Act

To promote export of textiles from Africa to America

2001

Kenya Industrial Property Institute

To grant and enforce property rights and trade marks

2004

Kenya Investment Authority

To replace the Investment Promotion Centre and introduce mandatory investment thresholds and restrictive screening procedures for foreign investments

2008

Vision 2030

To make Kenya globally competitive and prosperous. The economic pillar on which Vision 2030 is founded pays special attention to manufacturing and proposes important flagship projects in support of the sector including development of integrated iron and steel mills that will lead to local supply of machines and equipment

2013

Jubilee Manifesto

To implement the blueprint to be used by the Jubilee government to implement its agenda of transforming Kenya;

to include the transformation of the industrial conversion, building on Vision 2030

Source: Based on Kinyanjui (2013).

Since publication of the Economic Recovery Strategy by the National Rainbow Coalition (NARC) government in 2004 (Republic of Kenya 2003) and Vision 2030 which was its successor, there was more focus on improving the performance of the manufacturing sector. There was also a focus on improving the overall business climate including the rationalization of business licences. The enactment of the AGOA, revival of the EAC, and deeper participation in the common market for eastern and southern Africa (COMESA) opened up new opportunities for Kenyan capital and exports. Kenya is currently the most important source of foreign direct investment (FDI) in Uganda and Rwanda. The region, particularly Uganda, is the main important export destination for Kenyan products.

(p.77) 4.4 Structure of the Industrial Sector

4.4.1 Sectoral Composition

Industrial activity, concentrated around the three largest urban centres, Nairobi, Mombasa, and Kisumu, is dominated by food-processing industries such as grain milling, beer production, and sugarcane crushing, and the fabrication of consumer goods, e.g. vehicles from kits. Kenya also has had an oil refinery that processed imported crude petroleum into petroleum products, mainly for the domestic market till 2015 when it became uneconomical to run. A distinctive feature of the manufacturing sector in Kenya is the coexistence of the modern sector alongside a rapidly expanding informal sector. While the former comprises mainly small, medium, and large enterprises, the latter covers all small-scale activities that are normally semi-organized, unregulated, and use low and simple technologies while employing few persons. A large proportion of industrial output is directed towards satisfying basics needs, namely the provision of low-income consumer goods and services. Such items include clothing, furniture, foodstuffs, and motor vehicle repairs. While data on this sub-sector are inadequate, it is one of the fastest growing sectors and a major source of employment in Kenya.

The small and medium-size enterprises (SMEs), which form part of the formal economy, are characterized by some degree of specialization. These enterprises manufacture a wide range of items including wood and furniture, metal products, glass and pottery, clothing, and leather products. The items are generally designed to meet the domestic needs of low-income households although some are exported to neighbouring countries.

Table 4.2 Percentage share of total manufacturing value added by sub-sector

Manufacturing activity (at current prices)

2005

2006

2007

2008

2009

Manufacture of food products

20.61

20.37

20.93

19.71

22.42

Tobacco and beverages

8.37

9.03

9.45

10.28

10.48

Textiles

1.87

1.80

1.73

1.51

1.19

Clothing

1.27

1.45

1.37

1.55

1.81

Leather and footwear

1.76

1.75

1.83

1.87

1.66

Wood and cork products

0.82

0.77

0.73

0.80

0.74

Furniture

0.78

0.74

0.79

0.95

1.01

Paper and paper products

4.42

3.98

3.92

5.27

3.15

Printing and publishing

2.86

2.52

2.58

1.89

2.42

Industrial chemicals, paint, and soap

1.42

1.37

1.35

1.49

1.56

Petroleum refineries

15.87

15.43

15.37

9.54

4.75

Rubber and plastic products

3.29

3.27

3.02

2.62

2.83

Other non-metallic mineral products

11.72

12.54

12.92

16.94

19.42

Metal products

4.24

4.58

4.60

4.56

4.76

Non-electrical machinery

0.61

0.53

0.38

0.32

0.31

Electrical machinery

2.05

1.79

1.29

1.08

1.05

Transport equipment

1.50

1.76

1.61

1.72

1.74

Miscellaneous manufacturing

0.54

0.52

0.55

0.66

0.71

Micro- and small enterprises

11.94

12.01

11.66

13.32

14.94

Export Processing Zones

4.05

3.79

3.93

3.90

3.07

Source: KNBS (2006–10); authors’ calculations.

