Discussion Paper No 297 of 2022 on Drivers of Firms’ Innovation in Kenya

Abstract

Innovation is recognized in the Kenya Vision 2030 as an enabler of economic growth and development. The vision envisages a knowledge-driven economic growth with application of innovation to enhance efficiency and raise productivity in the economy. Though Kenya’s performance in the Global Innovation Index has been steadily increasing in the last 5 years, it has remained lower than that of aspirator countries. It is, therefore, important to accelerate innovation in the country to achieve the vision of a globally competitive and prosperous upper middle-income country. Innovation plays a critical role in societal and economic development, particularly in enhancing firms’ value addition activities and competitiveness. Therefore, identifying the drivers of firm level innovation, and types of innovation, is important in achieving the development goal of the country. This study thereby sets out to identify the drivers of innovation of firms in Kenya. The study estimated a probit model using data from the 2018 World Bank Kenya Enterprise Survey. The study established that firm size, female ownership, manager experience and R&D drive firm innovation in Kenya. Further, different factors influence the type of innovation undertaken by a firm. The sector of the firm, R&D and interactions (co-development) influence process innovation. In the case of product/service innovation, firm size, female ownership, manager experience, sector, R&D, and interactions (formal networks) are significant drivers. Proposed policy interventions to accelerate innovation include transforming the National Research Fund to fund R&D activities by MSMEs that focus on process innovation; review and enhancement of other fiscal incentives and research infrastructure provided by the government for innovation to scale uptake of R&D among Kenyan firms; and supporting MSMEs in external knowledge generating activities such as through exports.