Developing Kenyan SMEs through linkage to Global Value chains

Despite the continued importance of SMEs to the Kenyan economy; supportive policy intervention towards the sector continues to be sub optimal at best and downright wrong in the worst case scenario. Example; the COVID 19 stimuli program rolled out in 2020 to backstop SMEs included tax breaks (VAT, Corporate tax etc), Release of cash (Ksh 35 Bn or so) into the economy through reduction of bank cash reserve ratio among other intervention despite the glaring fact that over 5 million out of 7.4 million SME are informal in nature hence the program was dead in the water.

Similarly, there is policy dissonance in regards to supporting SMEs in Kenya. For example trade deals under AGOA and most recently with the UK bring value back to the economy in the short term but will have long term negative repression to development of local manufacturing. Further the continued development of special economic zones with little or no consideration of backward SME integration will mean no trickle down value back to the economy either through capital or technology transfer.

The current SME support policy trend must shift to creating significant value rather than short term remedies. For instance, the current SME sector distribution must shift from majority being wholesale-retail (which is highly susceptible to external shocks and has limited upscale value) to manufacturing which has a real potential to contribute to significant socio economic development.

Linkage of Kenyan SMEs to global value chains must be made a key policy priority cognizant that international trade and the expansion of global value chains has a direct correlation with development especially for developing countries.

For example; Samsung makes its mobile phones with parts from 2,500 suppliers across the globe. One country—Vietnam—produces more than a third of those phones, and it has reaped the benefits. The provinces in which the phones are produced, Thai Nguyen and Bac Ninh, have become two of the richest in Vietnam, and poverty there has fallen dramatically as a result. Similarly, in Ethiopia firms participating in global value chains are more than twice as productive as similar firms that participate in standard trade.

A global value chain breaks up the production process across countries. Firms specialize in a specific c task and do not produce the whole product. In the case of Kenya; the country can establish the value chain that fits its strength and align SMEs towards the same through policy alignment and resource allocation

Kenya must transition from exporting commodities with no value addition to exporting basic manufactured products in the short term then to advanced manufacturing in the medium to long term.

To achieve this fundamental policy must focus on the following key areas;

Attracting foreign direct investment,

Negotiating trade liberalization that offer significant market for local SME manufactures as a whole, innovative investment in transport, communication and infrastructure to ensure value for money through public private partnership as well as infusion of competition among firms.

Investment in Human capital aligned to global value chain demand (The Penang Skills Development Centre in Malaysia is an example of an industry-led training center that has played an important role in supporting Malaysia’s upgrading to electronics and engineering global value chains)

Direct linkage programs between SMEs and lead firms in global value chain by ensuring SME through special economic zones ensuring effective support