FACTORS CONTRIBUTING TO THE LOW UPTAKE OF EXPORT OPPORTUNITIES BY SMALL AND MEDIUM ENTREPRISES (SMEs) IN KENYA: FOCUS ON EXPORT PROCESSING ZONES (EPZs)

BY

HEZEKIAH BUNDE OKEYO

Reg.No. 23ENB11544

This paper was submitted in partial fulfillment of the requirements for the award of

ESAMI Degree,

Masters in Business Administration (MBA)

Awarded by

ESAMI and MSM

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Eastern & Southern AfricaMaastricht School

Management Institute of ManagementP.O. Box 3030 P.O. Box 1203Arusha, TANZANIA 6201 BE Maastricht

THE NETHERLANDS

11th October 2012

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DECLARATION

I, Hezekiah Bunde Okeyo, declare that I am the sole author of

this dissertation, that during the period of registered study

I have not been registered for other academic award or

qualification, nor has any of the material been submitted

wholly or partially for any other award. This dissertation is

a result of my own research work, and where other people’s

research was used, they have been dully acknowledged.

Date:………………… Signature:……………………………..CANDIDATE

Date:………………… Name:…………………………………..SUPERVISOR

Signature:……………………………..SUPERVISOR

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DEDICATION

To my beloved wife Ludfine and our children

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ACKNOWLEDGEMENT

First and foremost, I would like to thank my supervisor,Professor Sarone Ole Sena for the guidance, valuable commentsand continued support that made this research possible.

I am very grateful to the Acting Chief Executive of ExportProcessing Zones Authority (EPZA), Mr. Benjamin Chesang’ forallowing the research to be undertaken at the Athi RiverExport processing Zone. Special thanks goes to the ManagerExport Business Accelerator Programme at EPZA, Mr. PeterWainaina for taking all the trouble to provide valuableinformation and facilitating the data collection, interviewsand follow-ups with enterprises.

I owe special thanks to the Danish International DevelopmentAgency (DANIDA) whose Business Sector Programme Support (BSPS)co-funded my study with the Ministry of IndustrializationKenya. The financial support enabled the course works andresearch to be undertaken.

The continued moral support, encouragement, prayers andcomfort from my wife and the children is highly appreciated.

Thanks also go to my fellow intake 23 ESAMI Nairobi eveningclass and colleagues at work for all the assistance andencouragement.

Last but not least, I sincerely thank the Almighty God forrendering all His blessings, energy and good health.

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EXECUTIVE SUMMARY

The Small and Medium Enterprises (SMEs) sector is universally

acknowledged as an effective instrument for economic

development due to its potential to create jobs at low

investment costs, generate wealth, reduce poverty, develop

entrepreneurial capabilities, and generate foreign exchange

earnings. Many countries are therefore keen to realize their

potential. The definition of the sector, however, is as

diverse and economy-dependent and this makes comparisons

difficult. They are often classified by size, in terms of the

number of employees and also level of investment or turn-over.

The ranges are often different.

In Kenya, the number of employees is mostly adopted for

classification of enterprises such that a small enterprise is

that with up to 50 employees while a medium enterprise is that

with up to 100 employees. In Kenya’s context, SMEs mean

enterprises with a maximum of 100 employees. The sector faces

many challenges that have weighed it down and hampered the

realization of its potential, especially in export business.

The export promotion programmes put in place to attract

export-oriented investment have ended up attracting large

enterprises, and mainly foreign investment.

The objective of the research is to investigate the factors

that contribute to the slow pace of uptake by local SMEs of

programmes and incentives that the Government of Kenya (GoK)

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has put in place to promote exports, such as export processing

zones. The focus is to establish the role played by such

promotional programmes in nurturing entrepreneurship for

export business, determine the internal and external factors

responsible, and identify policy measures to enhance their

export participation.

The Athi River Export Processing Zones (EPZs) was targeted due

to the high concentration (43 percent) of export-based

enterprises which are also considered experienced in export

business and therefore familiar with constraints. The unit of

analysis is enterprises and the target population of the study

is the Chief Executive Officers (CEOs) of the enterprises. Out

of 47 enterprises at the Athi River EPZ, 34 of them fully

completed and returned the questionnaire. This is a response

rate of 72 percent.

The findings are that out of 34 enterprises 12 (35 percent)

are owned by Kenyans while 22 (65 percent) are owned by

foreigners. Of the Kenyan owned enterprises, the SMEs are 10

(29 percent) and large enterprises are 2 (6 per cent).

Investigation into the extent to which the SMEs are influenced

by existing policy incentives to locate at the EPZ reveal that

majority are influenced by presence of industrial buildings,

opportunities for networks, marketing support, export

logistics, tax incentives, business support and finance

facilitation.

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The study establishes that the export promotional programmes

have played some role but not fully exploited the potential

for entrepreneurship culture inherent in SMEs to enable them

play their rightful roles in export earnings and job creation.

In addition, both internal and external factors play a role in

hampering the uptake of export opportunities by SMEs. The

study concludes that the SMEs and large enterprises are

affected differently, in terms of magnitude, by the internal

and external factors with SMEs generally more vulnerable to

both internal and external challenges compared to large

enterprises.

Between the internal and external factors, SMEs are more

vulnerable to the external factors. Thus, the study concludes

that perception of SMEs on external factors is not dissimilar.

The external factors include inadequate work sites, high cost

of electricity, weak government policy framework, stiff

competition in the market, complex export documentation

procedures, high rental costs of business premises, and lack

of business development services support. The internal factors

include lack of financial resources, weak business networks,

lack of market information, weak marketing strategy, low

productive capacity, lack of business planning skills, and

insufficient managerial human resource.

A new approach is therefore needed in the elimination of

external constraints, particularly incentive packages that are

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cross-cutting and to avoid one-size-fits-all approach. The

research establishes that the needs of SMEs and large

enterprises are not exactly similar and need specific

interventions. The firms’ characteristics and internal factors

could be addressed through the newly introduced Export

Business Accelerator (EBA) programme. It is recommended that

the weak areas of EBA highlighted in this report be addressed.

There is need to mount a major policy shift to design a

dynamic definition of SMEs that takes cognizance of dynamism

in the structure of the economy and to delink the amount of

jobs created with enterprises size. This will enable more pro-

active interventions by agencies such as Export Processing

Zones Authority (EPZA) which is the institutional framework

for export-oriented investments. The agency needs enhanced

funding to fully perform its mandate. Another policy shift is

needed to address access to finance. Towards this end,

establishment of import/export bank and credit guarantee

schemes are recommended.

The findings of the study are not conclusive without a

comparative analysis of the exporters and non-exporters to

establish whether there is a significant difference in the

perceptions of export barriers. In addition, examination of

perception of export barriers within specific market contexts

is imperative. These two areas are recommended for further

research.

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LIST OF TABLES AND FIGURES

Figures

Figure 1: Schematic diagram of the Conceptual Framework............6Figure 2: Sectoral distribution of enterprises in Athi River EPZ. .18Figure 3: Comparison of Mean scores of the variables on SMEs andLarge enterprises.................................................19Figure 4: Internal versus external factors on SMEs................19Figure 5: Proportion of enterprises by size at the Athi River EPZ. 20Figure 6: Incentives that influence decisions to locate to EPZ....21Figure 7: SMEs level of satisfaction with the EBA programme.......22Figure 8: Effect of internal factors on SMEs and large enterprisesexport behaviour..................................................24Figure 9: Effect of external factors on SMEs and large enterprises 27

Tables

Table 1: Mean scores for internal and external factors (confidencelevel 95%, N=34)..................................................23Table 2: Mean ranking of internal barriers to the SMEs exportbehaviour (p=0.05, N=12)..........................................24Table 3: Mean ranking of external barriers on SMEs (p = 0.05, N=12)..................................................................26