The structure of Kenya’s manufacturing sector has undergone minimal change despite shifts in policies. Production is still largely geared towards consumer goods. Table 4.1 shows the share of total manufacturing (at the International Standard Industrial Classification (ISIC) three-digit level) value added by sectors from 2005.

Although the manufacturing sector in Kenya is diversified in terms of manufacturing activities, processing of food and other agricultural goods still contributes the largest share of manufacturing GDP, followed by textile and garment, and the refining of crude petroleum, respectively. For instance, in 2006 the contribution from the agro-processing of food commodities and refining of petroleum products to manufacturing value added to GDP was 21 per cent and 15 per cent respectively. The single most important industrial sub-sector is FBT which forms over 30 per cent of the total manufacturing output in recent years (Table 4.2). In 2009 food manufacturing contributed relatively about 22 per cent of manufacturing output, followed by other non-metallic mineral products at about 19 per cent (see Table 4.2). Food, printing and publishing, rubber and plastic products, and metal product sub-sectors (p.78) (p.80) recorded negative growth in 2008 but picked up in 2009. Growth theory suggests that nations tend to move from agrarian-led development towards manufacturing or technological development. Thus, the contribution from manufacturing would rise relative to that of agriculture. However, Kenya’s manufacturing sector share to GDP is fairly stagnant although the share from agriculture has itself declined. However, significant complementarity between the two sectors can be noted. The manufacturing output potential may lie in exploiting the valued addition of agricultural products.

Table 4.3 Manufacturing value added (% GDP)

2004

2005

2006

2007

2008

Brazil

19.2

18.1

17.4

17.4

16

China

32.4

32.8

33.6

34.1

34.4

Egypt, Arab Rep.

18

17.3

16.6

15.7

16.9

Botswana

4.1

3.7

3.7

3.3

3.2

Kenya

11.3

11.8

11.6

11

9.1

Mauritius

21.1

20.2

19.1

19.9

19.4

Malaysia

30.4

29.6

29.6

28

Singapore

27.5

26.9

26.9

24.9

20.8

South Africa

19

18.5

18.4

18.1

18.5

Uganda

7.6

7.6

7.7

7.7

7.6

Tanzania

7

6.8

6.9

Korea, Rep.

27.7

27.5

27.1

27.3

28.1

Source: World Development Indicators (WB 2011).

The manufacturing sector in Kenya is the third largest by sectoral contribution to GDP (10.3 per cent) after transport and communication (11.3 per cent) and agriculture and forestry (23.4 per cent) (KNBS 2008: Table 28). The average annual growth rate of real GDP for the manufacturing sector declined from 10 per cent in the period 1974–9 to 4.8 per cent, 2.5 per cent, and 3.8 per cent in the periods 1980–9, 1990–9, and 2000–7 respectively.

The manufacturing sector’s share of GDP has increased only marginally in the last three decades, contributing only 10 per cent in the 1964–73 period and 13.6 per cent in the 1990–5 period. It reverted back to 10 per cent and has stagnated at that level for most of the past decade. A combination of factors including the IS strategy, poor weather conditions, import liberalization, and deteriorating infrastructure could explain the slack. Although there has been a slight upswing in more recent years, the contribution from manufacturing to GDP has remained low, contributing 11.5 per cent and 12.8 per cent in the second quarters of 2009 and 2010 respectively. The manufacturing sector in general suffers from low value added compared to Malaysia, Singapore, Mauritius, and South Africa but higher than that of Uganda and Tanzania (Table 4.3).

(p.81) 4.4.2 Manufacturing Employment

Kenya’s manufacturing sector has been the main conduit for the country’s integration into regional and world markets. The sector is a major source of employment in urban areas and possesses substantial backward and forward linkages to the rest of the economy. It is critical to achieving the country’s vision of becoming prosperous and globally competitive by 2030. Available data show that casual employment as a proportion of total formal sector employment has risen markedly since 1994. Informal and precarious forms of employment have gained momentum, as the system evolves towards employment of a diverse pool of irregular, flexible, or casual workers3 with no formal labour contracts and employment benefits. Most of these employment effects have been witnessed during a period of intense trade liberalization and openness. This may have been largely undertaken as a cost-cutting strategy, since the latter types of workers do not usually enjoy fringe and other employment benefits such as severance pay, medical allowances, and so on. The proportion of part-time and casual workers increased to 36 per cent in 2003 from 28 per cent in 1993.

