INFLUENCE OF INTELLECTUAL CAPITAL ON THE GROWTH OF SMALL AND MEDIUM ENTERPRISES IN KENYA

Transcription

1 INFLUENCE OF INTELLECTUAL CAPITAL ON THE GROWTH OF SMALL AND MEDIUM ENTERPRISES IN KENYA NGUGI JOHN KARANJA STUDENT NO. HD413/0224/2010 SUPERVISORS: PROF. R.W. GAKURE DR. KAHIRI

2 INTRODUCTION The study sought to investigate influence of intellectual capital on the growth of SMEs in Kenya. SMEs make up over 90 per cent of all enterprises in the world (Daley, 2001). Entrepreneurship is the process of utilization of intellectual capital (Robert & Michael 2009). Intellectual capital is key resource to the growth and survival of SMEs (WB, 2012). SMES are engines of economic growth world wide through job creation and social democracy (World Economic Forum, (2011). Intervenes in poverty alleviation through job creation (WEF ). This shows why the sector is important for economic

3 Global Perspective Wealth and growth in today's world economy are driven by intellectual capital (Eberhart, Maxwell & Sidique, 2004). Intellectual capital is recognized as the foundation of entrepreneur enterprise growth and competitiveness in the twenty-first century (Bounfour & Edvinsson, 2005). In a knowledge-based economy, intellectual capital is a key driver for the success of the organizations (Wu, 2010). The above global studies is an illustrative evidence of influence of IC on growth of SMEs. 9/8/ Karanja Ngugi

4 Kenyan Perspective World Bank Report shows that issue of concern for Kenya is low intellectual capital utilization by SMES owners among key comparator countries that impact negatively on Gross domestic Product (WB, 2010). A study by Ngari, Kamau & Gichira, (2013) on the Relationship between Intellectual Capital Accounting and Financial Performance: An empirical review of Kenyan pharmaceutical firms found that the relationships between the performance of a company s intellectual capital and profitability, employee productivity, and growth in sales are informative. Gakure, (2012) show that creation of new knowledge or technology forms intellectual asset that is key to competitiveness of the firm. The above study is a manifestation that intellectual capital is an important input for growth of entreprises. 9/8/ Karanja Ngugi

5 Introduction (Cont d) SMEs contributed 70% GDP in 2011 in Kenya which is a manifestation of economic development of the country(rok,2012). United States, 99.7 per cent (Heneman, Tansky, and Camp, 2000) China, 99 per cent (Cunningham & Rowley, 2008), Europe, 99 per cent (Rauch and Frese, 1998), countries with over 90% growth of GDP achieved the rate from high utilization of intellectual capital by SME owners (WB, 2012). Intellectual capital has capability to innovate and offer a better competitive advantage (Subramanian & Youndt, 2005). 5

6 Statement of the Problem Collapse ratio of SMEs in both developed and developing countries is alarming (Hodgetts & Kuratko, 2004). SMEs fail within first five years of their business operation (Zimmerer, Searborough &Wilson 2008; Hodgents & Kuratko, 2004). IC is a key factor in enterprise success and lever for value creation (Marco Montemari, 2010 ). High utilization of IC yields to growth of SMEs (WB, 2010). Bontis, (2000) show that low utilization leads to poor quality of products and technology. Huang and Wu, (2010) informs that intellectual capital is known to contribute to the growth of SMEs. 6

7 Statement of the Problem cont d Evidence from Kenya shows that three out of five SMEs fail within their first three years of operation in Kenya (ROK, 2005). This collapse rate is alarming (WB, 2012) SMEs in Kenya are evidence of a missing middle : a shortage of middle - sized growth - oriented SMEs that could make an important contribution to development (Khalique, Shaari, Bin M Isa & Agee (2011). PWC (2012) show that SMEs employ employees with low education and less motivated that reveal that IC is wanting. Failure rate leads low economic development and loss of jobs (RoK, 2012). Would lack of utilization of intellectual capital be the contributor of this high SME mortality rate in Kenya? Therefore the study seeks to find out the influence of intellectual capital on the growth of small and medium enterprises in Kenya 9/8/ Karanja Ngugi