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LIST OF ACRONYMS

CEOs Chief Executive Officers

EBA Export Business Accelerator

EPZA Export Processing Zones Authority

EPC Export Promotion Council

EPZs Export Processing Zones

ESAMI Eastern and Southern African Management Institute

GoK Government of Kenya

ICT Information, Communication and Technology

KenInvest Kenya Investment Authority

KNBS Kenya National Bureau of Statistics

MBA Master of Business Administration

PPPs Private-Public sector Partnerships

SMEs Small and Medium Enterprises

SPSS Statistical Package for Social Sciences

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TABLE OF CONTENTS

DECLARATION........................................................iDEDICATION........................................................iiACKNOWLEDGEMENT..................................................iiiEXECUTIVE SUMMARY.................................................ivLIST OF TABLES AND FIGURES.......................................viiLIST OF ACRONYMS................................................viiiTABLE OF CONTENTS.................................................ixCHAPTER 1..........................................................1INTRODUCTION.......................................................11.1 Background..................................................11.2 Problem statement...........................................21.3 Research objectives.........................................31.4 Research questions..........................................31.5 Significance of the study...................................41.6 Limitations/Delimitations...................................51.7 Propositions................................................51.8 Conceptual Framework........................................6

CHAPTER 2..........................................................7LITERATURE REVIEW..................................................72.1 The role played by the existing promotional programmes......72.2 The internal factors inhibiting entrepreneurship and exportbusiness by SMEs................................................102.3 The exogenous factors create barriers to export business bySMEs 112.4 The policy measures to enhance SMEs to become high growthexporters.......................................................11

CHAPTER 3.........................................................13RESEARCH METHODOLOGY..............................................133.1 Background.................................................133.2 Research approach and design...............................14

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3.3 Population, sample size and sampling design................153.4 Data collection methods....................................15

CHAPTER 4.........................................................17RESEARCH FINDINGS AND DISCUSSIONS.................................174.1 Findings of objective 1:...................................184.2 Findings of objective 2:...................................224.3 Findings of objective 3:...................................254.4 Findings of objective 4:...................................27

CHAPTER 5.........................................................30CONCLUSIONS AND RECOMMENDATIONS...................................305.1 Summary of findings........................................305.2 Conclusions on of findings.................................325.3 Recommendations on conclusions.............................32

REFERENCES........................................................34APPENDICES........................................................36Appendix 1: Introduction Letter.................................36Appendix 2: Questionnaire.......................................37

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CHAPTER 1INTRODUCTION

1.1 Background

Small and Medium Enterprises (SMEs) occupy vantage positions

in virtually every developing and developed country because of

the significant roles they play in the growth and development

of the economies. They operate in manufacturing, trade, agri-

business and service sectors of most economies and hence

represent a vehicle for the achievement of national economic

development objectives.

The role of SMEs sector is universally acknowledged as an

effective instrument for economic development due to its

potential to create jobs at low investment costs, generate

wealth, reduce poverty, develop entrepreneurial capabilities,

and also play an even greater role in earning foreign

exchange.

Many economies have consistently promoted SMEs over the years

and are reaping from the interventions in terms of creation of

employment at relatively low capital cost, reduction of income

disparities, development of skills for innovative products,

and improving the balance of trade through exports.

According to Senik, et al (2010), there is a lack of consensus on

the definition of SMEs globally. In many countries, they are

often classified by size (that is the number of employees) and

level of investment or turn-over. The size classification also

varies within regions of the world and across countries

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relative to the size of the economy and the country’s

endowments.

In many definitions, there is always a minimum as well as

maximum size for SMEs in terms of number of jobs created

(Inegbenebor, 2006). In Kenya, the number of employees is

mostly adopted for classification of enterprises such that a

small enterprise is that with up to 50 employees while a

medium enterprise is that with up to 100 employees (GoK,

2005). In Kenya’s context therefore, SMEs mean enterprises

with a maximum of 100 employees.

The Government of Kenya (GoK) has over the years recognized

the importance of SMEs in its national development agenda and

formulated policy interventions and programmes to leverage the

sector. The challenges that have hampered the growth and

development of the SMEs sector have been documented. These

include unfavourable policy environment, inhibitive legal and

regulatory environment, limited access to markets, inadequate

access to financial services, limited access to infrastructure

(work sites), inadequate business skills, limited access to

information, and inadequate access to skills and technology

(GoK, 2005).

Senik et al (2010) emphasize that expansion of a nation’s exports

has a significant positive effect on the growth of a nation’s

economy. The GoK has over the years put in place incentive

packages to attract export-oriented local and foreign

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investors, especially in manufacturing sector. This has been

done under the common understanding that there is a positive

correlation between value-added exports and economic

development. The export promotion policy has been implemented

through the incentives packages offered by the Export

Processing Zones (EPZ) programme, among others.

The EPZ programme, among other programmes, was introduced in

1990 especially for the purpose of attracting local and

foreign investments to increase the productive capital

investment portfolio in the country. The ultimate aim was to

realize economic objectives of job creation, technology and

skill transfer, diversification and value-addition of

exportable products and the creation of backward linkages with

the domestic economy. Since the commencement of the EPZ

programme, mostly foreign enterprises have attracted with

minimum participation of local SMEs, yet the EPZs programme

has predictable incentive packages across the board.

1.2 Problem statement

Kenya is among many developing countries that continue to lag

behind in the export-driven economic growth in spite of the

export promotional programmes put in place to attract local

and foreign investors.

The export promotion programmes in place to attract export-

oriented investment have the necessary physical

infrastructure, attractive incentive packages, and supportive

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institutional framework to facilitate the firms to achieve

export competitiveness. In spite of this existence, the uptake

of available opportunities remains low, particularly by SMEs

owned by local entrepreneurs.

The Export Processing Zones Authority (EPZA) has come up with

the Export Business Accelerator (EBA) facilitation programme

for SMEs, but the proportion of the SMEs taking up the

opportunities and accessing export market remains low

nationally and account for a small proportion of the

enterprises operating in the EPZ programme. By exploring the

incentives, the firms’ characteristics, internal as well as

external factors, conclusions have been drawn on the findings

and recommendations made.

This research project is intended to investigate the factors

that contribute to the slow pace of uptake by local SMEs of

programmes and incentives that the GoK has put in place to

promote exports.

1.3 Research objectives

The overall objective of the research is to establish the

constraints that contribute to low uptake of export

opportunities by SMEs and the role of government and

entrepreneurs. The existing government incentives for

investment and export promotion, policy interventions and the

characteristics of the enterprises have been examined.

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The research intends to achieve the following specific

objectives:

1) Establish the role played by the existing promotional

programmes in nurturing the entrepreneurship culture for

export business;

2) Determine the firm characteristics (internal factors)

that inhibit entrepreneurship and export business by

SMEs;

3) Determine exogenous factors that create barriers to

export business by SMEs; and

4) Identify policy measures to enhance SMEs to become high

growth exporters.

1.4 Research questions

1) What is the proportion of SMEs participating in the

Export Processing Zones programmes

2) In what way are the characteristics, attributes, features

and internal organizational climate of the participating

SMEs similar?

3) How effective are the existing promotional programmes and

measures contributing to export performance by SMEs?

4) What are the key policy issues/challenges for the SMEs?

1.5 Significance of the study

There is no comprehensive national database of exporting

enterprises except the one maintained under the EPZs

programme. The export-oriented enterprises based at the EPZs

are easily accessible and hence targeted since they are also

construed to have mastered the technicalities of exporting and

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learnt to cope with perceived barriers. They are therefore

well placed to share practical experience on barriers to

export.

The significance of understanding the factors that contribute

to the low uptake of export opportunities by SMEs is that the

policy makers and implementers will be able to assess the

efficacy of the existing programmes, policies and strategies.

Where gaps are established, recommendations are made

accordingly to proactively stimulate entrepreneurship and

promote export-oriented SMEs in Kenya.

It has been noted that there is little research done on this

subject in developing countries, including Kenya. The research

has endeavored to bridge the knowledge gap and contribute to a

better understanding of the relationships between and among

the internal constraints and exogenous factors that hinder

SMEs from exploiting export opportunities. This research will

provide additional insights into SMEs challenges and

operations in Kenya.

The findings of the research will hopefully inspire SMEs to

enter into export market. The study will therefore make a

significant contribution to entrepreneurs, policy-makers and

researchers on three fronts.

