Our small and medium enterprises (SMEs or jua kali employing one to 50 employees) sector is responsible for more than 80 per cent of Kenya’s workforce.
Although it is well acknowledged as the engine of growth, it is stuck in the mud and devoid of creativity and innovation.
It is not by choice that this important sector is trapped by lack of public investments even as unemployment continues to hurt the economy.
It is because we are apathetic to our own creations. Linking innovation to this sector may lead to greater employment and wealth creation.
Most enterprises in Kenya are very small. More than 90 per cent employ less than ten employees.
The sector is characterized by poor infrastructure, lack of financial resources, poor production capacity, low levels of health and safety standards, low awareness of environmental issues, lack of information that is essential for technology transfer, and dependence on large industries for the supply of raw materials, products, and technology.
CHEAP CHINESE KARAIS
A 1995 Unep Round Table discussion on knowledge sharing showed that SMEs in developing countries, including Kenya, are reluctant to change, often fearing that new technologies could put them out of business.
Since many of these enterprises fall within several clusters scattered throughout the country, the impact of reluctance to change can be concentrated, with major implications for local economies. It also makes it difficult to disseminate information where there are no clear channels, such as industry organizations.
A recent cursory survey I did in Mukuru Kwa Reuben, Kariobangi Light Industries, Dagoretti, Shauri Moyo and Outer Ring-Umoja shows that nothing has changed since the Unep study.
An earlier proposal to help the Shauri Moyo jua kali sector automate and produce more karais for greater productivity and increased exports was vehemently opposed even by artisans themselves, for fear that such changes would put most of them out of jobs.
Unknown to them is the fact that Chinese karais are far cheaper, have found their way into local supermarkets and would soon put most of the jua kalis out of work. This is the result of our apathetic minimalist thinking and failure to create industry associations where information can be disseminated.
Deeper interviews reveal that behind some of the artisans are millionaires who supplement local productions with cheap imports for tax-evasion purposes. Would-be-successful entrepreneurs create several small fronts, such as butcheries, small shops, hair salons, matatus and informal housing on public lands. They are the merchants of informal settlements.
LOCALLY MADE FURNITURE
In a situation like this, there is no industry that can grow to become a global player and there are no plans or even thoughts of growing these enterprises. In effect, they contribute greatly to most of the problems in the SME sector.
Even as the government favours youth and women’s enterprises in procurement, there is no local production of commercial furniture. Furniture in Kenya is largely subsistence, for households. The commercial market previously dominated by Italy is today dominated by China and Turkey, yet this sub-sector can be very easily upgraded to produce commercial furniture.
The tragedy is the fact that some of the furniture, such as executive chairs, are not easily repairable locally. A great opportunity exists to create backward and forward linkages for the Multinational Companies (MNC) that make this furniture.
In Africa, we broadly acknowledge that entrepreneurs and SMEs play an important role in economic growth and development, as well as contributing to poverty alleviation.
At the same time, the nature and extent of this contribution varies between countries, reflecting differences in economic, social and institutional conditions, and ultimately the competitiveness of the SME sector.
In this context, African countries in particular face a need to promote and strengthen the long-term development of the SME sector, which requires access to market opportunities, as well as to new technology and management know-how, often in a situation of considerable resource scarcity
FDI FROM DEVELOPING COUNTRIES
In this blog post I will discuss the potential role of Foreign Direct Investment (FDI) in relation to the long-term competitive development and internationalization of the SME sector in Kenya.
While this is not a new topic, a number of recent trends suggest there may be greater scope for developing such linkages in the future than in the past.
A 2004 research paper by David Smallbone noted that these trends include the emergence of new sources of FDI in developing and emerging economies themselves, increasing signs of SMEs internationalising their operations rather than simply exporting from their domestic base; the continued increase in outsourcing by MNCs; and a growing recognition by the international community of the importance of rising income levels in the African sub-continent in particular.
While such trends undoubtedly present challenges to SMEs in transition and developing countries, they also present opportunities.
LEVERAGE OUR EMBASSIES
In the Information Communications and Technology sector (ICT), we have had some successes with internationalization, where a number of Kenyan Medium enterprises have become regional and international players and smaller firms are attracting FDI.
Medium enterprises like Seven Seas, Cellulant and Onfon have extensive African branch networks. Seven Seas, for example, has had a successful European acquisition.