Employment growth averaged 1.43 per cent per annum over the period 2005–9. The average annual growth rate declined from 3.34 per cent in 2007 to −0.75 per cent in 2008. This was followed by a growth rate of 0.44 per cent in 2009. Employment growth seems to have largely followed the decline in manufacturing output growth and hence economic growth. Growth between 2008 and 2009 is probably due to an increase in the number of employees rather than an increase in the number of establishments, since these too declined during this period (see Table 4.6 (size distribution)). Informal sector economic manufacturing activities provided employment for 1,801.1 workers in 2010, up from 1,711.2 in 2009, an increase of 5.3 per cent.

Table 4.4 Trend in percentage share of employment by sector

Manufacturing activity

2005

2006

2007

2008

2009

Manufacture of food products

31.37

31.16

30.73

30.68

30.89

Tobacco and beverages

3.09

2.95

3.34

3.31

3.36

Textiles

17.59

17.73

17.49

17.59

17.12

Clothing

6.41

6.26

6.11

5.61

5.61

Leather and footwear

0.77

0.72

0.67

1.14

1.01

Wood and cork products

3.93

3.83

3.70

3.70

3.78

Furniture

1.78

1.75

1.71

1.64

1.69

Paper and paper products

3.38

3.33

3.25

3.28

3.34

Printing and publishing

3.46

3.48

3.45

3.34

3.32

Industrial chemicals, paint, and soap

6.04

6.03

6.02

5.75

5.84

Petroleum refineries

0.10

0.09

0.08

0.09

0.10

Rubber and plastic products

4.24

4.49

4.80

4.71

4.64

Other non-metallic mineral products

3.14

3.39

3.80

3.99

4.08

Metal products

4.36

4.31

4.40

4.45

4.51

Fabricated metal products

3.50

3.44

3.36

3.28

3.35

Non-electrical machinery

0.61

0.59

0.58

0.60

0.62

Electrical machinery

1.23

1.19

1.15

1.15

1.14

Transport equipment

2.75

2.58

2.39

2.96

2.92

Medical precision and optical instruments

0.15

0.15

0.15

0.15

0.16

Other manufacturing

2.11

2.51

2.80

2.56

2.52

Percentage employment growth

1.6

2.52

3.34

−0.75

0.44

Source: KNBS (2006–10); authors’ calculations.

The FBT sub-sector was significantly affected in 2009 by post-election violence and dry weather. Even as the FBT manufacturing sub-sector actually recorded negative growth in the 2008–9 period the performance of other manufacturing in 2008 was not only positive but had increased. This may be a pointer to low linkages between the two sub-sectors, meaning that they neither support nor reinforce each other. Table 4.4 shows the trend in percentage share of employment by sector.

Table 4.4 reveals notable differences in terms of employment within the sub-sectors. Out of the total wage employment in the manufacturing sector in 2009, FBT contributed 34.25 per cent whereas textile and garments (p.82) contributed 22.73 per cent. In 2009, the manufacturing sector contributed 13.27 per cent of total formal employment in Kenya. Note that apart from the agriculture based sub-sectors offering a higher contribution to value added than all other manufacturing sub-sectors, these sub-sectors also absorb the largest share (about 13 per cent) of manufacturing contribution to overall formal employment.

4.4.3 Size Distribution

Table 4.5 Percentage share in the distribution of employment by size/category

Year/employees

0–10

11–50

> 50

% growth

2005

1.65

9.89

88.46

1.60

2006

1.65

9.88

88.47

2.52

2007

3.42

25.70

70.88

3.34

2008

3.28

25.22

71.50

−0.75

2009

3.29

25.01

71.70

0.44

Source: KNBS (2006–10); authors’ calculations.

