SMALL-SCALE MANUFACTURING IN KENYA: CHARACTERISTICS, PROBLEMS AND SOURCES OF FINANCE KENNETH R. GRAY FLORIDA A & M UNIVERSITY WILLIAM COOLEY JACKSON STATE UNIVERSITY JESSE LUTABINGWA JACKSON STATE UNIVERSITY ABSTRACT This paper examines small business manufacturer's characteristics in Kenya. Much literature on small business development in developing world countries assume informal sector activities as homogeneous in their characteristics (Morris and Pitt, 1995; Bewayo, 1995; Ekpenyong and Nyong, 1992). Thereby policy recommendations are blanket and not of great assistance. The paper investigates a sample of 320 manufacturers from three industries. The objectives are to evaluate characteristics of small-scale manufacturers that make it difficult to be profitable and the problems faced which contribute to poor performance. BACKGROUND Until the early 1960s, many economists viewed the continued existence of small-scale industries in less developed countries as justified by scarcity of capital and administrative experience. It was often argued that with economic growth, the small, traditional type of enterprise would, in one sector after another, be superseded by modem forms of large-scale production. In order to ensure an orderly transition, small industries were seen to deserve support, but mainly in sectors where modem methods could not be immediately applied. In the mid-1960s a new approach to small to medium-scale enterprise (SME) development began to emerge due to several factors. First, there was growing concern over low employment elasticity of modem large-scale production. It was claimed that even with more optimal policies, this form of industrial organization was unable to absorb a significant proportion of the rapidly expanding labor force (Cherney et al., 1974; ILO, 1973). Second, there was widespread recognition that the benefits of economic growth were not being fairly distributed,
and that the use of large-scale, capital intensive techniques was partly to blame (McCormick, 1988; House, 1981; Cherney et al., 1974). Third, empirical studies revealed that the causes of poverty were not confined to unemployment, and that most of the poor were employed in a large variety of small-scale production (Noormohamed, 1985). This suggest a new role for small industries, in what has come to be labeled "the urban informal sector". Small, labor intensive industries were seen not only to increase employment, but also to increase the living standards of the poor. They were also thought to be capable of providing a new dynamic of economic growth. The new objective was not just to stop to retreat, but to promote the small-scale sector (House, 1981; Schmitz, 1982; Giamartino, 1991). This change in approach was accompanied by a shift of focus towards a "rurally orientated smallholder" (ROSH) industrialization strategy, well articulated in Kilby (1975), Child (1976), House (1978), Noormohamed (1985), and Olofin (1990), among others. While the World Bank (1992) and others have tended to favor the ROSH implementation strategy by assigning the major role to the private sector, there are those who favor its implementation by assigning a major role to government (Olofin, 1990, Noormohamed, 1985). Assigning the major role to the private sector has its appeal in the fact that the private sector has the resources needed to implement the strategy. But the proponents of assigning the role to the government are aware that in many developing economies, government is the major mover of the economy with only a small and sometimes weak private sector. Thus, they argue that assigning such an important role to the private sector would not work. Besides, for the strategy to produce an optimal effect on the well-being of the people, the social environment has to be considered something the private sector may not be willing to do. Kilby (1969) sees SMEs as a quasi sponge for urban employment and a provider of inexpensive...