Technical efficiency of Micro and Small enterprises in Kenya
Over the years, the role of Micro and Small Enterprises (MSEs) in economic development has become apparent. In order to formulate appropriate policy measures to improve the development of MSEs, it is important to examine their level of efficiency. This paper provides an assessment of technical efficiency levels among Micro and Small Enterprises (MSEs) in Kenya and investigates sources of technical inefficiency. Cross sectional data was obtained from the National MSE Baseline survey conducted in 1999 by the Central Bureau of Statistics (CBS) in conjunction with K-Rep Holdings and the International Center for Economic Growth (ICEG). To estimate technical efficiency and identify the sources of inefficiency among MSEs the study uses the Cobb-Douglas stochastic production frontier approach. The one-stage estimation procedure of Battese and Coelli (1995) is adopted. The results indicate that MSEs in Kenya are on average technically efficient. The average efficiency score is 72%. More than 50% of the firms have efficiency levels of 70% and above but there are other firms that are highly inefficient with efficiency scores of as low as 0.3 %. Results of the inefficiency effects model reveal that, the owner's age, level of education and training are negatively related to technical inefficiency. Access to infrastructure is also negatively related to technical inefficiency. Sourcing startup capital from financial institutions was found to have a positive relationship with technical inefficiency. Improving Education, availing credit to the MSEs and improving infrastructure would go along way in assisting the MSEs improve their efficiency thus increasing output.