Table 4.5 shows trends in the distribution of employment by size. Firms are classified as follows: micro-establishments with fewer than five employees; small establishments (from 5–20 employees); medium establishments (21–50 employees); and large establishments (over 50 employees).4

Table 4.6 Percentage share in the number of establishments by size/category

Year/category

0–10

11–50

> 50

% growth

2005

32.62

34.24

33.17

2006

32.94

34.16

32.878

0.82

2007

32.92

34.21

32.875

−0.73

2008

32.98

34.25

32.775

1.68

2009

32.96

34.25

32.782

−0.02

Source: KNBS (2006–10); authors’ calculations.

As shown in Table 4.5, the share of employment across the years in the different size categories has been fluctuating, decreasing in 2008 probably due to post-election violence. The share has remained high in both medium and large enterprises over the years. Distribution in the sub-sectors indicates that FBT had the highest percentage share of the total medium and large (p.83) enterprises, while clothing, fabricated metal products, furniture, industrial chemicals, paint, and soap, and electrical machinery had the highest percentage share of the total micro-enterprises. Table 4.6 shows trends in the number of establishments by size/categories.

Concentration of the number of establishments in large businesses declined over time. In particular, the percentage share of plants employing over 50 workers reduced at a decreasing rate up to 2009. In contrast, the percentage share of small plants employing 11 to 50 workers slowly increased up to 2008 while the percentage share of micro-plants fluctuated over the study period. Consequently, distribution of employment by number of establishment size indicates that the role of micro- and small enterprises (MSEs) in employment is increasingly important, while the role of medium and large business in employment weakened during 2005–9. Small-size enterprises maintain the largest share in number of establishments over time even when employment is declining.

Interestingly, a decline in the number of employees in MSEs is accompanied by an increase in the number of establishments indicating new firm creation rather than increases in sizes in these categories. This implies a high level of ‘churning’; that is, new enterprises starting up and at the same time existing ones ceasing operations. This is in contrast to large enterprises where a decline in the number of employees is reflected in a reduction in the number of establishments, while an increase in the number of employees is not reflected in the number of establishments, indicating that large enterprises absorb employees into their existing enterprises.

(p.84) 4.4.4 Ownership

In Kenya, there are two ethnically distinct groups of businesses, namely, those owned by Kenyans of Asian (largely Indian) origin and others owned by Kenyans of African origin. While the former group constitutes a small minority their presence in trade and manufacturing is substantial (Himbara 1994). There are possibly extensive flows of information among Kenyan–Asian entrepreneurs. For example, the formal or organized sector is relatively small with correspondingly few players, most of whom are Kenyan Asians. In addition, for various political and historical reasons, this immigrant entrepreneurial community is socially embedded. For example, its members tend to live in clusters of close proximity, participate vigorously in social clubs, and have numerous community activities both within and outside these clubs.

Table 4.7 Enterprise ownership by ethnic origin

African

Indian(Asian)

Middle Eastern

Other Asian

European

Other

Total

No.

%

No.

%

No.

%

No.

%

No.

%

No.

%

%

No.

Micro

282

87.31

31

9.60

0

0.00

7

2.17

1

0.31

2

0.62

323

41.36

Small

134

54.47

94

38.21

4

1.63

6

2.44

6

2.44

2

0.81

246

31.50

Medium

20

22.47

49

55.06

1

1.12

6

6.74

9

10.11

4

4.49

89

11.40

Large

14

11.38

76

61.79

5

4.07

15

12.20

10

8.13

3

2.44

123

15.75

Total

450

57.62

250

32.01

10

1.28

34

4.35

26

3.33

11

1.41

781

100

Source: Authors’ calculations from Investment Climate Assessment Survey (WB 2007).

With regard to ownership and management of firms in Kenya’s manufacturing industry, there have been significant changes in the years since independence. Currently, multinationals and parastatals dominate the large industries while Kenyans of African origin dominate the micro- and small establishments. Table 4.7 shows the enterprise ownership by ethnic origin.

Table 4.8 Legal status of firms by size category

Publicly listed

Private ltd co.

Sole proprietors

Partnership

Other

Total

No.

%

No.

%

No.

%

No.

%

No.

%

No.

