Tax Incentives and Growth of Small and Medium sized Enterprises in Nairobi County

Abstract

In a low income country such as Kenya, the role of SMEs is crucial in pushing the country’s social economic development agenda. SMEs are highly perceived to be the accelerators of growth and innovation in the economy (Braunerhjelm, 2012). However, SMEs face challenges with regard to financing, disproportionate regulatory burdens and competition failures compared to large entities. An attractive business environment is therefore important to minimize the impact of these obstacles and aims at providing a level playing ground for firms of all sizes. Reduction of the tax burden for SMEs through issuing incentives will free up funds to be used in innovation and efforts to access global markets and ultimately ensure business growth. The study’s objective was to determine the effect of tax incentives on growth of SMEs in Nairobi City County Kenya. This study was guided by the normative theory, political systems theory and the resource based view theory. The research employed the descriptive research design. The population was all the 1539 SMEs operating in Nairobi CBD. Stratified random sampling was used to derive 155 respondents which were used as the sample. Primary data was collected from the respondents by use of self-administered structured questionnaires containing closed ended questions. The questionnaires were administered through the drop and pick method. Out of the 155 questionnaires issued, 121 were successfully filled and returned translating to a 78% response rate. The collected data was edited and coded and fed into the SPSS computer package to generate both inferential and descriptive statistics. The inferential statistics was undertaken by performing two regressions on each of the independent variable against growth. The study found p values of 0.000 at 95% level of confidence on the association between each of the independent variables (tax exemptions and investment allowances) on growth of SMEs in Nairobi, County. This shows that the model adopted for this study was significant and that tax incentives affect the growth of SMEs. From the data analysis, it can be concluded there are various tax incentives that have been formulated to accelerate the growth of SMEs although their practical implementation has not been fully realized. The study recommends that policy formulations by the Kenyan government to accelerate the growth of SMEs should have user and stakeholder input before being concretized in order to prevent dormancy and to facilitate the desired growth trajectory. The government should also provide frequent trainings to SMES on the available incentives which could leverage on to boost their growth