Factors Affecting Growth of SMEs in Gatundu Region North Sub-county

Research Paper (undergraduate) 2012 13 Pages

Economics - Micro-economics


Table of Contents



Literature Review


Findings and Discussion




About 99% of all the enterprises in the world are small or medium enterprises characterized of start up firms at the infant stage or well established SMEs. SMEs are essential in all economies especially to the developing countries characterized by major unemployment and income distribution challenges. In Kenya, SMEs are essential to the economy for which they are considered the main drivers. There are about 7.5 million SMEs in Kenya providing employment and income generating opportunities to low income sectors of the economy. The official policy framework of SMEs in Kenya is contained in the Sessional Paper No 2 of 2005: Development of Micro and Small Enterprises for Wealth and Employment Creation for Poverty Reduction. The policy forms the basis for enacting the SME Act which institutionalizes SME policy in Kenya (Syekei & Opijah, 2012). The contribution of the SMEs sector to the Gross Domestic Product (GDP) in Kenya increased from 13.8 percent in 1993 to about 40 percent by 2008. The sector further provides approximately 80% of the total employment and contributes about 92% of the new jobs created within the economy. The sector serves as the bedrock for industrializing the country in the future (Capital Markets Authority, 2010).

In the developing countries such as Kenya, with large informal or micro enterprise sectors, SMEs constitute the middle of the size range, hence their strategic importance. SMEs are considerably more complicated in terms of the organizational structure as opposed to microenterprises but less complicated as opposed to large corporations with layers of management and high division of labor among other characteristics. In terms of technology SMEs are intermediate between high labor intensive technologies and high capital intensive technologies providing SMEs with a special role in generation of adequate or decent employment (Palma, 2005). Due to these characteristics various constraints lower SMEs resilience to risk and prevent them from growing and attaining economies of scale. The challenges faced by SMEs in Kenya are not limited to the areas of financing investments and working capital but also include human resource development, market access and access to modern technology and information. Consequently, there are various factors that have supported SMEs growth since the 1990s (Capital Markets Authority, 2010).

In this view, this research study seeks to identify the factors affecting the growth of SMEs in the Gatundu North Sub-county. To this end, the study will establish the factors that contribute to the growth and the factors that inhibit the SMEs growth within the region. The following objectives will guide the achievement of this end: Establish the factors facilitating SMEs growth; unearth the factors inhibiting SMEs growth; and draw conclusions from the study findings. Apart from setting pace for future researchers who will be exploring SMEs growth the study may be of immediate benefit to individuals currently managing SMEs.

Literature Review

This chapter presents a review of existing literature on the factors inhibiting and facilitating the growth of SMEs. According to Capital Markets Authority (CMU) (2010), Kenyan SMEs lack access to financing though most SMEs tend to be located in urban and peri-urban areas and are usually registered. SMEs usually rely on the banking sector and other financial intermediaries for financial instruments for financing working capital and providing short-term liquidity management. The financial instruments are not always forthcoming in the required amounts as banks evaluate SMEs on the basis of a checklist made of audited financial statement, project proposals, financial projection, monitoring costs, credit or default risk and enforcement costs. Carrier (1999) argues that SMEs are considered a high risk activity that generates transaction costs and low returns on investment by many financial providers. Where provided, the financial products fail to meet the expectations of SMEs thus frustrating the SMEs efforts of achieving the set business efforts. Carrier (1999) argues that improving access to finance small and medium enterprises is crucial in fostering entreprenuership, competition, innovation and growth in Kenya.

Longenecker et al. (2006) attributes the failure of SMEs to poor or lack of planning, improper financing and poor management. This challenge is compounded by lack of education or vocational training in most of the SMEs managers. Lack of training creates possibilities of simple management mistakes which considerably lead to enterprise failure (Bowen, Morara & Mureithi, 2009). Managerial competencies are very significant to the continued existence and enlargement of new SMEs. Lack of education and training concentrates management aptitude in new firms leading to low level entrepreneurial formation and high collapse rates of new business enterprises (Olawale, 2010). Management at the SME level is characterized by development of own management approaches which are based on intuition and opportunistic rather than analytical and strategic. This creates problems especially in occasions which demand complex decisions. Poor managerial ability further results in poor change management and consequent failure. Competition is a major challenge to SMEs as most small enterprises congregate in dense markets and overcrowded cities. Competition as a challenge is further compounded by lack of market information and innovation leading to duplication of already existing businesses. SMEs have also to contend with globalization which presents challenges such as increased competition and opportunities (Bowen, Morara & Mureithi, 2009). Lack of or poor employee motivation affects employee performance resulting in low productivity. Due to low motivation levels, employees divert their energy into features not related to an organization’s work such as individual conversation, internet surfing and captivating longer lunches which cost SMEs time and money. William (2012) argues that concentrated efficiency is harmful to an organization’s recital and future achievement or growth.



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factors affecting growth smes gatundu region north sub-county




Title: Factors Affecting Growth of SMEs in Gatundu Region North Sub-county