Firstly, from the policy perspective it will generate new

knowledge on the factors that contribute to poor response by

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SMEs to take advantage of the export opportunities. Policy

recommendations are provided for consideration by the

government and policy makers on the possible solutions;

Secondly, the findings will be of importance to the

academicians and scholars for it will form an invaluable

source of material both secondary and reading material upon

which further research and studies will be based; and

Finally, recommendations for further research are provided on

the basis of the findings.

1.6 Limitations/Delimitations

There are currently over 40 gazetted export processing zones

spread in Nairobi, Mombasa, Athi River, Kilifi, Voi, Eldoret,

Thika, Laikipia, Murang’a, Kajiado, Mavoko and Nandi Hills

which are in various stages of development by both private and

public zone developers/operators. Some of these are

specialized one-factory EPZs, while others are intended to

attract investing enterprises to occupy pre-built premises or

lease serviced plots where a custom-built industrial building

can be built by the investing enterprise (EPZA, 2009).

Considering the distribution of enterprises in the EPZs in

Kenya, it is not possible within the resources available

(time, human and financial) to sample SMEs or visit all the

EPZs during the period of this study. The scope of the study

therefore concentrates at the Athi River public EPZ.

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The target population are enterprises located at Athi River

EPZ. This is relevant because of the uniformity of incentives,

infrastructure, and across-the-board environment for doing

business.

This limitation in scope calls for a sampling strategy that

takes on board enterprises that are representative of the SMEs

including those currently not exporting whilst also ensuring

the validity and reliability of the data. There are many non-

exporting SMEs in the country and it is believed that the

findings establishes the barriers and interventions.

1.7 Propositions

1. The managers of SMEs’ perceive the main exogenous

barriers to export as significantly important barriers;

2. The managers of SMEs’ perceive the main internal barriers

to export as significantly important barriers;

3. The perception of SMEs managers towards exogenous

exporting barriers is similar; and

4. The higher the perceived exogenous exporting barriers,

the lower the export behavior

1.8 Conceptual Framework

The export performance of SMEs is negatively affected by

internal barriers as well as external barriers.

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Export behaviour of SMEsInstitutional framework for facilitation

Export Barriers (Internal Factors)

Export Barriers (Exogenous factors)

Well targeted policy measures and appropriate incentives

championed by a facilitating agency can intervene to reduce or

eliminate some of the constraints and release the SMEs

potential to invest and export. Figure 1: Schematic diagram of the Conceptual Framework

Independent variables Intervening variable

Dependent variable

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CHAPTER 2LITERATURE REVIEW

The literature is replete with information on the factors that

are likely to induce the SMEs to uptake export opportunities

under different socio-economic environments, especially in

developed and newly industrialized countries of South East

Asia and targeting very specific sub-sectors. There is still a

gap of knowledge in this area in Africa.

Further, there is no unanimously accepted single factor

determining the SMEs uptake of export opportunities in any

country. Neither is there a single theory on SMEs export

barriers but a variety of theoretical models attempting to

explain influencing factors. The different approaches do not

necessarily replace each other but explain different aspects

of the same phenomenon. A number of influencing factors can be

extracted as reviewed hereunder, further buttressing the need

for research in this subject.

2.1 The role played by the existing promotional programmes

Among the export promotion measures introduced and evolved

over the years in many countries included the setting up of

the Export Processing Zones (EPZs) under which all investors

enjoy attractive incentive packages such tax incentives,

infrastructure, buildings and business development services

(GoK, 2011).

Kenya has implemented the export-orientation strategy since

1990 and created Export Processing Zones Authority (EPZA)

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through an Act of parliament as the institutional framework to

promote export-oriented investments under the EPZs programme.

Similarly, the Kenya Investment Authority (KenInvest) was

established in 2004 through an Act of Parliament with the

main objective of promoting investments in Kenya, both Foreign

Direct Investment and Domestic Direct Investments, including

SMEs (KenInvest, 2008).

The EPZ programme offer lucrative tax incentives such 10-year

corporate tax holiday and 25 per cent tax hereafter; 10 year

withholding tax holiday on remittance of dividends; duty and

value added tax exemption on raw materials, machinery and

other inputs; stamp duty exemption and 100 per cent investment

deduction on capital expenditure within 20 years. The

infrastructure incentives include work spaces and production

areas, and office space. Business development support services

are also provided to the exporting enterprises such as export

marketing; export logistics and customs management; product

design and development; business planning and management;

financing for small enterprises; organizational development;

quality management; and technology sourcing and application

(EPZA, 2009).

Under the EPZ programme, there are both public and private

zones. The largest zone in the country is at Athi River 30km

south east of Nairobi. It occupies over 93 hectares with

several pre-built industrial units and serviced plots suitable

for investors to construct their own buildings. It is publicly

funded and managed by the EPZA. Within the Athi River zone,

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private EPZ service companies have also constructed over 20

additional sheds for rental.

The Athi River zone is surrounded by a secure boundary fence

and each building or plot is provided with access to utilities

telephone, electricity, water and sewage services for which

the tenant can obtain connection with the relevant utility

service company. Garbage collection, street lighting,

landscaping and security are provided by EPZA which in turn

receives a service charge from tenants. The zone has its own

fire station and health clinic. Banking, retail and postal

services are available in nearby Athi River town or in

Nairobi.

The other major public zone is located in Mombasa. The private

zones are located in Nairobi, Mombasa, Kilifi, Voi, Eldoret,

Thika, Laikipia, Murang’a, Kajiado, Mavoko and Nandi Hills.

Majority of these are specialized one-factory EPZs, often

large size.

In spite of the lucrative incentive packages offered through

the EPZs, there has been low uptake of the opportunities by

local entrepreneurs, especially SMES. Solutions must therefore

be found to address the constraining factors. It is believed

that successful entrepreneurs share certain internal

attributes and characteristics and that when the internal

constraints are minimal and the external environment is

enabling through facilitation by a promotional agency,

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entrepreneurs are motivated to take risks and invest in

export-oriented enterprises.

According to Kenya National Bureau of Statistics, KNBS (2012),

while the value of Kenya’s total exports grew by 24.7 per cent

from Ksh 409.8 billion in 2010 to Ksh 511.0 billion in 2011,

the key exports remain the traditional commodities such as

tea, coffee, horticulture, and tobacco manufactures. The value

of imports grew by 38.9 per cent from Ksh 947.4 billion in

2010 to KSh 1.3 trillion in 2011 and comprising mainly of

petroleum, industrial machinery and road motor vehicles. This

means that Kenya’s trade balance worsened by 49.7 per cent in

2011 compared with 21.3 per cent in 2010.

The EPZA established the Export Business Accelerator (EBA)

facilitation programme in 2009 its efforts to incubate and

nurture local SMEs to be exporters and graduate them into

medium and large exporting enterprises through alleviation of

operational constraints. The EBA programme aims at encouraging

entrepreneurship and accelerating growth of operational SMEs

exporters that desire to set up under the EPZ programme. Among

the criteria for participation in the EBA programme are the

requirements that an SME must be a “new version of existing

business” and demonstrate business management and

entrepreneurial acumen. However, according to EPZA (2009), the

total local investor participation in the EPZ programme has

been low accounting for about 16 per cent of the enterprises

operating in the zones.

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The study by Okpara (2011) on factors that hinder the growth

and survival of small businesses in Nigeria stated that Sub-

Saharan Africa has been negated and therefore less researched

with respect to this topic. He used a survey method to gather

data from 211 small business owners and managers located in

selected cities in Nigeria.

The results of the study by Okpara (2011) reveal that the the

most common constraints hindering small business growth and

survival in Nigeria are lack of financial support, poor

management, corruption, lack of training and experience, poor

infrastructure, insufficient profits, and low demand for

product and services. The researcher acknowledged that there

were limitations to his study due to the instruments used that

needed to be subjected to more statistical tests in order to

establish a more robust validity and reliability. It is

important to appreciate the fact that the economic and

political situations of Nigeria and Kenya are not quite

similar and therefore the internal and exogenous factors could

vary significantly. Furthermore, the study by Okpara did not

have an emphasis on exports potential of SMEs.

Many thesis researches have been conducted by Osewe, J. O.

