Technical Efficiency of Small and Medium-sized Enterprises in Kenya

Abstract

Small and medium-sized enterprises play a crucial role in the development of the Kenyan economy. The sector is not only a major source of employment but also plays a significant role in promoting competition, innovation and enhancing enterprise culture which is necessary for private sector development and industrialization. In order to formulate appropriate policy measures to improve the development of SMEs, it is important to examine their levels of efficiency. This paper employs a stochastic frontier production function to measure and explain the technical efficiency of SMEs in Kenya. Secondary data from enterprise survey data (2018) is used. The results indicate that technical efficiencies among SMEs are below average. According to the study physical capital is one of the major determinants of the firm’s efficiency although its impact is weak. In addition, labor force, age of the firm and legal status of the firm are found to have a positive and significant relationship to technical efficiency. It is therefore recommended that SMEs need to enhance their quantity of physical capital which will enable them to have a competitive advantage due to enhanced technical efficiency. Investment in human capital development is highly recommended since labor has proven to be a key determinant of technical efficiency. There is also a need to encourage women to take jobs at the helm of organizations because of their significant impact on technical efficiency.