SMEs are considered key drivers of socio-economic development and competitiveness due to their multifaceted contributions to the economy. Despite the crucial role they play in the economy, SMEs face various challenges that stifle their potential and contribution to socio- economic development. Manufacturing SMEs are critical in Kenya’s development and yet remain uncompetitive, characterised by production of less diversified products, stagnated growth and contribution and low survival rates. To effectively contribute to economic development, the SMEs need to establish and maintain their competitiveness. Innovation is widely acknowledged as one of the key factors in SME competitiveness and has become prominent in SMEs strategies and government policy. In Kenya, Vision 2030 seeks to intensify the application of Science, technology and innovation to improve productivity and competitiveness of the key sectors.Despite the ardent attention on innovation, empirical studies linking innovation and firm competitiveness are very limited in developing countries like Kenya. This study therefore sought to establish the effect of innovation on firm competitiveness by focusing on manufacturing SMEs in Nairobi County, Kenya. The general objective of the study was to investigate the effect of innovation on firm competitiveness while the specific objectives of the study were; to establish the effect of product innovation on firm competitiveness, to analyse the effect of process innovation on firm competitiveness; to assess the effect of marketing innovation on firm competitiveness; to determine the effect of organizational innovations on firm competitiveness; to examine the combined effect of process, product, marketing and organizational innovations on firm competitiveness and lastly to investigate the moderating effect of firm size on innovation and SMEs’ competitiveness in Manufacturing SMEs in Nairobi county. The study is anchored in Schumpeter’s theory of entrepreneurship and innovation; the theory of the innovative firm; the resource based theory and the dynamic capability theory. To realise the research objectives, a descripto – explanatory research design with a survey strategy was employed. The target population for the study was manufacturing SMEs in Nairobi City County. A sample of 284 enterprises from three industrial Clusters; Industrial area, Ruaraka/babadogo and kariobangi /outering/ the area off mombasa and airport road was drawn. The main instrument of data collection was a semi-structured questionnaire administered to the owner/ manager of the enterprises. Descriptive and inferential statistics were used to analyse data. Multiple Linear regression model was used to analyse relationships and the effect of innovation on firm competitiveness. Study findings reveal that all the four types of innovation; Product, Process, Marketing and Organizational had positive effect oncompetitiveness. However product innovation had insignificant effect (β=0.19, p=0.834> 0.05) while process (β=0.306, p=0.001< 0.05), Marketing Innovation (β=0.205, p=0.021< 0.05), Organizational innovation (β=0.194, p=0.033< 0.05) and combined Innovation (β=0.521, p=0.000< 0.05) had signgificant effect on firm competitiveness.The study also revealed that firm size had significant moderating effect on the innovation and competitiveness relationship. The study recommends that SME practioners consider implementing innovations to enhance their competitiveness, especially innovations with higher novelty that are new to the market, industry, country or the world. To achieve this SMEs need to form linkages and cooperate in innovation with knowledge generating institutions that provide new knowledge. The government on the other hand need to promote and support research that leads to the creation of new knowledge critical for innovation. Lastly the study recommends further research on the relationship between the nature of innovations and the level of impact on firm competitiveness and to empirically establish that radical innovations have a higher impact on firm competitiveness.
CHAPTER ONE INTRODUCTION
Background to the Study
Small and Medium Enterprises (SMEs) are globally recognised as catalysts for global economic growth. SMEs are considered key drivers of socio-economic development and competitiveness due to their multifaceted contributions to the economy. The sector generates significant income and employment, provides opportunities for developing and adopting appropriate technology, and is a major source for innovations (OECD, 2000; Shiu & Walker, 2007; Subrahmanya, Mathirajan & Krishnaswamy, 2010). SMEs also play a critical role in the penetration of new markets and stimulate growth and development of economies (UNDP, 2015).
SMEs being at the centre of innovation practices are considered key players in the competitiveness and growth of nations( UNCTAD, 2002). These enterprises dominate world businesses and are estimated to be more than 95% of all enterprises worldwide, providing over 60% employment in the private sector. In developed countries, SMEs contribute about 64 percent to the GDP and 62 percent of employment (Ayyagari et al., 2007). In Kenya, SMEs cut across all sectors of the economy, and are a major source of employment, income and is key in poverty reduction (GOK, 2005). Ninety eight percent (98 %) of all businesses in the country are SMEs wich contribute about 25 % of GDP and 50% of formal employment giving an employment growth rate of 12-14% per annum (MOIED, 2015; KNBS, 2016).
Kenya Vision 2030 the national blueprint strategy for development and growth acknowledges the crucial role played by SMEs in the economy. SMEs are central in national development strategies aimed at stirring up economic activity and reducing unemployment and poverty. Hence a competitive SME sector is a must if the country is to and attain vision 2030 (GOK, 2007). The sector has over the years been recognized for its role in the provision of goods and services, in stirring competition, fostering innovation, generating employment and poverty alleviation (KNBS, 2016, KAM, 2015).
SMEs are important in national development as they form linkages between small-scale producers and local, national, or export markets; drive competition and innovation; introduce new business methods, products, and services, enhance the enterprise culture; drive industrialization and are a seedbed for entrepreneurial pursuits. SMEs stand out as the definite foundation of economic diversification and expansion, contributing enormously to socio-economic growth (MOIED, 2015; Kiraka, Kobia & Katwalo, 2013; GOK, 2005).
SMEs due to their contribution are thought to be the foundation of entrepreneurial development in economies and key in inculcating an entrepreneurial culture that drives industrial and economic development (OECD, 2004). Entrepreneurship on the other hand is an important lever for employment creation and economic development and is being fronted world wide as a model for socio-economic development. In Kenya, entrepreneurship has almost become synonymous with the SME sector. SMEs are the seedbed of entrepreneurship owing to the fact that entrepreneurship is majorly practiced and nurtured in the SMEs. Hence to promote entrepreneurship for development, the
Government of Kenya seeks to establish an enabling legal framework for the development of the SME Sector (GOK, 2005; KNBS, 2016).