(2003); Lumbasi, J. A.(2003); Nyabicha, A. M(2003); and

Njogu, K. L. W(2006) that separately address either SMEs or

export processing zones. The emphasis of these studies has

been on the role of EPZs as a useful tool for employment

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creation and social equity rather than a programme to nurture

local entrepreneurship for greater export penetration and

competitiveness. Many of the studies analysed the challenges

posed by the conditions of work at the Export Processing Zone;

factors hindering growth of micro and small enterprises with

focus on micro-finance borrowers; and factors hindering the

growth of business support centres for SMEs in Kenya.

On one hand conclusions from the studies are that SMEs are

important for raising economic efficiency of a country owing

to their flexibility and low production costs and that they

are breeding grounds for entrepreneurship, innovations and

inventions and a reservoir for employment and hence must be

nurtured to grow the SMEs beyond survival level. On the other

hand conclusions are also drawn that those countries that wish

to develop through greater integration with the global economy

must pursue the EPZ programme. A comprehensive study that

integrates the SMEs and the EPZ programme focusing on their

export potential has not been done in those countries that

have implemented the EPZ programme, Kenya included.

2.2 The internal factors inhibiting entrepreneurship and

export business by SMEs

According to Blomstermo et al (2004) and Pinho and Martins

(2010), the main internal constraints are general lack of

knowledge and information on how to export, managerial

barriers, low financial resource base, lack of qualified

personnel, lack of productive capacity, fear of foreign

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competition. The researchers argue that internal barriers are

the controllable constraints emanating within the firms.

The improvement of human factors increases the survival rate

of SMEs in the sense that entering the knowledge-based economy

requires efficient, professional, knowledgeable, creative and

innovative, entrepreneur and motivated worker since human

resources are the distinguishing factor of successful and

sustainable companies.

Marketing improvement enhances survival of SMEs in the sense

that SMEs are generally started by motivated people who have

ambitions and perspectives. Such characteristics will increase

the probability of success if integrated with a complex

marketing orientation supported with knowledge and

information.

A theoretical framework provided by Kazemy et al (2011)

postulates that financial factors and survival of SMEs have

significant relationship such that the improvement of

financial systems and factors may positively affect survival

and performance of SMEs.

There is a gap in the literature on whether there are

identifiable characteristics of SMEs that could make it easy

or hard for them to control internal constraints that emanate

within the firms, especially existence of networks.

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2.3 The exogenous factors create barriers to export business

by SMEs

The exogenous barriers emanate outside the firms’ environment

and are due to activities of other agents such as governments,

competitors, customers and suppliers. They are often difficult

to predict and control (Leonidou, 2004).

The exogenous obstacles that hamper the participation of SMEs

in export markets cited by Suarez-Ortega (2003), Leonidou

(2004), Julian and Ahmed (2005), Okpara and Koumbiadis (2009)

and Senik et al (2010) include government bureaucracy and

regulatory barriers, stringent export procedures, inadequate

export assistance in terms of tax incentives and technical

assistance, customs regulations, and poor infrastructure, poor

economic environment, and corruption.

Within the Kenya’s export promotion programme under review, it

would appear the cited exogenous barriers are minimal given

the incentive packages that are in place. It would be

important to establish the extent and relevance of the

exogenous constraints and what else if any that is hampering

the full participation SMEs in export markets.

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2.4 The policy measures to enhance SMEs to become high growth

exporters

Many countries have identified exporting as a leading priority

for their indigenous firms and several of them have developed

export-oriented policies and strategies and extensive

assistance programs to encourage export expansion.

Kenya’s industrial policies have evolved through three

distinct policy orientations, including import substitution

that was embraced soon after independence in 1963, followed

thereafter by an export-led policy orientation that commenced

in the 1990s and has continued to receive emphasis in

successive economic blue prints to date (GoK, 2007). The main

objectives of the export-led industrial sector reform

programmes are to improve efficiency, and to stimulate private

investment to create jobs and increase the foreign exchange

earnings.

In line with Kenya Vision 2030 empowerment of small and medium

scale local investors to become full time exporters, is a

policy objective. The government is promoting value-addition

and processing through SMEs as a key strategy for achieving

national development goals. These include enhancement of

industrial and economic growth and export-orientation as a

means to reduce the high incidences of poverty and improve

balance of payments (GoK, 2007).

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CHAPTER 3RESEARCH METHODOLOGY

3.1 Background

The main of objective of Kenya’s EPZ programme, among other

export promotion schemes was to encourage investments that are

export-oriented. The variables and measurement in this study

were the export performance (dependent variable) and internal

and exogenous barriers to export (independent variables).

The study used perceptual measures of export barriers

identified from review of literature of export management

including by Suarez-Ortega (2003), Leonidou (2004), Julian and

Ahmed (2005) and Pinho and Martins (2010). Export performance

of enterprises can be conceptualized as the involvement of

enterprises in export activities.

In this study export performance was determined in terms of

the proportion of exports to total sales which was directly

related with maximization of a country’s exports (Dhanaraj and

Beamish, 2003). This approach was preferred in yielding

results because data related to exports to profit of firms

would not be easy to obtain (Marandu, 2008).

In order to establish the barriers, the Chief Executive

Officers of the respective enterprises were asked to rate, on

a five point Likert scale, the extent to which a given

perceived barrier had an effect on export activities. The

adequacy of intervention by the institutional framework was

checked . The factors or correlations influencing the uptake

Page | 19

of investment and export promotion incentives by SMEs has been

established (Saunders, et al., 2009).

The internal barriers are the constraints associated with

organizational resources, capabilities and company approach to

export business (Leonidou, 2004). The barriers analysed

comprised financing resources, technological resources,

knowledge and information access, production capacity,

managerial skills, technical skills, business planning skills,

development skills, marketing strategy, education levels, and

entrepreneurship skills.

Tesfom and Lutz (2006) and Senik et al (2010) define exogenous

barriers as those which are rooted in the external environment

and the firm itself has no control over their consequences.

Those analysed comprised physical infrastructure (cost of

electricity), taxation levels, work site, rental costs of

business premises, export documentation procedures, Non-Tariff

Barriers, corruption, competition, and policy and regulatory

framework.

The unit of analysis of this quantitative research was

undertaken through a descriptive survey study was the EPZ

enterprises and the target population was 47 enterprises based

at Athi River EPZ. A comprehensive and reliable database of

exporting enterprises that also includes SMEs owned by locals

is still lacking in the country. The Athi River EPZ was chosen

because of its high concentration of registered export-

Page | 20

oriented enterprises in manufacturing, commercial and services

sectors.

The Athi River public EPZ was relevant because of its large

size, ability to attract a wide diversity of enterprises, and

the available physical infrastructure and worksites. The

secondary data was obtained from the published directory of

enterprises by EPZA and a database of enterprise kept by the

EPZA. Some of the information available in the secondary data

were levels of education and other background information of

entrepreneurs’ personal data.

Primary data was obtained from the top management of

individual enterprises at the Athi River EPZ. EPZA also

assisted in the hand delivery distribution and collection of

the questionnaires.

The study targeted all the 47 enterprises based at Athi River

EPZ and data collected using structured questionnaire. The

validity and reliability of the questionnaire was tested by a

pilot survey. The data collected was be analyzed using the

Statistical Package for Social Science (SPSS). The data is

analysed and presented in bar charts, pie charts, histogram

and tables in chapter 4.

3.2 Research approach and design

This was a descriptive survey study aimed at establishing the

factors (correlations) influencing uptake of export

Page | 21

opportunities by Kenyan SMEs (in the natural environment of

the enterprises with minimal interference of the researcher).

The unit of analysis was enterprises and the target population

of the study was the Chief Executive Officers (CEOs) of the

enterprises. The method was preferred because it allowed for

collection of adequate data from sizeable population at

economical cost and also allowed for prudent comparison of the

data.

The research accorded the researcher the opportunity to

determine the relationship between the dependent and

independent variables. It was a cross-sectional study in

which data is gathered just once.

3.3 Population, sample size and sampling design

Kenya has total 110 enterprises situated at the 44 Export

Processing Zones (EPZs) spread throughout the country. The

majority of the EPZs are private single-factory enterprises.

The two public EPZs located at Athi River and Mombasa comprise

over 60 percent of the total enterprises. The Athi River EPZs

hosts 47 enterprises (43 percent) of the 110 enterprises.

