Discussion Paper No. 228 of 2019 on Effect of Business Environment on Productivity of Informal Manufacturing Enterprises in Kenya

Abstract

A favorable business environment enables easy entry and exit of domestic and multinationals from the markets, lessens the cost of doing business, and hence leads to higher productivity and consequently job creation. This study uses firm level survey data of informal manufacturing enterprises in Kenya to study the effect of business environment on total factor productivity (TFP) using data on micro, small and medium enterprises collected by KNBS in 2016. The sector contained 1,044 observations/enterprises, which comprised 13 sub-sectors. Out of these sub-sectors, the study focused on five major sub-sectors in which a total of 998 enterprises were interviewed (95.6%). These were 370 firms in the wearing apparel, 206 firms in the manufacture of food products, 203 firms in the manufacture of furniture, 157 firms in the manufacture of fabricated metal products (except machinery and equipment) and 62 firms in the manufacture of wood and of products of wood and cork (except furniture, manufacture of articles of straw and plaiting materials. The study employed a Cob-Douglas production approach to derive the total factor productivity.