8 General Objective The study sought to investigate influence of intellectual capital on the growth of small and medium enterprises in Kenya. 8

9 Specific Objectives To establish the influence of managerial skills as part of IC on the growth of SMEs in Kenya. To find out the influence of innovativeness as an element of IC on the growth of SMEs in Kenya. To assess the influence of Entrepreneurial skills as constituent of IC on the growth of SMEs in Kenya. To establish the influence of structural capital as factor of IC on the growth of SMEs in Kenya. To find out the influence of customer capital as module of IC on the growth of SMEs in Kenya. 9

10 Research Questions To what extent does managerial skills as a component of IC influences the growth of SMEs in Kenya? What is the influence of innovativeness constituent of IC on the growth of SMEs in Kenya? How does Entrepreneurial skills an element of IC influence the growth of SMEs in Kenya? To what extent does structural capital module of IC influence the growth of SMEs in Kenya? How does customer capital factor of IC influence the growth of SMEs in Kenya? 10

11 Contribution of SMEs to economic development Author and Year Country Percentage Heneman, Tansky, & Camp, 2000 Cunningham & Rowley, 2008 (Rauch & Frese, 2000 United States of America China Europe 99.7 % of the firms in the United States 99%of the firms in china 99%of the firms in the Europe Lin, 1998 Philippines 95%of the firms in Philippines Lin, 1998 Taiwan 96.5%of the firms in Taiwan Man & Wafa, 2007 Malaysia 99.2%of the firms in Malaysia World Bank, 2012 Kenya Over 70% of the GDP 11 The above table shows that SMEs contribute a major portion of the

12 Literature Review Divided into the following parts: i. Theoretical review with respect to independent ii. variables The conceptual framework that guides the study. iii. Empirical review of past studies iv. Critique of the available literature gaps. and the research 12

13 Independent variables Intellectual Capital Dependent Variable Managerial skills Planning and organizing Level of Education. Experience. Human resource management practices. Innovativeness Emergence of new products New markets Research and development Intellectual property Entrepreneurial skills Risk taking Proactiveness Need for achievement (N Ach) Growth of SME Sales revenue Return on asset Market share Structural Capital Cost per transaction Social influence Patents and trademark proprietary databases Customer capital Customer loyalty. Market rivalry. Customer relationship marketing 13

14 Supporting Theories Research Question To what extent do managerial skills as a component of IC influences the growth of SMEs in Kenya? What is the influence of innovativeness constituent of IC on the growth of SMEs in Kenya? How does Entrepreneurial skills an element of IC influence the growth of SMEs in Kenya? To what extent does structural capital module of IC influence the growth of SMEs in Kenya? How does customer capital factor of IC influence the growth of SMEs in Kenya? Supporting Theory Supported by Mintzberg Theory and Human capital theory. Instigated by Joseph Schumpeterian Theory on Innovations 1934 about creative destruction. Was informed by psychological theory by David McClelland (1961). Was instigated by resource based view by Penrose, (1959). Was prompted by resource based view Penrose, (1959). 9/8/ Karanja Ngugi

15 Origin of Variables Variable Scholars Year Discussion Managerial skills Schultz 1961 Schultz argues that investment in education and training which is a key component of intellectual capital leads to an increase in human productivity, which in turn leads to a positive rate of return and hence of growth of businesses. Bontis 2002 Increased training of employees which is a part of IC may leads to higher productivity and enhanced creativity. Martin and Staines 2008 Managerial skills is a business acumen, which is described as an intuitive understanding of how enterprises make money and a realization that a compelling vision can be effectively translated into an actionable strategy through utilization of IC. Mintzberg 2009 Informs that decisional skills, technical skills, interpersonal skills and informational skills are key integral part of intellectual capital that influences performance of enterprises. Research Gap: Future research should15attempt to further explore role of managerial skills (which is a key component of IC) on SMEs growth in other transition economies.