The population of study consisted of all the 47 enterprises

located at the public Athi River EPZ. Since data could be

collected from the entire population, there was no need to

sample (Saunders, et al, 2009).

Page | 22

Targeting data collection on the entire population of

enterprises enabled a more representative sample of the entire

110 EPZ enterprises. The list of all enterprises was obtained

from EPZA.

3.4 Data collection methods

Both primary and secondary data was collected. Primary data

was collected through a structured questionnaire designed to

capture the research objectives and questions. The

questionnaire is presented as appendix 2 to this report. The

questionnaire was pre-tested prior to commencement of the full

scale survey.

Two research Assistants including key staff of the EPZA who

was familiar with the enterprises assisted in the data

collection and facilitation of interviews and follow-ups. The

questionnaire was administered by hand-delivery to the firms’

chief executives and picked on the agreed dates. Out of 47

enterprises, 34 of them fully completed and returned the

questionnaire. This is a response rate of 72 percent. Data

analysis and interpretation methods

The study will use the quantitative method of data analysis.

Data will be edited, coded, categorized and thereafter

analyzed using Statistical Package for Social Sciences (SPSS)

programme (Saunders et al., 2009). Descriptive and multiple

regressions will be used. The information will be displayed by

use of table, charts, graphs to give a clear picture of the

research findings.

Page | 23

Page | 24

CHAPTER 4RESEARCH FINDINGS AND DISCUSSIONS

Leonidou (2004) defined export barriers as the internal and

external constraints that dissuade firms from initiating and

or expanding export activities. The study focussed on Athi

River Export Processing Zones at two levels of barriers,

internal and external in relation to enterprises within the

export promotion programme.

In order to understand these barriers and the effectiveness of

the existing promotional incentives, the enterprises were

subjected to four questions as described below:

1. A question asked the enterprises to rate, on a five point

Likert scale how the perceived constraints (14 randomly

listed) affected their decision export with 5 being “very

great extent” and 1 “being very low extent”

2. Another question to establish the effectiveness of the

existing incentives (10 randomly listed) in attracting

investments for export asked the enterprises to rate, on a

five point Likert scale how the incentives influenced their

decisions to invest under the export programme with 5 being

“strongly agree” and 1 being “strongly disagree”.

3. An assessment of the Export Business Accelerator (EBA)

programme which the Export Processing Zones Authority came

Page | 25

up with in 2009 as an apparent remedy for SMEs to take up

export opportunities was undertaken through a question for

the participating enterprises. The three point Likert scale

asked enterprises to indicate their level of satisfaction

with the EBA incentives (7 randomly listed) with 3 being

“fully satisfied” and 1 being “least satisfied”.

4. SMEs participating in the EBA programme were also assessed

on their percenption on whether EBA progarmme was value for

money on a 5 point Likert scale with 5 being “strongly

agree” and 1 being “strongly disagree”

A total of 34 enterprises (12 SMEs and 22 large) submitted

fully completed questionnaire that have been analysed and

findings presented and discussed in this chapter.

4.1 Findings of objective 1:To establish the role played by the existing promotionalprogrammes in nurturing the entrepreneurship culture forexport business

There are a total of 110 enterprises in all the 44 export

processing zones (EPZs) in Kenya. Over 60 percent of

enterprises are situated in the two public EPZs in Athi River

and Mombasa. Out of 11o enterprises, Athi River EPZ hosts 47

enterprises (43 percent) (EPZA, 2012).

A total of 47 enterprises were surveyed, out of which 34

enterprises submitted the returns, a rate of 72 percent. Out

of the 34 enterprises, 27 of them (79 percent) were

manufacturing enterprises, 6 enterprises (17 percent) were

Page | 26

commercial enterprises and one enterprise was service sector.

These are illustrated in figure 2.

Figure 2: Sectoral distribution of enterprises in Athi RiverEPZ

79%

18%3%

Sectoral distribution of enterprise

Manufaturing Commercial Service

Analysis of the findings to ascertain the extent to which the

internal and external variables impact on the export

propensity show that exporting behaviour is differently

affected between the SMEs and large enterprises indicating

that the severity of each variable is size specific as shown

in figure 3, especially so on internal characteristics such as

access to finance, existence of business networks, market

information, marketing strategy, productive capacity, business

planning capacity and managerial resource capacity. On all

these variables, the mean scores are higher for SMEs meaning

that internal characteristics are important to SMEs than

exogenous factors as far as SMEs are concerned.

Figure 3: Comparison of Mean scores of the variables on SMEsand Large enterprises

Page | 27

Worksite/space

Cost of electricity

Government policy

Competition

Documentation procedures

Rental costs

Market information

Finance

Networking

Managerial human resource

Marketing strategy

Productive capacity

Business Planning skills

Business Development Services

1.00 2.00 3.00 4.00 5.00

Comparison of mean scores for Large and SMEs on barriers

Mean-LargeMean-SMEs

Very

low

ext

ent

- Ve

ry g

reat

ext

ent

Analysis of mean scores of internal versus external factors on

SMEs alone is presented in figure 4 and indicates that to some

significant extent, external factors impact more on SMEs in

quantum terms. The external factors are inadequate worksite,

stiff market competition, high cost of electricity, high

rental cost of premises, government policy and export

documentation procedures.

Figure 4: Internal versus external factors on SMEs

1.00 2.00 3.00 4.00 5.00 4.58 4.17 4.08

3.50 3.42 2.58

2.00

4.58 4.33 4.25 4.17 3.75 3.67 2.92

Mean score for the factors on SMEs

Very

low

ext

ent

- ve

ry

grea

t ex

tent

Page | 28

Figure 5 interpret the cross tabulation of the 34 enterprises

at the Athi River EPZ, out of which 12 enterprises (35

percent) are owned by Kenyans while 22 (65 percent) are owned

by foreigners. Of the Kenyan owned enterprises, the Small and

Medium Enterprises (SMEs) are 10 (29 percent) and large are 2

enterprises (6 per cent).

Figure 5: Proportion of enterprises by size at the Athi RiverEPZ

29%

6%6%

59%

Proportion of Enterprises at Athi River EPZ

Kenyan-owned SMEs

Foreign-owned SMEs

Kenyan-owned Large Enterprises

Foreign -owned Large Enterprises

Out of the 10 SMEs owned by Kenyans, 9 (90 percent) of them

are in manufacturing sector engaged in textile and garments,

horticulture processing, alcoholic beverages, commercial

crafts and agro-inputs. The nine enterprises that are also

participants into the Export Business Accelerator (EBA)

programme which was initiated by the Export Promotion Zones

Authority (EPZA) in year 2009.

Page | 29

The inference from the above analysis is that the export

promotion programmes which commenced in earnest in 1990 with

the enactment of the Export Promotion Act and the

establishment of EPZA has not been effective in nurturing the

entrepreneurship culture for export business by SMEs going by

the numbers and the age of existing SMEs.

The EBA programme which commenced in 2009 has succeeded in

attracting 9 enterprises that are being nurtured by EPZA for

export market through alleviation of operational exogenous and

internal constraints. However, the SMEs have expressed similar

perceptions in their level of satisfaction with certain

aspects of the EBA programme.

The extent to which the enterprises are influenced by existing

policy incentives to locate at the EPZ is presented in figure

4 which indicate that on average, the SMEs are strongly agreed

they are influenced by presence of industrial buildings (work

sites), opportunities for networks, marketing support, export

logistics and tax incentives. This preference is followed by

business support and finance facilitation.

Figure 6: Incentives that influence decisions to locate to EPZ

Page | 30

-

1.00

2.00

3.00

4.00

5.00 Extent the incentives influence decisions to locate at EPZ SMEs Large

Leve

l of

pos

itiv

e in

flue

nce

In the list of preference of possible positive influence under

the export programme, SMEs compares well with the large

enterprises in worksite, export logistics and tax incentives.

The large enterprises de-emphasize availability of networks.

On the overall, SMEs are strongly agreed that the Export

Business Accelerator (EBA) programme is good value for money.