%

Micro

0

0

51

14.13

213

72.69

64

55.17

0

0

328

42

Small

1

14.28

125

34.63

70

23.89

46

39.66

3

75

245

31.37

Medium

2

28.57

74

20.5

4

1.37

5

4.31

0

0

85

10.88

Large

4

57.14

11

3.05

6

2.05

1

0.86

1

25

23

2.95

Total

7

0.9

361

46

293

37.5

116

14.9

4

0.5

781

781

Source: Authors’ calculations from Investment Climate Assessment Survey (WB 2007).

Most of the micro- and small-scale enterprises are owned by Kenyans of African origin (Table 4.7). The share of African owned businesses falls sharply as those of Indian origin and other Asian origin ownership increase up the enterprise size scale. As a consequence, Asians own a majority of the medium and large-scale enterprises, a finding consistent with Ikiara et al. (2002). Europeans and entrepreneurs from the Middle East own a small proportion only of all size categories compared with other entrepreneurs. The concentration of African entrepreneurs in micro- and small businesses could be explained by Africa’s limited ability to mobilize financial and human resources (Ikiara et al. 2002). Table 4.8 shows the legal status of firms by size category.

The majority of micro-establishments were owned by sole proprietors, with ownership declining with size category. Although the publicly listed companies’ ownership was small across all size categories, they still held the largest (p.85) percentage share in the large size category. Private limited companies held the highest percentage share in small enterprises. About 94 per cent of African owned firms were sole proprietorships compared to 5.34 per cent of Indian owned firms (Table 4.8).

4.5 Sunrise and Sunset Industries

The industrialization process in Kenya was, in the early post-independence period, clustered around three sub-sectors namely textile, food processing, and metal industries. Whereas the market liberalization policies from the 1980s led to the collapse of the textile industry, food processing and metal industries have withstood the vagaries of a changing macro- and policy environment and developed over time, albeit slowly. The AGOA in 2001 slightly changed the growth fortunes for the textile industry with exports of garments and apparel from Kenya increasing from US$30 million in 2000 to nearly US$250 million by 2005 (KIPPRA 2009). The growth in food processing and metal industries has largely been driven by expanding local and regional markets. However, growth in these sub-sectors was at its lowest ebb during 1990–2002 as the cost of doing business worsened during the period, occasioned by the near-collapse of infrastructure, declining local demand, and lack of clear policy direction.

Failure to create backward linkages to fully exploit the AGOA initiative, particularly in reviving the cotton industry, delayed the envisioned growth in the textile industry. Increasing input costs and uncoordinated cotton marketing have been a disincentive to cotton farmers. Similarly, local textile products are not sufficiently competitive to penetrate the local market which has largely become the domain of textile imports. For instance, Kenya’s textile industry has relatively high labour costs when compared to textile producing countries such as China and India.

(p.86) The Economic Recovery Strategy (ERS) 2003–7 placed emphasis on revitalizing the infrastructure and was categorical about the direction in which the government wanted industry to go. Further, enhanced discourse between the government and the private sector, particularly through the Kenya Association of Manufactures, has been catalytic in raising government interest in addressing problems facing manufacturers. Indeed, there has been an increased trend for government to involve the private sector in the budget process, as well as in institutions responsible for prioritizing critical areas where the government should invest to improve the business environment.

Beyond textile, food processing, and metal industries, Kenya has diversified her manufacturing activities. Refining of petroleum products, rubber and plastics manufacturing, and paper and printing have increasingly contributed to manufacturing GDP. Similarly, manufacturing of construction products, particularly cement, have had phenomenal growth fuelled by increased demand in the real estate industry. This growth is expected to continue, given the many infrastructure projects planned under Vision 2030, with general growth in the real estate and construction sectors. The oil and steel industry and other industries that feed on iron ore petroleum products such as plastics are poised to grow phenomenally given recent discoveries in Kenya of fossil resources and iron ore.

