25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and                                   ...
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Empirical stands of business succesion among african owned business africa 3

  1. 1. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________ THE ‘INVISIBLE MIDDLE’: A CRITICAL REVIEW OF SMALL BUSINESS DEVELOPMENT AND THE POLITICAL-INSTITUTIONAL ENVIRONMENT IN KENYA Judith Esuha and Denise Fletcher Nottingham Business School The Nottingham Trent University Burton Street Nottingham, NG1 4BU Telephone + 44 (0)115 848 6028 Fax: +44(0) 115 848 6512 E-mail: Judykadenge@yahoo.com and Denise.Fletcher@ntu.ac.uk Paper presented at the 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  2. 2. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________AbstractResearch in the less developed countries has clearly shown that small enterprises both in theformal and informal sectors have failed to evolve into medium-sized firms (Ferrand, 1999;GEMINI, 1991). Studies conducted in Kenya (Baseline, 1999, McCormick, 1988; Marris andSomerset, 1971) suggest inaccessibility to markets, capital, and management skills as some ofthe major constraints to the growth of small-scale enterprises in Kenya. The inability of small-size enterprises to grow and graduate to medium- size has created a sectoral vacuumcommonly referred to as the “missing middle”. The existence of this phenomenon acrossAfrica underscores the need for further research in this area. Since small enterprises dominatethe industrial scene in Africa, a better understanding of this sector can help in facilitatingAfrica’s industrialisation. There is also need for a better understanding of the adaptivestrategies and transformation process of the successful medium-sized enterprises. This paperanalyses four medium sized indigenous businesses in Kenya and highlights that the notion ofthe ‘missing middle’ in terms of small business development and growth is a misnomer.Indeed, business owners ‘manage’ the hostile political and institutional environment in orderto successfully grow their businesses but they do this by adopting a mix of fourapproaches/strategies. These are ‘choosing markets carefully’, ‘keeping clean’, developing a‘family culture’ and maintaining ‘low visibility’. This leads to the conclusion that the issuefor small business development and growth in Kenya be more appropriately understood as the‘invisible middle’.Key words: Political-institutional environment, missing middle small and medium- sizeenterprises, Kenya;Introduction: Business Development in KenyaOne of the issues uppermost in the minds of Kenyans is whether the long-awaited economicrecovery will be realised and whether the country will meet its target to industrialise by theyear 2020. Statistics from the Central Bank of Kenya indicated that the country’s economicgrowth has been low, recording only 1.1 per cent GDP growth between October 2001 andFebruary, 2002. The decline in economic growth coupled with a population of growth of overtwo percent has aggravated the poverty situation in the country. Besides, unemployment,dilapidated infrastructure, corruption, insecurity, declining donor resources and the high costof production have exacerbated the country’s economic problems. Today over fifty per centof Kenya’s population live below the poverty while a large number of Kenyan professionalsare seeking better opportunities in other countries. Although, the Kenyan Government hastried to put in place measures aimed at increasing productivity and speeding up theindustrialisation process, indigenous capital appears to be underdeveloped.___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  3. 3. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________ This paper seeks to contribute to the understanding the ‘indigenous missing middle’phenomenon by exploring the effect of the political environment on four indigenous medium-sized companies in Kenya who have successfully achieved growth. In the first section, thedebate about the ‘missing middle’ is elaborated. The second section of the paper discusses therole of the political-institutional environment for business growth and development in Kenya.The third section presents the research design. In the fourth section the field work based onfour medium sized companies is presented and analysed. The analysis highlights howbusiness owners successfully ‘manage’ the hostile political and institutional environment byadopting a mix of four approaches/strategies. These are ‘choosing markets carefully’,‘keeping clean’, developing a ‘family culture’ and maintaining ‘low visibility. This leads tothe conclusion in the fifth section that the issue for small business development and growth inKenya be more appropriately understood as the ‘invisible middle’.1. Barriers to growth of African -owned Enterprises: The ‘Missing Middle’ DebateAlthough the small business sector in Kenya has been growing rapidly over the past fewdecades, it is widely commented on that individual enterprises have not experienced muchgrowth. The number of these organisations stands at over 1.3 million while private formalmedium and large firms in Kenya are estimated to be 42,000 (Baseline, 1999). Despite thefact that Kenya has been independent since 