As shown in figure Majority (over 90 percent) are fully

satisfied with work space and export facilitation by Export

Processing Zones Authority (EPZA). However, about 80 percent

and 90 percent are least satisfied with rental cost and

application and service fees respectively. The large number

(almost 80 percent) that are moderately satisfied with

selection criteria, business development services and credit

facilitation cannot be ignored.

Page | 31

Figure 7: SMEs level of satisfaction with the EBA programme

Selection Criteria

Work space

Export facilitation

Rental cost

BDS

Credit facilitation

Service fees

0%

20%

40%

60%

80%

100% 22 - -

78

- 22

89

SMEs level of satisfaction with EBA

Least satisfiedModerately satisfied Fully satisfied

4.2 Findings of objective 2:To determine the firm characteristics (internal factors)inhibiting entrepreneurship and export business by SMEs

The internal factors analysed comprised market information,

financial resources, managerial resources, marketing strategy,

business planning capacity, productive capacity, and

networking arrangements. The findings are illustrated in the

table 1 and 2 and figure 6 and which reports descriptive

statistics.

Page | 32

Table 1: Mean scores for internal and external factors(confidence level 95%, N=34)

Variable

Mean1.= Very low extent2.= Low extent3.= Moderateextent4.= Greatextent5. =Very great extent SD

Kurtosis

Skewness

1 Inadequate worksite/space 4.71

0.46 -1.18 -0.95

2 High cost of electricity 4.53 0.96 2.47 -1.94

3 Stiff competition in the markets 4.26

0.86 -1.44 -0.56

4 Weak government policy for export 4.12 0.69 -0.76 -0.15

5 Complex export documentation procedures 4.00 0.89 0.34 -0.83

6 High rental costs of business premises 3.91 0.79 0.45 -0.61

7 Lack of market information 3.76 0.85 -0.61 -0.13

8 High cost of finance 3.76 0.89 -1.22 0.22 9 Lack of networking

opportunities 3.29 1.31 -1.16 -0.16 10

Lack of marketing strategy 2.41 1.31 0.01 0.99

11 Low productive capacity 2.09

1.26 - 1.25 0.69

1 Insufficient managerial 1.94 0.60 0.01 0.02

Page | 33

2 human resource capacity13

Lack of Business Development Services support 1.71 1.19 -0.12 1.29

14

Lack of Business Planning skills 1.65 1.01 -0.21 1.16

Analysis of the constraints on the whole population as

presented in table 1 indicate that enterprises, irrespective

of size perceive inadequate worksite, high cost of

electricity, stiff competition in the export market, weak

government policy framework, complex export documentation

procedures and high rental cost of business premises as the

most constraining top six factors in that order. These six

factors apparently are external to the enterprises and

seemingly reflect the ranking of the large enterprises which

constituted 65 percent of the sample.

The table 2 present an analysis of the SMEs separately and it

reveals a marked difference in their ranking of the

constraints.

Table 2: Mean ranking of internal barriers to the SMEs exportbehaviour (p=0.05, N=12)

Rank

Perceived constraint

Mean:1.= Very low extent2.= Low extent3.= Moderateextent4.= Great extent5. =Very great

Standard Deviation

Skewness

Kurtosis

Page | 34

extent

1 Finance 4.58

0.79 -1.64 1.132

Networks 4.17

1.40 -1.53

1.18 3 Market

information 4.08

1.16 -1.02 -0.32 4 Marketing

strategy 3.50

1.45 -0.22 -1.34 5 Productive

capacity 3.42

1.16 -1.83

1.90 6 Business

planning 2.58

1.08 -0.51 -0.92 7 Managerial

capacity 2.00 0.60 - 0.73

As shown in figure 6, the three internal factors that affect

the SMEs to a very large extent are financial resources,

networking arrangements and market information. Marketing

strategy and productive capacity affect the SMEs to a great

extent. These factors are discussed hereunder:

Figure 8: Effect of internal factors on SMEs and large enterprisesexport behaviour

Finances

Networks

Market info

Market strat

Productive...

Business plan

Managerial

- 1.00 2.00 3.00 4.00 5.00

Internal factors

SMEsLarge

Very

lo

w to

Ver

y gr

eat

exte

nt

Page | 35

As shown in figure 8, financial resources emerged tops in the

category of internal constraints. It can be deduced that

availability of financial resources is a significant variable

that severely affects SMES since they often have limited funds

for working capital. Naturally, an enterprise with limited

financial resources is less likely to be competitive in export

market since exporting activity requires enterprises to have

ability to offer credit sales possibly longer than domestic

trade, and also meet cost of insurance, among others.

Lack of market information and networks is a critical internal

constraint and a very critical one for SMEs since many of them

generally depend on small number of suppliers and buyers which

often limit their productive capacity and ultimately

negatively influence their economies of scale. The large

exporters, on the other hand, have a marketing strategy that

maximizes economies of scale and hence seek to pursue

competitiveness through price, quality and speed of delivery

which they often get from a large pool of suppliers and

buyers. This explains why marketing strategy is an important

constraint for SMEs as compared to large enterprises as shown

in figure 3.

With relevant market information and network enterprises can

formulate competitive marketing strategies that can help

circumvent market risks. The significance of market

information as a major constraint makes sense, particularly

Page | 36

for SMEs because their communication infrastructure is not yet

fully developed.

A study by Leonidou (2004) found out that the lack of export

market knowledge and information tend to have very high impact

on export activities of enterprises. Market development should

therefore be a strategic intervention role of the government

export promotion agencies, such as EPZA.

4.3 Findings of objective 3:

To determine exogenous factors create barriers to export

business by SMEs

The external factors analysed comprised cost of electricity,

adequacy of work sites, policy environment, market

competition, export documentation, business development

services and rental costs of worksites. The findings are

illustrated in table 3 and figure 9:

Table 3: Mean ranking of external barriers on SMEs (p = 0.05, N=12)

Rank

Perceived constraint

Mean:1.= Very low extent2.= Low extent3.= Moderateextent4.= Great extent5. =Very greatextent

Standard Deviation

Skewness

Kurtosis

1 Work site 4.58 0.51 -0.39 -2.262 Competition 4.33 0.89 -0.80 -1.273 Electricity cost 4.25 1.22 -1.30 0.03

Page | 37

4 Rent of premises 4.17 1.11 -1.33 0.765 Policy 3.75 0.45 -1.33 -0.336 Export

documentation 3.67 0.89 -1.07 0.767 Business

Development Services 2.92 1.31 -0.69 -1.40

The perceived lack of worksite, stiff export market

competition, high cost of electricity and high cost of rent

emerged in that order as the major external constraints with a

great extent on export behaviour. The other factors, except

Business Development Services (BDS), are equally perceived to

have moderate constraint on export behaviour. The Economic

Survey (KNBS, 2012) indicates that high cost of electricity

and its unreliability remain a burden to firms’

competitiveness in general.

Regarding the external factors, except for the BDS, the

perceived lack of worksite, stiff export market competition,

high cost of electricity and high cost of rent emerged

important for both SMEs and large enterprises as shown in

figure 9. The large enterprises, probably because of energy-

intensity due to big sized equipment and machinery, perceive

electricity variable to have a big impact in their propensity

to export. The argument follows for worksite where the large

enterprises require more work space, but can afford the rent

as compared with SMEs.

Page | 38

Figure 9: Effect of external factors on SMEs and large enterprises

1.00

2.00

3.00

4.00

5.00

External factors

SMEsLarge

Very low extent to very great extent

4.4 Findings of objective 4:To identify policy measures to enhance SMEs to become high

growth exporters

The policy measures to enhance SMEs performance should be able

to ameliorate the perceived internal and external constraints.

The internal factors with perceived great extent as

constraints are lack of access to finance, weak networks

arrangement with the market and weak market information and

knowledge. The external factors with perceived great extent as

constraints are access to worksite, stiff export market

Page | 39

competition, high cost of electricity cost, and high rent on

business premises.

The major policy stance of the export-led growth, particularly

the export processing zones programme is job creation. A major

policy shift is required in the definition of SMEs to delink

enterprises size with amount of jobs created. The current

static definition based on the number of employees does not

take cognizance of the evolution of high technology and

capital intensive economic sectors driven by information,

communication and technology (ICT). World over, the size of

the shop floor is shrinking and direct jobs as well, yet

indirect and diversified jobs are gaining prominence.

