Why SMEs should scale-up

August 22, 2017
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Invest in Africa and Strathmore Business School released the findings of a study which highlighted inability for SMEs to scale up as another major barrier that has seen 70 percent failure rate of SMEs/CFM BUSINESS

, Twenty years ago, a majority of workers were employed in governments and corporate organizations. This trend is fast changing with a majority of employees working in small and medium sized enterprises (SMEs).

Last year, a study conducted by the World Bank Group indicated that in the next 15 years, 600 million jobs will be required to absorb a growing global workforce. Currently, a large number of formal jobs in emerging markets are in SMEs, which create 4 out of every 5 new positions.

Another study by a global financial institution suggests that there are between 365-445 million micro small and medium enterprises in emerging markets. Out of these, 25-30 million are formal SMEs, 55-70 million formal micro enterprises while 285-345 million are informal enterprises. The Kenya National Bureau of Statistics indicates that there are more than 17 million SMEs registered in Kenya. 98% of them contribute about 25% of the country’s GDP and employing up to 50% of Kenya’s workforce.

The Kenya National Bureau of Statistics indicates that there are more than 17 million SMEs registered in Kenya. 98% of them contribute about 25 percent of the country’s GDP and employing up to 50 percent of Kenya’s workforce.

If these developments are anything to go by, there is need for concerted efforts in moving informal SMEs into the formal sector. World Bank supports this move, with the study illuminating the advantages it holds for the SMEs.

The benefits include; better access to credit and government services, higher tax revenues and better regulation.  The study also indicates that “….. improving SMEs access to finance and finding solutions to unlock sources of capital is crucial to enable this potentially dynamic sector to grow and provide the needed jobs.”

Employee incentives promote innovation

Innovativeness has also been linked to the growth of SMEs in the country. In yet another study-The Provision of Incentives for Innovative Employee three lecturers at the Jomo Kenyatta University of Agriculture and Technology (JKUAT) established that incentives for innovative employees greatly influence the growth of SMEs.

Entrepreneurs’ who support employees’ innovation through material rewards such as bonuses and pay increases encourage innovation. In addition, the number of patents within the enterprise to a large extent influences the growth of SMEs.

They also established that recognition of employees is an important element in building a sustained and thriving innovation in the enterprise. This, they argued, was a requirement for SMEs growth where compensation is pegged on employees’ creativity associated with emergence of new markets and new products.

There is need for SMEs to scale up

On the other hand, even as the World Bank highlights the benefits of scaling up the SMEs from one level to the next, research conducted in Kenya shows that the SMEs face immense challenges even as they make attempts to grow.

In June 2016, Invest in Africa and Strathmore Business School released the findings of a study which highlighted inability for SMEs to scale up as another major barrier that has seen 70 percent failure rate of SMEs within the first three years of existence. Invest in Africa works in partnership with both private and public sector companies to identify and tackle challenges of doing business in Africa, thus delivering more impactful and cost-efficient solutions.

An article published in the April-September 2015 Edition of the International Journal of Management and Commerce Innovations highlights the Effects of Funding Source on Growth of Small and Medium Enterprises in Kenya: A Case Study of Juja Town, Kiambu County. For starters, Koech D. J et

For starters, Koech D. indicates that access to funding is an important element in the growth of any SME. Unfortunately, most SMEs are faced with many challenges in accessing funding. According to the study, most SMEs rate access to funding as a major constraint.

In Kakamega County it emerged that there was a weak marginal association between financial factors and growth of SMEs. Another University of Nairobi report proposed that there be in place checks on the financial factors as this could lead to growth of SMEs, for example reduction of interest rates by both commercial banks and micro financial institutions.

The above studies and viewpoints call for multi-faceted and deliberate efforts geared towards growing the small and medium enterprises. This is at the heart of Invest in Africa’s undertakings.

 By Wangechi Muriuki, Chief Operations Officer, Invest in Africa – Kenya

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