1964, it is frequently cited that the indigenousformal business sector remains significantly underdeveloped. This underdevelopment is oftenbeen attributed to small- scale enterprises’ inability to grow and graduate to medium –sizeenterprises and strong barriers to direct entry in to the medium-scale private formal sector (themiddle) – referred to as the ‘missing middle’. Researchers have come up with severalexplanations to the seemingly persistent existence of the missing middle in most Africancountries. In Kenya, for instance, the absence of the indigenous middle scale enterprises hasbeen strongly linked to an essentially dysfunctional political economy. For example,Hiambara (1994: 160) argues that corruption and patrimonialism are “the leading obstacles tofurther wealth accumulation in the post-colonial Kenyan state”. A typical but sombre politicalproblem in many countries in Africa has been the nexus between centralized political powerand wealth. Thus, the weak yet autocratic state is often thought to undermine the developmentof private property and to convert key economic roles into political appointments, therebydistorting development and channelling the political priority into a quest for control of statepatronage. This political autocracy has entrenched patronage politics rather than addressingthese countries’ developmental needs. For instance, in many African countries, an indigenousfirm can only grow up to a certain ceiling before top government officials or senior politiciansdemand a share in the enterprise. In essence, many of these countries the politicians areterrified of autonomous indigenous economic power centres. The fear is that those witheconomic power might use their economic power to oust them from office. Ironically, thelarge foreign and resident alien -owned enterprises are often exempted from this containmentas they are perceived as “harmless”. Thus, they either lack political ambition or can be easily___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  4. 4. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________expelled from the country if they behaved contrary to this expectation. Accordingly, thosewith material ambition do not go directly into business but instead seek to control the state inorder to gain from the privileges associated with influential government/ political offices. Another area of concern is the fragmentation of the economic class into an ethnicallybased identity. Cowen and MacWilliam (1996: 136-137), contend that both the Kenyatta1 andMoi2 regimes created conditions which encouraged wealth accumulation on the basis ofethnicity. Such conditions would seem inimical to the development indigenous middle-scaleentrepreneurs who depend critically on the effective performance of the state’s enabling rolein the economy. An illustration of this line of reasoning can be found in the argumentsometimes made, that the emergent Kikuyu business class was stifled3 more or lessintentionally as a result of the consolidation of the Moi regime. Accordingly, Kalenjinpolitical power could only be maintained by establishing corresponding economic strengthboth absolutely and in relative terms to the Kikuyu supremacy it sought to displace. Anotherdimension of the complexity of Kenya’s ethnic- based indigenous capital is the presence of adominant Asian formal sector. Hiambara (1993, 1994) points out that through much of theKenyan debate the question of indigenous Asian capital has been largely ignored. Similarly,most studies on Kenyan capital have often left out Kenyans of European origin despite thefact that they play a vital role in the country’s foreign trade. However, since the focus of thispaper is on barriers to growth of indigenous capital, the minority capital dimension will not beexplored further. Investigations into the constraints to micro-enterprises’ growth and graduation into themiddle-scale have revealed a number of constraints. These include access to capital (Baseline,1999; Ferrand, 1999: 84, Marsden, 1990: 18); the cost of associated with formalisation(McCormick, 1999); risks associated with capital accumulation within a single enterprise(McCormick, 1988, 1999) poor technology (Coughlin 1988). Others include managerialbottlenecks (Marsden, 1990; Marris and Somerset, 1971, McCormick, 1999: 153) weaklinkages between different sectors (Ferrand, 1999:88; Coughlin, 1991; weak institutionalenvironment (McCormick, 1999: 1536) and lack of competitiveness, (Marsden1990: 17). Despite what appears to be pro-indigenous policies by various African governments,the development of an indigenous African private sector - especially in the manufacturingsector- seems to be lower than expected. Thus, in addition to the general problemsencountered by both indigenous and non-indigenous business owners- inaccessibility tocapital, markets, good infra structure and security-the indigenous business owners face certainunique problems. Some of these problems are linked to their historical path, social structuresand the political environment. In Kenya, the political-institutional environment is often citedas a major impediment to indigenous capital formation. In summary, the literature on Kenya contains no complete convincing explanation forthe lack of the middle-scale enterprises. In this regard two major difficulties can beidentified: First, the apparent lack of a theoretical framework which is able to draw togetherthe various strands of evidence into a cohesive explanation. The second problem lies in the___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  5. 5. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________scantiness of in-depth empirical studies into the middle-scale enterprises in Kenya. This paperseeks to contribute to this understanding by exploring the effect of the political environmenton the emergence and growth of four medium-sized companies in Kenya.2. Socio- political barriers to business development in KenyaA survey of sixty third and fourth students at an international university in Kenya in February2002 revealed the following as the major socio- political factors hindering economic/ businessdevelopment in both Kenya and the other African countries (see table below). Each studentwas asked to identify and explain at least five major socio- political barriers.Table: Socio- political barriers to business growth in Africa (Kenya) Socio- problems identified by the students Response (%)4 1. Political risk, civil unrest and insecurity 73 2.Corruption and weak legal frame work 63 3. Dependency syndrome 52 4.Poor leadership, governance and general mismanagement 38 5. Illiteracy and lack of technical skills (education system) 33 6. Poor policies and lack of policy implementation 23 7. Diseases and ‘epidemics’ 22 8. Negative impact of the colonial rule 17 9. Rapid population increase 17 10. Cultural beliefs, practices, values and taboos 12 11. Brain drain 12 12. Ethnic/ tribal diversity and division 8 Source: Esuha, J. K. 2002- Unpublished. According to this survey, political correctness and connection is crucial to abusinessman’s success. Business owners with political links enjoy privileges that are noteasily available to an ordinary citizen. For instance, some of the respondents cited a situationwhere ‘politically- connected businessmen are able to acquire huge loans from banks evenwithout collateral securities. Corruption was cited as the second major barrier. Therespondents felt that these were a product of the weak legal framework, which could notassure people of fair judgement and justice. Kenya was ranked the fourth most corruptcountry by transparency international last year. A further survey by the same organisationthis year in Kenya ranked three government departments as the most corrupt5. The judiciarywas ranked sixth among the most bribery-prone institutions. The survey concludes that, ifcorruption is eliminated, the overall salaries of Kenyans would increase by thirty percent.Corruption in Kenya had raised the cost of living by fifteen percent on households and up to1.4 percent of turnover for companies. Corruption also was cited as the biggest barrier tobusiness development at a regional conference in Kenya. During the conference, East Africas___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  6. 6. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________most respected Chief Executive Officer (Manu Chandria) said “ it used to be Toa Kitu Kidogo(give me something small), then it became Toa Kitu Kikubwa (give me something big) buttoday is Toa Kila Kitu (give me everything). Also studies by Marris and Somerset (1971, 1988) emphasised the sense of a gapbetween the traditional society of the indigenous entrepreneur and that of the moderncapitalist. They point to such features as the perceived need to escape from the traditionobligations of kinship. Other social barriers have often been cited but lack empirical backing,such as, the burden of kinship obligations and the high value placed on the ownership of landor stock thus’ potentially diverting resources from expanding a capitalist enterprise. In examining how some indigenous business owners have succeed in what isperceived as a hostile environment to indigenous formal businesses, we concur with Kilby’sobservations: Kilby (1988) identifies four groups of activities, which an entrepreneur mustundertake within a small or middle-sized enterprise. These include managing exchangerelationships, political administration, management control and technology. However, in thecase of Kenya, Kilby concludes that the major source of difficulties in the enterprise was inthe area of management control and technology. He argues that these weaknesses could betraced to social structure such as an absence of transmutable antecedent roles and inhibitorysocial structures. In his conclusion, he blames the failure of the small-size enterprises on thelack of continuity between social structure associated with traditional means of productionand those associated with capitalistic enterprises. In this paper however, managing thepolitical-institutional environment is emphasised.4. Research DesignThis study adopted an interpretative approach (Burr, 1995) in order to examine the meaningsand interpretations of the owners of the four focus enterprises. The study adopted anembedded multiple-case design (Yin, 1994) focusing upon the four business units as theprimary units of analysis. As the study explored the extent to which the political environmentimpedes the development of the indigenous medium-size sector, the field work focussed