This is a rare opportunity in Africa that the government must seize and begin to support these firms in their international operations. Virtually all foreign firms in Kenya leverage their embassies to win businesses.
I would even propose that Kenya convert one of the government-owned banks into an export promotion bank (note that I have deliberately left out import because our imports are disproportionately higher than exports) to finance local firms that are successful out there.
Although the agricultural sector has great potential for attracting FDI and improving our export base, it is a sleeping giant that sees no opportunity in value addition of especially horticultural exports. Coffee, which by itself could change the lives of many poor Kenyans, is under the grip of cartels.
Governor Gachagua’s attempt to fight it out with cartels seems to be waning. Poor and impatient farmers may eventually force him to abandon a just cause to create value at the bottom of the pyramid.
THE ETHIOPIAN STORY
In 2006, Ethiopia sought to narrow down this gap between the retail price and the return to the producers. The Ethiopian government tried to use a range of intellectual property rights (IPRs) to differentiate their coffee in the marketplace and achieve higher returns.
In one of its online articles, the World Intellectual Property Organization (WIPO) noted that in 2004, the government launched the Ethiopian Coffee Trademarking and Licensing Initiative (the Initiative) to provide a practical solution to overcome the longstanding divide between what coffee farmers receive for a sack of their beans and what retailers charge for that coffee when they sell it in retail outlets in different countries.
WIPO further noted that the trademark initiative for Ethiopian coffee faced a major difficulty in 2006. The United States Patent and Trademark Office (USPTO) had approved the application to register one of its varieties, Yirgacheffe.
But the National Coffee Association (NCA), representing coffee roasters of the United States, objected to the Ethiopian Intellectual Property Office (EIPO) applications to trademark for other varieties, first Harrar, then Sidamo.
‘DISTINCTIVE COFFEE TYPES’
The grounds for opposition in both cases were that the names had become too generic a description of coffee, and as such were not eligible for registration under United States trademark law. The USPTO turned down the application for Harrar in 2005 and for Sidamo in 2006.
Eventually as WIPO reports, the American coffee chain Starbucks Coffee Corporation, which was widely reported in the media to have been a driving force behind the NCA objection, publicly offered to assist Ethiopia in setting up a national system of certification marks to enable the farmers to protect and market their coffee as “robust” geographical indications.
“These systems are far more effective than registering trademarks for geographically descriptive terms, which is actually contrary to general trademark law and customs,” said the company in a statement. But the EIPO and its advisors disagreed.
The designations, they argued, referred not to geographical locations but to distinctive coffee types. Moreover, appropriate intellectual property (IP) tools had to be chosen to meet specific needs and situations. “You have to understand the situation in Ethiopia,” Mr. Mengistie of EIPO explained. “Our coffee is grown on four million very small plots of land. Setting up a certification system would have been impracticable and too expensive. Trademarking was more appropriate to our needs. It was a more direct route offering more control.”
Read the entire WIPO article here.
MAKING VEHICLE PARTS
Kenya may never follow the Ethiopian model, but there are other options like assisting various coffee associations make a serious bid on Java Coffee House and seeking to internationalize it and develop a new global brand offering specialty coffee such as Blue Mountain, giving our farmers more leverage on price for their produce.
One can develop a franchise model that would lead to multiple SMEs. This may be controversial but there is no time in future when the cartels would surrender to the poor farmers.
Research shows that most enterprises are created out of replications. Japan did it. The Newly Industrialized Countries of Asia have done it. It is our turn to begin replicating SMEs and grow the economy. At Kariobangi South, we make many vehicle parts and at some point displaced Avery from the weighing machine business.
There is need to consciously put more effort to diversify local industrial production and through policy, begin to require local content in all locally assembled vehicles with a target to fully manufacture all vehicle parts locally in five years. There is no other way of growing local firms without the government investing in new technologies and creating a conducive business environment.
Nelson Mandela said, “The greatest glory in living lies not in never falling, but in rising every time we fall.” Let’s rise and comprehensively deal with our bottom of the pyramid through linking innovations to our SMEs for greater local productions and exports.
Dr Ndemo is a senior lecturer at the University of Nairobi's Business School, Lower Kabete campus. He is a former permanent secretary in the Ministry of Information and Communication. Twitter:@bantigito