4.6 Labour and Total Factor Productivity

Given the increasing openness of the economies of many countries, discussions on how competitive is a country are of special importance because a globalized market environment demands that products compete locally with imports while at the same time trying to have a competitive edge in world markets. A country or a firm can be either price- or quality-competitive in specific products. Productivity is important for competitiveness. Firms that are not productive have a poor chance of competing for domestic and export markets. This is particularly so considering recent developments in which countries have opened their economies by dismantling trade barriers and enacting policies for promoting trade. Not only does productivity performance have a bearing on competitiveness, it also has a bearing on profits and wages, and ultimately poverty reduction and overall welfare. Productivity growth permits sustained economic expansion, a greater demand for labour, and increased real wages.

Two broad categories of factors determine competitiveness (Urata 1994; Onjala 2002). One includes factors defining the operating environment and is therefore exogenous to the firm. Competitive pressure, indicated by market concentration and openness of an economy and buttressed by trade policies is (p.87) an example of such factors. In an acutely competitive environment, firms either match up regarding efficient use of factors of production or are forced out of the market purely as a response to external forces. The other category includes those associated with the internal capability of firms. Such factors include managerial talent, reward systems, value–cost ratios, and technological fitness. An analysis of firm-level productivity is important in understanding the extent of preparedness by Kenyan manufacturers to compete in external markets. In this section, we attempt to assess the productivity of Kenya’s manufacturing sector by exploring output per worker and total factor productivity. Parametric measures of productivity are sensitive to the models used. For that reason, results obtained from this level of our analysis need to be viewed as indicative only.

In order to generate estimates on output per worker and firm-level total factor productivity, we use the 2007 WB datasets on manufacturing. These datasets provide information on the value of sales, used in this report to proxy for output; expenditure on equipment and buildings, used to proxy for capital; wage bills, used to represent labour input; and the cost of raw materials. For growth in total factor productivity in manufacturing, we need time series information on aggregate manufacturing output, capital, and labour. Official statistical reports such as the Statistical Abstract and Economic Survey publish sufficiently disaggregated data on these variables. We were able to build a 1964–2010 series from these sources from which we applied a lag operator to generate the necessary changes in the variables in our estimation.

While it is quite easy to obtain direct information on the value of manufacturing output and manufacturing wage bills, capital is always difficult to measure. This is because it is the value of the flow of capital services rather than the actual capital stock that is desirable for purposes of modelling productivity. However, such a flow is difficult to track through time since it contains components such as dividends and interest charges that are not usually recorded on an annual basis. To circumvent this problem, the practice is normally to assume that capital services are proportional to the stock of capital. In addition, we use fixed capital formation in the manufacturing sector as a proxy for the flow of capital services.5 Information on the manufacturing sector’s contribution to GDP and the aggregate manufacturing wage bill is also extracted directly from official statistical publications. Because of these data problems, our estimated productivity measures must be treated as initial approximations.

Official statistics on value added and employment, only available for firms with more than 50 employees, reveal that leather and footwear, industrial (p.88) chemicals, petroleum refineries, other non-metallic products, and electrical machinery have the highest levels of labour productivity, more than twice as high as levels in other sectors. Firm-level data obtained from a WB survey in 2007 indicate that productivity in the food sector is greater than that for garments and other sectors.6 This is true for both labour productivity and total factor productivity. The food sub-sector appears an outlier from a manufacturing sector labour productivity perspective. However, the distinction is less dramatic when total factor productivity (TFP) is taken into account, suggesting that there is more capital being utilized in the food sector relative to other sectors in Kenya’s manufacturing sector. Overall, labour productivity is greater for medium and large firms than for small firms, and higher in privately owned firms than in firms under different forms of ownership.

4.7 Conclusions

4.7.1 Factors Undermining Industrial Development in Kenya

Industrial policies in Kenya have been inconsistent over time. Even when policy statements are potentially efficacious, the stated policies have not always been diligently implemented. For example there are many useful policies developed in the recent past which have not yet been implemented. Failure to implement has often led to loss of industrial development opportunities. For example, the NIP, which makes significant proposals, is yet to be implemented. While other countries have used the less technologically complicated textile sector to kick off rapid industrialization, Kenya allowed marketing boards to destroy the cotton value chain beginning with the destruction of cotton growing and ginning. Major joint venture investments in cotton mills were unable to survive the lack of cotton and opportunistic management. State involvement in other agro-processing industries such as the sugar sector and dairy and meat processing combined with the excesses of the cooperative movement to undermine what would have been huge industrial operations.