onindigenous successful medium-size enterprises that started small but experienced rapidgrowth over the post independence period (1963-2002). In order to explore comparativepatterns, the four businesses were selected from different trading sectors. In each of the fourselected enterprises three areas were explored: the entrepreneurs’ profiles and successstrategies; critical incidents of business success and their perception of the politicalenvironment as an impediment to the growth of business. The case study enterprises wereselected from an initial sample of fifty successful indigenous enterprises that were used duringthe pilot study. Selection of the four enterprises was based on accessibility and credibility ofthe information given. The case study information was collected through in-depth interviews.These interviews were supplemented and compared with other materials such as documentary___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  7. 7. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________evidence and real setting observation. However, access was one of the major problemsencountered in the data collection process.As this study seeks to create an understanding as to how some indigenous businesses havebeen successfully able to manage the barriers to the emergence of an indigenous formalmiddle, the main research questions are as follows; 1. Do you think the current political environment in Kenya is conducive to rapid business growth? Please explain your answer. 2. Please list (starting with the most pressing barrier) some of the socio- political barriers to business growth in Kenya 3. Show how you successfully managed to overcome each of these barriers and managed to grow? 4. Do you think patron client relationships exist between politicians and business interest groups in Kenya? If yes, do think this is partly to blame for the underdevelopment of the indigenous- formal sector? Please explain.Background information of the four successful indigenous owner- managers The four case- study enterprises varied in terms of annual turnover, number of employees,major products and management style, however, they shared one common thing; they startedvery small but had managed to overcome the barriers to indigenous businesses and hadgrown. This part of the paper examines and analyses the factors that led to the growth ofthese four enterprises in an environment that is perceived to be hostile to indigenousbusinesses. In particular we examine what the owner-managers say about the Kenyan politicalenvironment and the survival strategies. Below are statements about how these entrepreneursstarted their businesses (also refer to the appendix for more background information).Owner- manager A“I started business in high school. I used to buy scones at a whole sale price and resell them tothe other boys at a retail price, making a 50% profit. Later on I began lending other studentsmoney at an interest. Real business began when, I was in the university; I used to buy optionsfrom people intending to sell their property and would resell the property at a higher pricethan what the owner wanted. When I graduated from university I was employed in theMinistry of Trade and Industry. After working in this place for sometime, I soon realised thatI would not ascend to the top as quickly as I had desired. I opted to take up post-graduatestudies, in order to accelerate my promotion. I went back to the University of Nairobi, butlater transferred to IMEDE (now IMD) Laussane, Switzerland, and completed my MBA in1978.___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  8. 8. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________When I came back home, I was promoted to the position of Assistant Director of Industries.However, after obtaining the MBA, I realised I wanted to do big things, I looked at Kenya andthought capital would be an important commodity in the market. At the age of 33 (1980), Itook early retirement from civil service and launched my own bank. I soon realised that themarket was still sceptical about Africans getting involved in banking! Even the local peoplewere very sceptical! In 1986, my banking career came to an abrupt end, due to the change incapital flow in the country. The banking crisis led to a takeover and consolidation of most ofthe small banks by the government. By the time of this takeover, my bank had grown from 1to over 16 branches countrywide. To me this was the price of pioneering, the price I paid tobecome a more seasoned entrepreneur. After the takeover of my bank, I moved to stockbroking business by buying off Dye and Blair Limited from Kenya Commercial Bank. At thismoment, this company was making loses, but since my long term dream was to establish afinancial services supermarket, I saw that in Dye & Blair Limited. I have been with thiscompany for the last 19 years. Though, I do not consider myself a successful entrepreneur,other people think I have succeeded. Today I employ over 500 employees, with an annualturnover of over one billion Kenyan shillings (1 US dollar - KSh. 78).Owner-manager B“I started by selling insurance policies on the street, then I was hired by an internationalInsurance company to perform special duties- agency coordination. Later on, I was asked totrain and develop