Discussion Paper No. 278 of 2021 on Factors Influencing Services Firms' Investment in Research and Development in Kenya

Abstract

Research and development (R&D) refers to creative works done to increase knowledge and make new applications using the acquired knowledge. R&D is a vital input to innovation, which plays a critical role in a firm’s competitiveness and productivity. R&D investment in Kenya, like most African countries, is below the Africa Union target of 1 per cent of GDP. While half of the services sector is envisioned to deliver 10 per cent annual growth in the Kenya Vision 2030 and create employment, the sector has been performing below its potential in the last decade, which could be attributed to low R&D investment by service firms. Only 15.75 per cent of service firms invest in R&D, of which 45 per cent are small firms, 43 per cent are medium-sized firms and 12 per cent are large firms. The study employed a double hurdle model to analyze the factors that influence service firms' investment in R&D in Kenya. Specifically, the study sought to determine the factors that influence service firm’s decision and intensity to invest in R&D in Kenya. The study used 546 observations from the World Bank Enterprise Survey 2018. The study found that participation in international markets, firm size, family ownership, informal competition, previous innovation, skilled human resource on innovation, innovation facility (hubs), taxation and political stability were the key factors that influenced service firm’s decision to invest in R&D. Firm sub-sector, firm age, skilled human resource, skilled human resource on R&D and informal competition influenced firm investment in R&D intensity. To foster firm’s investment in R&D, the government could consider: public funding to recommended level of 2 per cent of GDP; introducing R&D grants and subsidies to encourage service firms to undertake R&D; rolling out R&D investment campaigns at the county levels, and rolling out sensitization and capacity building programmes on R&D at firm level. To ensure fair competition between formal and informal firms, the National Treasury could consider lowering tax rate for R & D investing firms.