Discussion Paper No.171 of 2014 on Analysis of Factors Determining Performance of Kenya's Manufactured Exports

Abstract

This paper examines the factors that influence the performance of Kenya's manufactured exports, and covers the period between 1980 and 2012. It focuses on domestic factors that affect production and participation of firms in the manufacturing sector. It also looks at the effects of absorptive capacity of key trading partners on performance of these exports. The Principal Component Analysis (PCA) is used to compute the composite infrastructure index based on transport, communication and energy indicators. The long run relationships were estimated and the error correction model was used to estimate the short run dynamic relationships of manufactured exports and selected factors. Empirical results indicate that infrastructure development, human development, real exchange rate and output of the manufacturing sector are important in explaining the performance of manufactured exports. The study recommends increased infrastructural investment by both the national and county governments as a way of boosting production in the manufacturing sector. Equally important is investment in human development, which encompasses improving standards of education, upgrading skills, ensuring higher health standards and reducing poverty. The study also recommends increased investment in manufacturing sector in order to increase output and exports from the sector.