Discussion Paper No 382 of 2025 on Cost Structure and Profitability of Manufacturing Firms in Kenya

Abstract

The Kenya manufacturing sector is vital to achieving socioeconomic development and is critical to achieving the Kenya Vision 2030 target of propelling the economy to a 10 per cent growth rate. However, high costs of production have the potential to constrain firms from achieving optimal performance. This study examined the cost structure of Kenyan manufacturing firms and its influence on the profitability of firms listed in the Nairobi Securities Exchange. The various cost components of these firms included manufacturing costs that comprised cost of goods sold, and non-manufacturing costs comprising administrative costs, marketing and distribution costs, finance costs, and compliance costs. A panel random-effects model was applied in the analysis using data for the period 2014 to 2023. The findings showed that manufacturing costs measured by the cost of goods sold formed the largest share of total costs and had a negative effect on firm profitability. The cost of raw materials and electricity significantly contributed to elevated production expenses. On non-manufacturing costs, tax obligations, especially corporate taxes, negatively influenced firms’ profitability. To ease the cost-related constraints facing the manufacturing sector, the following policy recommendations are proposed. First, under manufacturing costs, there is need to promote a predictable taxation regime for imported raw materials and intermediate goods that is cognizant of the EAC Common External Tariff and the Export-Led Duty Remission Scheme. Second, reviewing the threshold for power consumption to allow more manufacturing firms access the time-of-use tariff to lower electricity costs is critical.