agents for the company. And then, I was asked to develop an employeebenefits division. I worked with the insurance company for five years in different positions. In1976, I felt, what I was earning was not enough to sustain my family. I had lived in poverty asa child and I desired to give my family a better life. I also knew that my father was poor, notbecause he was lazy. My father worked very hard, and despite his hard work as a forestworker, we continued to live in poverty. I knew I could give my children a better future if Iworked harder. My biggest role models were the Kenyan athletes who had come from veryhumble homes to become world beaters: I was convinced that was possible in other fields too-not just running. This gave me courage to confront the World. I quit the company and startedmy own insurance business. My turn annually turnover is over 1.4 billion Kenyan shillings”.Owner- manager C“I was in the banking sector, previously with an international bank for 32 years. Then when Iretired, I went on to start a bank in partnership with three of my friends as shareholders”Owner-manager D“I first worked as an editor/ writer with a leading Kenyan magazine. While there I was forcedby circumstances to automate my operations and in the process discovered there was littletechnology in Kenya to meet my needs. I tried importing this technology from abroad but itwas very expensive. In the process I taught myself DTP programming and then data mining/___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  9. 9. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________ communication. I was later employed by PriceWaterhouse to help them do what I had done for the magazine company and after working with them for five years. I set out to start my own business.” Findings: About the socio- political environment The owner- managers were asked a number of questions that were meant to address the major problem areas in running an indigenous business in Kenya. Due to the sensitivity of the research topic, some questions were included so as moderate the study and make it more acceptable to the respondents. However the main focus of this study was to explore the effect of the political environment on the indigenous businesses. Since political issues are often considered sensitive, the research questions included a social dimension which though not directly related to this particular study, was intended to make the questions more neutral and therefore acceptable to the respondents. In table below, therefore the responses in italics are more related to the political environment, while the others are not. Figure: A summary of the findingsCompany/ Company A Company B Company C Company DQuestions1. Do you think the No, in a system No, the answer No, there are too No, there is a lot ofcurrent political where appointment certainly lies in many constraints; uncertainty in thisenvironment in to key positions is the government’s in particular country. ForKenya is conducive not based on merit- reports on the dispute resolution example, one canfor rapid business other things such country’s is very slow. never win agrowth? Please ethnicity, sexism, economic growth. Corruption is also government bid onexplain your answer. nepotism etc. work. Kenya’s rampant. This merit. In any case, Such a system economic growth slows down many they do not bid, cannot boost has declined over other company they use corrupt business growth! there last few operations. means to determine years. This is the winner well Besides resources because the The government before the actual are not utilised government has does not assist bidding. well, for instance not put in place local/ smaller allocation of good policies investors in any The judiciary natural resources way- we lack system too is corrupt and one ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  10. 10. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________ are not based on incentives. can not win even a the highest return. very genuine case. I The government lost 7.4 million The government has compromised Kenyan Shillings to practices the in a number of a partner who politics of areas. For defrauded me but exclusion, if you do example, some of up to now I have not support them; the cabinet never found justice. they exclude you ministers are I do not trust any from the national actively involved in lawyer and will resources. As a dumping cheap never ask for their poor country we transit goods in the services ever, I will need to practice the market, killing study law and politics of local companies, represents myself in inclusion- we yet he is silent court if need be! should allocate our about this issue. This is a bandit resources based on country! the highest returns. Our politicians have no sense of legacy, they do not care about the country’s future African families are larger hence hard to save for investment2. Please list (starting Corruption, I encounter very Corruption, high Corruption, legalthe most pressing dishonesty few such taxation, political framework, lowbarrier) some of the indiscipline, lack of problems because scenario, poverty employeesocio- political self motivation, I have put in productivitybarriers to business place measures togrowth in Kenya counter them. However, I encounter some difficulties when dealing with Indians and Pakistanis- they are so closely knit and is very hard to penetrate them. ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  11. 11. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________3. Show how you It is very difficult- I understand my I have remained I’m in a high- techsuccessfully managed one has to put in industry very clean thus stifling industry and myto overcome each of place extensive well. I have been the growth of my choice is athese barriers and measures- because in this business company. It is deliberate one. Thismanaged to grow, one cannot afford for a very long hard to get industry is complex to trust even some time and I and it would not be anything moving managing understand the attractive to directors. This is market well. without getting corrupt people who very expensive and involved in a want quick easy consumes a lot of Over time I have corrupt deal, so if money. This keeps the CEO’s time. put in place you choose them off and we are control otherwise you happy because this mechanism that have a price to is what has made counter many of pay- slower us succeed in the problems growth. business business people encounter in their Poverty is We also deal with day to day another major few but large business corporate clients problem - it is operations. For and therefore we instance to stop very strenuous to do not advertise. theft of company make it in a We prefer the low property- I have country where profile because it ensured that my most of the keeps us invisible workers are people are poor. to the predictors. If treated well. I There will always you advertise in have given them be pressure on this country you one of the best you to help or open up your working bail out someone! company to all environments one sorts of predators- can find in this the politicians, country. government officials, beggars I have also and many other embraced malicious people. technology and use it to minimize We have a family- fraud and other like organizational such things. culture. We all truly care for each other. We work in teams and we are rewarded according to output. ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  12. 12. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________4. What traits do you This varies with the Ownership of the To lead by Visionary,consider essential for size of your business idea you example and to flexibility,business growth in company. Smaller have in mind. encourage staff to understand theKenya? Please organizations You should have work harder and industry you are in,explain require long hours a passion for it remain loyal to the Entrepreneurial, of hard work, and even be company. relevance and finding a good prepared to die superior work market niche, and for it. There culture good control should be no mechanisms. option called failure. I embrace But the large the word of the businesses require James Baker, political former US- connection, mental Secretary of flexibility, State, - ruthlessness, Preparedness controlling costs, prevents poor access to good performance. But credit and “low the underpin to visibility”. the 4P’s is discipline that is consistent and persistent; This wholesomeness is essential.5. Do you think Yes, especially for Yes, most Kenyan Yes, business Yes, there arepatron- client the Kenyan Asian Asians have opportunities are bandits who willrelationships exist community. They enjoyed and passed on to ambush anyonebetween politicians pay patrons to benefited from relatives of trying to succeed.and the business secure contracts. political powerfulinterest groups in patronage. politicians or onKenya? If yes, do However, P-C is But,success ethnic basis.think this is partly to not a popular depends onesblame for the strategy in our ownership of hisunderdevelopment of country, because it business idea, thisthe indigenous- is a very expensive success should beformal sector? Please affair. The patrons sustainable.explain? here are more of Political predators and it is connections better to keep away cannot help from them without the competence to run the business. ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  13. 13. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________Analysis of the findingsThere some empirical evidence that the political environment in Kenya is not conducive to theemergence and growth of formal medium and large-size indigenous enterprises. However, asdepicted by the four cases above it is possible to run a successful business in Kenya. In thispart of this paper we examine some of the winning strategies that have been adopted by theseowner- managers. In particular, we will examine how these owner- managers have successfully‘managed’ the political- institutional environment.The main political barriers cited include: ! Political appointments to senior government positions: The major worry was that such appointments, ultimately led to the mismanagement of public utilities that provide essential services such as electricity, water, and telephone services. There are no alternative providers since such services are under the government’s monopoly. This monopoly is at times used as a weapon against non-conforming business owners. ! Politics of exclusion: The