Many of the manufacturing enterprises are either micro- or small establishments. Studies have shown that firms in this size category face particular problems. First, they are under-capitalized and face very poor transformation prospects (Lundvall et al. 2002; Kimuyu 2010). Second, they have more limited access to financial services (Isaksson and Wihlborg 2002). Most of their start-up cost and upgrading is funded through borrowing from family and friends (Green et al. 2007). As a result, they invest very little if at all, (p.89) usually in used equipment (Söderbom 2002). MSEs are less productive and less able to participate in external markets: studies have established a strong positive association between size and propensity to export (Graner and Isaksson 2009). What all this means is that the dominance of small firms in Kenyan industry gets in the way of industrial development.

Generally, Kenyan manufacturing has suffered poor productivity growth. There are numerous reasons for this outcome. Very little investment takes place, either at firm or national level. The public sector emphasizes academic rather than technical education which tends to have greater impact on overall productivity. Kenya does not have an adequate supply of infrastructure and many firms are forced to self-provide for water, power, and security. Also, firms are not always able to focus on their core business because of failures in the market for such complementary services as transport. Most firms end up spending their resources on providing services which can be supplied more cost effectively through outsourcing. Finally, very little R&D takes place in Kenya. There are no mechanisms for linking industry with institutions of higher learning. The result is that there is neither obvious demand for nor beneficial application of results arising from research carried out by such institutions.

References

Bibliography references:

Asanuma, Shinji et al. (2008). Report of the Stocktaking Work on the Economic Development in Africa and the Asian Growth Experience. Tokyo: Japan International Cooperation Agency (JICA) and Japan Bank for International Cooperation (JBIC).

Bigsten, A. (2002). ‘History and Policy of Manufacturing in Kenya’, in A. Bigsten and P. Kimuyu (eds) Structure and Performance of Manufacturing in Kenya. New York: Palgrave, 7–30.

Bigsten A., Kimuyu, P., and Söderbom M. (2010). ‘The Manufacturing Sector’, in C. Adams, P. Collier, Ndungu and N. S. (eds) (2007) Kenya: Policies for Prosperity. Oxford: Oxford University Press.

Chege, Jacob, Ngui, Dianah, and Kimuyu, Peter (2014). ‘Scoping Paper on Kenyan Manufacturing’. WIDER Working Paper 2014/136. Helsinki: UNU-WIDER.

Chirwa, E. W. (2000). ‘Structural Adjustment Programmes and Technical Efficiency in the Malawian Manufacturing Sector’. African Development Review 12(1): 89–113.

Coughlin, P. (1988). ‘Toward a New Industrialization Strategy in Kenya’, in P. Coughlin and G. K. Ikiara (eds) Industrialization in Kenya: In Search of a Strategy. Nairobi: Heinemann, ch. 12.

Foroutan, F. (1993). ‘Trade Reform in Ten sub-Saharan African Countries: Achievements and Failures’. World Bank Policy Research Paper 1222. Washington, DC: World Bank.

(p.90) Gerdin, A. (1997). On Productivity and Growth in Kenya, 1964–94, Ekonomiska Studier 72, PhD thesis, Göteborg University, Sweden.

Graner, M. and Isaksson, A. (2009). ‘Firm Efficiency and the Destination of Exports: Evidence from Kenyan Plant Level Data’. The Developing Economies 47(3): 279–306.

Green, C. J., Kimuyu, P., Manos, R., and Murinde, V. (2007). ‘How Do Small Firms in Developing Countries Raise Capital? Evidence from a Large-scale Survey of Kenyan Micro and Small Scale Enterprises (MSEs)’, in M. Hirschey, K. John, and A. K. Makhija (eds) Issues in Corporate Governance and Finance vol. 12: Advances in Financial Economics. Amsterdam: Elsevier, 379–404.

Himbara, D. (1994). ‘The Failed Africanization of Commerce and Industry in Kenya’. World Development 22: 3.

Ikiara, G. K., Kimuyu, P., Manundu, M., and Masai, W. (2002). ‘Firm and Other Characteristics’, in A. Bigsten and P. Kimuyu (eds) Structure and Performance of Manufacturing in Kenya. New York, NY: Palgrave, 151–72.

