Technical Efficiency of Manufacturing Firms in Kenya

Abstract

Manufacturing is critical to any country's economic development, and Kenya is no exception. The direct and indirect externalities from manufacturing range from increased industrialization, job creation, multiplier effect, and direct contribution to a country’s Gross Domestic Product. The primary goal of this research is to identify the factors that influence the technical efficiency of Kenyan manufacturing firms. The specific objectives are as follows: to determine the level of technical efficiency of Kenyan manufacturing firms and to identify the factors that influence the technical efficiency of Kenyan manufacturing firms. This research is informed by the firm theory, production theory, and efficiency theory. The World Bank Enterprise Survey Data for the year 2018 was used in this study because it is the most recent data available for manufacturing firms in Kenya. This data reports on various indicators of technical efficiency for individual firms and industries, as well as information on the qualitative and quantitative characteristics of these manufacturing firms. The variables that have been focused on in this study include the age and size of the firm, the managerial experience of the top executive, the structure of ownership, the exporting status of the firm, the location of the firm, the industry the firm is in, and finally, whether or not the firm undertakes research and development activities. In this study, the parametric Stochastic Frontier Analysis approach was used to assess efficiency. It is preferred to other methods like Data Envelopment Analysis (DEA) because when compared to DEA, SFA is better as it accounts for the noise, or random effects and is also able to provide a structure to figure out the causes of inefficiency in production and the causes of varying levels of productivity which are of great use while making conclusions of how inefficiency can be reduced and productivity increased. The model estimated that the technical efficiency of Kenyan manufacturing firms is 42.54%, implying that Kenyan manufacturing firms operate at a level 57.46% lower than their optimal level of operation. The study has finally analyzed the factors that influence this level of technical efficiency and has given recommendations on how the government can address these factors.