Another policy issue to consider is the current homogeneity of

incentive packages in spite of the diversity of sectors with

export opportunities and potential covering manufacturing,

commercial and services. This implies that export behaviour is

constrained and felt disproportionately not only by different

sectors but also at different size levels. The level of

dissatisfaction of the participating SMEs at the Export

Business Accelerator programme is a pointer to a policy review

in terms of selection criteria, rentals costs of premises,

application fees, and credit facilitation role of the agency.

The other specific policy measures for the identified

constraints are following.

Page | 40

Policy measures on internal constraints

Lack of access to export finance

Kenyan financial sector is quite diversified and also

versatile a result of intense reforms in the sector. The

findings, however, established that access to finance remains

a major internal constraint hampering uptake of export

opportunities. Perhaps, a government policy shift towards the

establishment of import/export bank and credit guarantee

schemes could be considered alongside on-going financial

sector reforms. These proposed public sector gesture will

create confidence in the private sector to avail export credit

to SMEs.

Weak market information and networks

In order to be competitive, exporters must acquaint themselves

with current information on market dynamics. Gathering market

intelligence information on all export market is expensive for

an enterprise. It is a major role of government to provide

such information to its enterprises.

The government agencies responsive for market information such

as Export Processing Zones Authority (EPZA) and Export

promotion Council (EPC) need some level of autonomy to

leverage their funding and build adequate capacity for

efficiency to provide requisite export services. Strong export

promotion agencies will build internal capacity of enterprises

through participation in international trade fair thereby

enabling firms to network socially and accumulate market

Page | 41

knowledge. Concerted efforts are need to enhance Electronic

commerce (e-commerce) within the private to push export from

SMEs to a higher level.

Policy measures on external constraints

Access to worksite and high rent on business premises

A well funded EPZA will be able provide adequate worksite

throughout the 47 Kenyan counties for promoting SMEs to become

exporters. With adequate government funding, the agency will

be able to lower the levels of application and user fees. The

private sector should be encouraged to develop large-capacity

zones under Private-Public sector Partnership (PPPs) to

encourage clustering of enterprises.

Page | 42

CHAPTER 5CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of findings

The study establishes that both internal and external factors

play a role in hampering the uptake of export opportunities by

Small and Medium Enterprises (SMEs). The export promotional

programmes put in place from 1990 have not succeeded in

nurturing entrepreneurship culture for export given the number

of SMEs participating.

The new initiative, Export Business Accelerator Programme by

the Export Processing Zones Authority which commenced in 2009

targeting SMEs is a good attempt. However, certain external

barriers that remain major concerns as shown in figure 7 are

high rental costs, poor business development services and high

fees. Moreover, the SMEs indicates that factors that

influenced their decision to participate in export promotion

programme as shown in figure 6 include adequate and affordable

work space, networks arrangements, marketing support,

facilitation of export logistics, and tax incentives, among

others.

The external factors examined include inadequate work sites,

high cost of electricity, weak government policy framework,

stiff competition in the market, complex export documentation

Page | 43

procedures, high rental costs of business premises, and lack

of business development services support.

The study confirms the first proposition that the external

factors analyzed are important for SMEs participation in

export business. While efforts have been made to build SMEs

internal capacity through the Export Business Accelerator

Programme by the Export Processing Zones Authority, more

concerted efforts are needed to address the external

constraints such as stiff competition in the market, high cost

of electricity, and high cost of rental premises, amongst

others. This confirms the fourth proposition that exogenous

factors are important and lower export behavior.

The internal factors examined include lack of financial

resources, weak business networks, lack of market information,

weak marketing strategy, low productive capacity, lack

business planning skills, and insufficient managerial human

resource. The study confirms the second proposition that the

internal factors analyzed are important for SMEs participation

in export business.

The study concludes that the SMEs and large enterprises are

affected differently, in terms of magnitude, by the internal

and external factors with SMEs generally more exposed to both

challenges than large enterprises. Between the internal and

external factors, SMEs are more vulnerable to the external

factors as indicated by the mean scores. Thus, the study

concludes that perception of SMEs on external factors is not

Page | 44

dissimilar, thereby confirming the third proposition that SMEs

hold similar perceptions on exogenous factors.

The research also finds out that lack of financial resources

which is an internal factor is an important factor that

affects the SMEs performance. This is understood from the fact

that financial resources are determinant in entry, growth and

sustainability and since SMEs are likely to have small capital

base, their fears become real and can be expressed very

strongly.

Limitation/delimitations

Firstly, there is the presumption that export-oriented

enterprises that were targeted have mastered the

technicalities of exporting and learnt to cope with perceived

barriers better than non-exporters. The small number of SMEs,

the narrow product range they are involved and the few years

in export business poses challenges the generalization of

barriers across all SMEs for Kenya,

Secondly, no analysis was undertaken on the market destination

of various products vis-a-vis the established export barriers.

With globalization and economic integration, different markets

have different characteristics with some market-specific

requirements that may pose non-tariff barriers;

Finally, the design and the small sample size poses challenge

of cause-effect interpretation.

Page | 45

A longitudinal study with a more representative sample could

solve the limitations.

5.2 Conclusions on of findings

The research established that many factors contribute to the

low uptake of export opportunities by SMEs. The constraints

are both internal and exogenous to the enterprises.

The export promotional programmes have played some role but

not fully exploited the potential for entrepreneurship culture

inherent in SMEs to enable them play their rightful roles in

export earnings and job creation.

The firms’ characteristics and internal factors such as lack

of financial resources, weak business networks, lack of market

information, weak marketing strategy, low productive capacity,

lack business planning skills, and insufficient managerial

human resource contribute to the low uptake of export

opportunities.

The external constraints such stiff competition in the market,

high cost of electricity, and high cost of rental premises,

amongst others.

5.3 Recommendations on conclusions

Page | 46

The export promotional programmes have played some role but

not fully exploited the potential for entrepreneurship culture

inherent in SMEs to enable them play their rightful roles in

export earnings and job creation. A new approach is also

needed in the elimination of external constraints,

particularly incentive packages that are cross-cutting and to

avoid one-size-fits-all approach. The research established

that the needs of SMEs and large are not exactly similar and

need specific interventions.

The firms’ characteristics and internal factors such as lack

of financial resources, weak business networks, lack of market

information, weak marketing strategy, low productive capacity,

lack business planning skills, and insufficient managerial

human resource could be addressed through EBA programme. It is

recommended that the weak areas of EBA highlighted in this

report be addressed.

There is need to mount a major policy shift to design a

dynamic definition of SMEs that takes cognizance of dynamism

in the structure of the economy and to delink the amount of

jobs created enterprises size. This will enable more pro-

active interventions by agencies such as Export Processing

Zones Authority (the institutional framework) to eliminate or

reduce the external constraints. The agency needs enhanced

funding to gather market intelligence information and

disseminate to enterprise. The policy shift should also

address access to finance. Towards this end establishment of

Page | 47

import/export bank and credit guarantee schemes are

recommended.

Area of further research:

The findings of the study are not conclusive without a

comparative analysis of the exporters and non-exporters to

establish whether there is a significant difference in the

perceptions of export barriers. In addition, examination of

perception of export barriers within specific market contexts

is imperative.

Page | 48

REFERENCES

Ahmad, Z. U., and Craig C. J. 2006. “Firm Internationalisationand Export Incentives from a Middle Eastern Perspective.” Journal of Small Business and enterprises development, 13 (4), 660-69.

Ajayi, S.I. 2007. “The determinants of Foreign Direct Investment: A survey of the evidence” in Ajayi S.I (eds) Foreign Direct Investment in Sub-Saharan Africa: Origins, targets, impact and potential. Africa Economic Research Consortium.

Blomstermo, A., Eriksson, K., and Sharma, D. 2004. Domestic activity and knowledge development in the internalization process of firms. Journal of International Entrepreneurship, 2: 239-258

Dhanaraj, C and Beamish, P.W. 2003. A resource-based approach to the study of export performance. Journal of Small Business Management, 41(3), 242-261

Export Processing Zones Authority (EPZA). 2009. Strategic Plan 2009-2013.