International Labour Organization (ILO) (1972). Employment, Income and Equality: A Strategy for Increasing Productive Employment in Kenya. Geneva: ILO.

Isaksson, A. and Wihlborg, C. (2002). ‘Financial Constraint on Kenyan Manufacturing’, in A. Bigsten and P. Kimuyu (eds) Structure and Performance of Manufacturing in Kenya. New York, NY: Palgrave, 93–115.

Kenya Association of Manufacturers (KAM) (1989). Rural Industrialization in Kenya: Opportunities and Constraints in Providing Basic Infrastructure. Nairobi: KAM.

Kenya Institute for Public Policy Research and Analysis (KIPPRA) (2009). Kenya Economic Report 2009: Building a Globally Competitive Economy. Nairobi: KIPPRA.

Kenya National Bureau of Statistics (KNBS) (1986). Sessional Paper No. 1 of 1986: Economic Management for Renewed Growth. Narobi: Government Printer.

Kenya National Bureau of Statistics (KNBS) (1994). National Development Plan 1994–1996. Nairobi: Government Printer.

Kenya National Bureau of Statistics (KNBS) (2006–2010). Statistical Abstract. Nairobi: Government Printer.

Kenya National Bureau of Statistics (KNBS) (2008). Economic Survey. Nairobi: Government Printer.

Kimuyu, P. (2010). ‘Do Small Firms in Developing Countries Ever Transform?’ Regional Development Studies 14: 11–28.

Kinyanjui, B. K. (2013). Reversed Fortunes in the South: A Comparison of the Role of FDI in Industrial Development in Kenya and Malaysia. Leiden: University of Leiden, African Studies Centre.

Lundvall, K., Ochoro, W., and Hjalmarsson, L. (2002). ‘Productivity and Technical Efficiency’, in A. Bigsten and P. Kimuyu (eds) Structure and Performance of Manufacturing in Kenya. New York, NY: Palgrave, 151–72.

Onjala, Joseph (2002). Total Factor Productivity in Kenya: The Links with Trade Policy. AERC Research Paper 118. Nairobi: African Economic Research Consortium.

Republic of Kenya (2003). Economic Recovery Strategy for Wealth Employment and Creation, 2003–2007. Nairobi: Government Printer.

Republic of Kenya (2007). Kenya Vision 2030: A Globally Competitive and Prosperous Kenya. Nairobi: Government Printer.

(p.91) Söderbom, M. (2002). ‘Investment Behaviour’, in A. Bigsten and P. Kimuyu (eds) Structure and Performance of Manufacturing in Kenya. New York: Palgrave, 119–48.

Swamy, G. (1994). ‘Kenya: Patchy, Intermittent Commitment’, in I. Husian and R. Farugee(eds) Adjustment in Africa: Lessons from Country Case Studies. World Bank Regional and Sectoral Studies. Washington, DC: World Bank, 193–237.

Urata, S. (1994). ‘Trade Liberalization and Productivity Growth in Asia: Introduction and Major Findings’. The Developing Economies, XXXII(4): 363–72.

World Bank (WB) (2007). Investment Climate Assessment Survey. Washington, DC: World Bank.

World Bank (2011). World Development Indicators. Washington, DC: World Bank.

Notes:

(1) For a detailed description of the incentives, see Gerdin (1997: 30); Bigsten (2002: 17).

(2) It was opportunistic implementation of the Export Compensation Scheme that led to the hugely infamous Goldenberg scam.

(3) In the literature, such forms of employment are also referred to as ‘non-standard forms of employment’ or ‘precarious employment’. Part-time workers in the context of this paper work under conditions similar to those of casual workers but for relatively shorter periods—periods of three months or fewer. In both cases, payment is often at the end of the day/week, or piece rate.

(4) Because there are insufficient data available, distribution in the World Bank (WB) survey disaggregates medium enterprises to comprise firms with between 51 and 100 workers, and large enterprises to comprise firms with 101 workers and above.

(5) This use of a proxy means that our results are at best provisional.

(6) See Chege et al. (2014) for further details.