Discussion Paper No. 89 of 2008 on Determinants of Inter-firm Networks in Kenya

Abstract

The small firm sub-sector has the potential to reduce poverty and unemployment in Kenya. However, in the face of global competition, market uncertainties and rapid technological changes, it is necessary to assist small enterprises to access information that can build their business competencies. This study applies descriptive and analytical methods to a stratified random sample of 71 enterprises in Nakuru Town to examine how firms use networks as information channels. A logit model is estimated to explain information-seeking behaviour of enterprises whereas an OLS regression model traces the extent to which entrepreneurs and enterprises influence network formation. The study establishes that various types of inter-firm networks exist among manufacturing enterprises in Kenya. However, small businesses have weak inter-firm networks, relations that are crucial in overcoming the market, material and credit constraints. Further, the study shows that the size of the enterprise, previous entrepreneurial experience and level of education of owner-managers positively influence the choice of inter-firm networking. The study thus recommends incentive mechanisms that encourage sub-contracting networks between small and large enterprises. Nevertheless, the findings need to be re-examined using more comprehensive data that captures effects of macro environment on inter-firm networks, for conclusive policy options to be drawn.