Discussion Paper No. 338 of 2024 on Digital Technology Utilization in Kenya’s Formal and Informal Micro, Small and Medium Size Enterprises

Abstract

Digital technology has the potential to enhance productivity of Micro, Small and Medium Size Enterprises (MSMEs) through enhanced market access and improved efficiency. The value added by the MSMEs' sector in Kenya is 33.8 per cent while it absorbs over 90 per cent of total labour force. Further, the informal sector, which accounts for 79 per cent for all MSMEs, contributes 10.4 per cent gross value added by MSMEs. A Tobit model was used to determine the utilization of digital technology in Kenya MSMEs using 2016 cross sectional MSMEs firm level data from the Kenya National Bureau of Statistics (KNBS). The level of informality was found to determine the use of digital technology, with informal sector MSMEs having low digital technology usage. In addition, there is a digital divide with low uptake of digital technology among women-owned firms. Further, the nature of worksites influences the use of digital technology with commercial or industrial sites and kiosks or jua kali sheds showing greater use of digital technology among informal MSMEs. Lastly, the usage of digital technology and innovation among MSMEs' are closely related. The study recommends continuous development of appropriate training on digital technology targeting informal MSMEs through MSEs associations; enhancement of the capacity and capability of women entrepreneurs to access and utilize digital technology through appropriate gender-sensitive policies and initiatives; design and implementation of appropriate ICT complementary worksites for informal MSMEs; and development and operationalization of a national innovation policy to promote the identification, documentation and promotion of innovations in Kenya. The operationalization of the national innovation database for digital technology is therefore critical.