Faeth, I. 2009. Determinants of Foreign Direct Investment- a tale of nine theoretical models. Journal of Economic Surveys, 23(1), 165-196

Government of the Republic of Kenya (GOK). 2007. Kenya Vision 2030. Government Printing Press Nairobi

Government of Kenya (GoK). 2005. Sessional Paper No.2 of 2005 onDevelopment of Micro and Small Enterprises for Wealth and Employment Creationfor Poverty Reduction. Government Printer, Nairobi.

Inegbenebor, A.U. 2006. Financing small and medium enterprisesin Nigeria: Case study of the Small and Medium Industries.Journal of Financial Management and Analysis, 19(1), 71-80

Julian, C.C., and Ahmed, Z.U.2005. The impacts of barriers to export onexport marketing performance. Journal of Global Marketing, 19(1), 71-79.

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Kazemy, M., Yoghoubi, N.M., Ghods, F., Saghafi, H. 2011.Evaluating the Effective Factors on Survival of SMEs:CaseStudy of Iran. American Journal of Scientific Research, 30 (2011), 141-150

Kenya Investment Authority, KenInvest. 2008. Annual Report 2006-2007

Kenya National Bureau of Statistics (KNBS). 2012. Kenya EconomicSurvey

Leonidou, L.C. 2004. An analysis of barriers hindering smallbusiness export development. Journal of Small Business Management,42(3), 279-302.

Lumbasi, J. A.. 2003. New industrial spaces in Kenya: a case study of export processing zones in Nairobi and Athi River. Master of Arts (MA) thesis. University of Nairobi, Kenya.

Marandu, E.E. 2008. Strategy factors associated with theexport performance of manufacturing firms. Journal of Business inDeveloping Nations, 11 (2008-2009?), 33-76

Nyabicha, A. M. 2003. A research project on the factors hindering growth ofmicro and small enterprises: a case of micro finance borrowers in Kisumu city.Master of Business Administration (MBA) thesis. KenyattaUniversity, Kenya.

Okpara, J.O. 2011. Factors constraining the growth andsurvival of SMEs in Nigeria. Management Research Review, 34(2), 156-171

Osewe, J. O. 2003. The application of global marketing concepts: a case ofexport processing zones in Kenya). Master of Business Administration(MBA) thesis. Kenyatta University, Kenya.

Pinho, C. J., and Martins, L. 2010. Exporting barriers: insights fromPortuguese small-and medium-sized exporters and non-exporters. Journal ofInternational Entrepreneurship, 8(2010), 254-272.

Saunders, M., Lewis, P., and Thornhill, A. 2009. Research Methods for Business Students, 4th Edn. FT Prentice Hall.

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Senik, Z.C., Isa, R.M., Scott-Ladd, B., and Entrekin L. 2010. Influential Factors for SME Internationalization: Evidence from Malaysia. International Journal of Economics and Management, 42(2), 285-304.

Suarez-Ortega, S. 2003. Export Barriers: Insights from small and medium-sized firms International Small Business Journal, 21(4), 403-419.

Tesform, G and Lutz, C. 2006. A classification of export marketing problems of small and medium sized manufacturing firms in developing countries. International Journal of Emerging Markets, 1(3), 262-281.

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APPENDICES

Appendix 1: Introduction Letter

The Managing Director,Export Processing Zone Authority (EPZA),P.O. Box 50563- 00200NAIROBI 9th July, 2012

RE: REQUEST FOR INFORMATION ACCESS ON THE RESEARCH PROJECT ON“FACTORS CONTRIBUTING TO THE LOW UPTAKE OF EXPORTOPPORTUNITIES BY SMALL AND MEDIUM ENTERPRISES IN KENYA: FOCUSON EXPORT PROCESSING ZONES”

I am a Kenyan pursuing a Masters of Business Administration

(MBA) program at the Eastern and Southern African Management

Institute (ESAMI) at Arusha, Tanzania and currently working

with the Ministry of Industrialization, Kenya. I would like to

conduct the research project as a part fulfilment for the

requirement of the award of the MBA degree.

I kindly seek your permission to conduct the research at Athi

River Export Processing Zone (EPZ) by administering a

structured questionnaire and follow-up interviews with the

Chief Executives of the export-oriented enterprises at the

Athi River EPZ. The research findings will contribute to a

body of knowledge for public policy and academic interests.

The raw information will be held in strict confidence and the

respondents will remain anonymous and not accessible to any

third party. The MBA Thesis will be a public document.

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Your assistance will be highly appreciated. Attached for your

perusal, please find the questionnaire for capturing the data.

Yours faithfully,

Hezekiah Bunde Okeyo

MBA Student, ESAMI

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Appendix 2: Questionnaire

This questionnaire is in three parts. Kindly answer thefollowing questions by ticking in the appropriate box orfilling the spaces provided. Your valued response will be heldin strict confidence and you will remain anonymous to anythird party.

PART ONE: GENERAL COMPANY INFORMATION

1. Name and designation of respondent:-………………………………………………..…..

2. Name of the Company:-………………………………………………………………..…

3. Address of the company:-…………………………………….……….…………………..

4. Telephone number:-…………………………………………..….………………….……

5. E-mail:-…………………………………..……………………………...…………….…..

6. Ownership by nationality (%):- Kenyan [ ]

Non-Kenyan [ ]

7. Sector of business:- Manufacturing [ ] Commercial [

] Services [ ]

8. Products (e.g. Garments, etc):-………………….………..….…………..……………..

…

9. Size by number of employees:- 1-100 [ ] over 100 [

]

PART TWO: HISTORICAL PERSPECTIVE

10. Years in operation in export business under EPZ

programme?

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1-2 yrs [ ] 3-4 yrs [ ] 5-10 yrs [ ]

over 10yrs [ ]

11. Prior to operating in the EPZ programme had you

managed any enterprise?

[ ] Yes[ ] No

12. If YES, was the enterprise involved in any export business before joining EPZ? [ ] Yes[ ] No

13. To what extent do you perceive the following factors as constraints to export performance? (Tick each of the 21 factors once)

S/No.

Factor Verylow extent

Low extent

Moderate extent

Great extent

Verygreat extent

1) Lack of market information

2) High cost of finance 3) Insufficient

managerial human resource capacity

4) Lack of marketing strategy

5) Lack of Business Planning skills

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6) Low productive capacity

7) Lack of networking opportunities

8) High cost of electricity

9) Inadequate worksite/space

10) Weak government policy for export

11) Stiff competition in the markets

12) Complex export documentation procedures

13) Lack of Business Development Services support

14) High rental costs of business premises

PART THREE: CURRENT PERSPECTIVE

14. The export incentives provided by the Kenya Government are adequate (tick one)

Strongly disagree

Disagree Neither agree/disagree

Agree Strongly agree

15. Are you participating in the EPZ Export Business Accelerator (EBA) programme? [ ] Yes[ ] No

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16. To what extent do you agree that the incentives below influenced your decision to invest under the EPZ programme? (Tick each of the 10 factors once)

S/No.

Incentives Strongly disagree

Disagree

Neither agree/disagree

Agree Strongly agree

1) Availability of industrial buildings

2) Availability of Business networking opportunities

3) Availability of Marketing support services

4) Technology selection and application support

5) Business planning, strategy & management support

6) Facilitation of export logistics

7) Access to finance

8) Incentives on Tax and importduty

9) Sufficient

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human managerial resource capacity

10) Sufficient human technical skills resource capacity

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17. Indicate your level of satisfaction with the following provided undertaken within the EPZ Export Business Accelerator programme? (Tick each of the 7 factors once)

S/No.

Factor Not applicable

Least satisfied

Moderately satisfied

Fully satisfied

1) Selection criteria to participate in the EPZ Export Business Accelerator

2) Adequate businesspremises including work space and office space

3) Adequate export market information, facilitation and networks

4) Rental costs of premises

5) Provision of business development support services

6) Credit facilitation

7) Fees (application, licence, etc)

18. The EPZ/EBA programme is good value for money (tick one)

Strongly disagree

Disagree

Neither agree/disagree

Agree Strongly agree

Not applicable

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THANK YOU FOR YOUR COOPERATION

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