respondents also felt that the politicians were practicing a system in which those who do not support them are completely excluded from national resources, such as proper infra-structural facilities. This is meant to suppress anybody who might want to use his wealth to gain power. Thus, any non- conformist is intentionally stifled. ! Politically motivated allocation of the country’s resources. Thus, the respondents observed that since the introduction of multi-party politics, politicians have often used national resources as an enticement for attracting votes. Thus, national resources are allocated, not on the basis of perceived return on the investment, but according to the anticipated votes from the area. ! A weak and corrupt judiciary system: The respondents felt that the judiciary system is corrupt weak, and lacks the power to work without political coercion. Thus genuine contractual relations with clients are almost impossible and often business conflicts are slow and in most cases justice is not guaranteed. ! Uncertainty emanating from the political environment. President Moi has announced he will be retiring this year. However, there is no clear indication on whether his succession will be peaceful, in view of an uncompleted constitution review. ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  14. 14. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________ Indigenous Business Adaptation Strategies When asked how they have managed to succeed amid the hostile political environment, the owner-managers said they had devised a number of survival strategies. The following major strategies emerged: Figure: Successful Business Adaptation Strategies in Kenya African Family- Careful selection like organisational of markets culture barriers to entry Strategies for managing the socio-political environment Low visibility Keep cleanAfrican ‘Family-like’ Organizational CultureThis approach was evident in three of the cases the successful business. In these companies, thebusiness owner plays a paternal role and is directly involved general well- being of hisemployees. He visits sick employees and pays for the medical needs, pays tuition fees to pursuefurther education and educates the employees’ children. These business owners felt thatdeveloping a family-like organisational culture was essential for the business’s success. Teamwork was often stressed and close supervision de- emphasised. Instead the employees’performance was accessed based on the end results or set targets. The family- like atmosphereis evident to anyone visiting these companies. This strategy enhanced the quality of thecompanies’ product/ service delivery giving them a competitive edge in the market. ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  15. 15. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________Choosing Markets CarefullyThe respondents observed that industries that were high-technology in nature and complexattracted very few corrupt people. The reason is that corrupt people seek for easy deals andwere reluctant to invest their money in ventures that have a long incubation period. Given theunstable political scenario in Kenya, few politicians would want to invest in long term ventures.To minimise risk it would seem attractive to them to go for easy entry and easy exit industries.Moreover, it would be easier to conceal corrupt deals in such industries. Another method underthis strategy was to avoid markets where direct competition with foreign or alien residentowned was imminent.Keep cleanAnother approach is the ‘keep clean and avoid problems strategy’, under this approach thebusiness owners strive to keep their operations as clean as possible. Both the company’sphysical facilities and operations are kept spotless. In doing such business owners are able toseal loopholes that would otherwise be used by corrupt government officers against them. Inthe long run this strategy improves the company’s efficiency, in that it is able to deliversuperior services/ products to its clients. Besides, since the company is perceived as a victim, itis able to benefit from sympathetic customers.Although this strategy helps to keep business owners away from the corrupt officers, it is saidto stifle growth. The argument here is that if you do not ‘grease’ your transactions they willtake longer to be processed. This is harmful to a company and can slow down its operations.However, it keeps the company away from predators.Low visibilityThe idea here is that the more visible the company is to politicians and other governmentofficials, the more vulnerable it is. To reduce this vulnerability, indigenous business ownersprefer to keep their business invisible. A number of methods are adopted under this strategyamong them: dealing with few but large clients, not advertising in the mass media, entering anindustry that deals with intangible products, diversifying into unrelated areas of business, joint-ventures with foreign companies or registering the company in another country.Most of these strategies are not unique to successful businesses in Kenya; however in Kenyathey are not used competitive but survival tool. Under this approach, indigenous businessesadopt a low profile so as to keep ‘predators’ away.Although this approach has been used successful by a number of business owners, it has somepotential shortcomings. For instance, it is not suitable for a business that targets a largeconsumer market. It may also make it difficult for purposes of tax revenue collection by the ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  16. 16. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship __________________________________________________________________________________government. To some extend this approach explains why the indigenous middle in Kenya isinvisible. Conclusion In this paper the literature commenting on the role of the political-institutional environment for indigenous business development in Kenya has been critical reviewed. Through interpretive analysis of four medium sized indigenous businesses in Kenya, it is concluded that the generalised notion of the ‘missing middle’ is something of a misnomer when evaluating small business growth. Indeed, it is found that business owners ‘manage’ the hostile political and institutional environment in order to successfully grow their businesses but they do this by adopting a mix of four approaches/strategies. The key strategy is one of maintaining ‘low visibility’ as a protective measure. The other successful strategies include ‘choosing markets carefully’, ‘keeping clean’ and developing a ‘family organisational culture’ This leads to the conclusion that the issue for small business development and growth in Kenya be more appropriately understood as the ‘invisible middle’. In terms of policy implications, perhaps a more enabling political-institutional environment might just be what Kenya needs to achieve its industrialization target. Appendix Company/ Questions Company A Company B Company C Company D Age 53 53 62 43 Marital status Married Married Married Married Educational B.com, MBA, LLB B.Sc., MBA. LLB B.com Information qualifications Technology Major products Financial services Financial services Banking services Programming and stock broking and insurance services and training Duration in the 10 (19) years 26 years 10 years 10 years business Number of 1 3 8 1 employees at the beginning. 50 Permanent Number of current Over 500 55 38 (previously 51) 50 Casual ___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  17. 17. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________Notes1 Kenya’s first President (1964- 1978). The late President was from the Kikuyu community2 Kenya’s current President (1978 – 2002). He is a Kalenjin3 According to grapevine in Kenya4 Each student was required to list five socio-political responses starting with what they perceived as the mostpressing one. The percentage of response was calculated bases on the number of students out of the total of sixtywho listed it as a problem. E.g. 44 out of 60 students cited political risk, unrest and insecurity as a problem.5 Sunday Nation, Revealed: Kenya list of Corruption January, 19, 2002, no 12908BibliographyBaseline Survey (1999) National Micro and Small Enterprises, Central Bureau of Statistics, K- Rep and International Centre for Economic Growth.Burr, V (1995) ‘An Introduction to Social Constructionism’, London; RoutledgeCowen, M. and MacWilliam, S (1996) Indigenous Capital in Kenya: the ‘Indian’ dimensions of debate, Helsinki: Institute of Development Studies, University of Helsinki.Ferrand, D (1999) Discontinuity in Development, “Kenya’s Middle –Scale Manufacturing Industry. PhD Thesis, University of DurhamGEMINI (1991), Micor and Small Scale Enterprises in Zimbabwe: Results of a Country- Wide Survey, GEMINI Technical Report, No, 25 Dec, 1991Himbara, D (1993) “Myths and Realities of Kenyan Capitalism”. Journal of Modern African Studies 31, 1.Himbara, D (1994) Kenyan Capitalists, the State and Development, Nairobi, EastAfrican Educational PublishersKilby, P (1988) “Breaking the Entrepreneurial Bottleneck in Late –Developing Countries”: Is there a useful role for Government?” Journal of Development Planning___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya
  18. 18. 25th ISBA National Small Firms Conference: Competing Perspectives of Small Business and Entrepreneurship__________________________________________________________________________________Kitching, G. (1985). “Politics, Methods and Evidence in ‘Kenya Debate’ ” in Bernstein and Campbell (1985).Marris, P. and Somerset, A. (1971) African Businessmen: A study of Entrepreneurship and Development in Kenya. London: Routledge & Kegan Paul.Marsden, K (1990) African entrepreneurs, pioneers of development, International Finance Corporation, Discussion Paper. No.9.McCormick, D (1999) ‘African Enterprise Clusters and Industrialisation’: Theory and Reality. World Development, Vol. 27. No.9. Pp. 1531- 1551. Elsevier Science Ltd. Britain.McCormick, D. (1988) “Small Enterprises in Nairobi: Golden Opportunity or Dead-end?” PhD. Dissertation, Baltimore: Johns Hopkins University.North, D.C. (1990) ‘Institutions, institutional change and economic performance’. Cambridge, England: Cambridge University Press.___________________________________________________________________________ The ‘Invisible Middle’: A Critical Review of Small Business Development and the Political-Institutional Environment in Kenya

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