16 Origin of Variables Variable Scholars year discussion Innovativeness Schumpeter s 1934 Emphasized the role of Intellectual capital through creative destructions and involves seeking out opportunities for novel value. Lehtimaki 1991 Attributed the emergence of IC such as new products through research and development for increased growth. Lumpkin & Dess 1996 Emphasized on IC through creative processes that may result in new products, services or technological processes. Vonortas & Xue 1997 Linkage to sources of expertise for learning were the major forces that influenced firms in adopting a process innovation for IC. Chanaron 1998 Close working relationships with a key customer and close analysis of competitor products are the major drivers of innovation in SMEs. Danneels & Kleinschmidt 2001 Innovations led to emergence of new markets. 16

17 Origin of Variables Variable Scholar Year Discussion Entrepreneurial Skills McClelland 1961 Growth of firms can be explained in terms of need for achievement which comprises of IC. Zahra 2005 Entrepreneur s industrial tenure of IC is associated with risk taking propensity. RESEARCH GAPS: Related studies should be carried on SMES since the above studies were on large enterprises. 17

18 Origin of the Variables (Cont d) Variable Scholars Year Discussion Customer capital Fatoki 2011 SME owners should always ensure that they maintain strong network ties with customers, suppliers, commercial banks and government agencies which an intellectual capital component that enhances growth. Ann, Ling-Ching Chan, Wen-Ying Wang 2012 IC components of customer capital such as customer loyalty and market intensity influences growth of SMEs. Gap: The study only concentrated on large firms hence a study needs to be carried out in small firms. 18

19 Structural Capital Variable Scholars Year Discussion Structural capital Desouza & Awazu The structural capital component of IC in SMEs is primarily developed and maintained by its employees. Hsu 2006 The main focus of structural capital is to embrace a sound enterprise foundation which translates to enhanced growth of the firm. Gap: The studies have not given a clear link between structural capital and SMEs growth. 9/8/

20 SME Growth Dependent Variable Scholars Year Discussion SME growth Romer 1993 New Growth theory show economic growth results from utilization Of IC associated with new knowledge which influences SMEs growth 9/8/ Karanja Ngugi

21 Research Design Research Design Scholar Year Discussion Descriptive Mugenda & Mugenda Creswell determines and reports the way things are -is used when data are collected to describe persons, organizations, settings or phenomena Exploratory Orodho allows the researcher to consider many different aspects of a problem. Matak & Gilaninia was philosophized by a similar study on Examination of Relationship between Intellectual Capital and the Small Business Enterprises Performance in Guilan Province, Iran. The study adopted both descriptive and exploratory research design as road map in answering the research questions 21

22 Research Design (Cont d) Scholar Year Discussion Population Sekaran Entire group of individual or objects having common observable characteristic. include 2500 SMEs in Manufacturing, 1500 SMEs Trade, 560 SMEs in other services (RoK, 2012) Stratified random Sampling Orodho Fatoki A technique used where the population is not homogeneous. -Used same technique when given homogenous population to study role of IC on growth of SMEs in South Africa. Sample size Kerlinger % of the target population is sufficient i.e 250 SMEs in Manufacturing, 150 SMEs Trade, 56 SMEs in other services 22

23 Data collection Research Design (Cont d) Scholar Year Discussion McNamara Fowler Interview guide since in-depth information -Postulates questionnaires as scientifically and objectively than other forms instruments. Bontis (1998) and Bontis et al.(2000) used questionnaire in similar study of IC and Growth of SMEs Pilot testing Cooper &Schindler Detect weaknesses in design and instrumentation Mugenda &Mugenda The Kunder-Richardson (K-R) 20 formulas used to access internal consistency of an instrument Cooper & Schilder,, Creswell, and % of the sample should constitute the pilot test

24 Data Analysis First, data was analyzed by descriptive in line in a similar study by Daud &Yusoff 2011 in Malaysia Then multiple regression in line with Ahangar (2011) who studied the relationship between intellectual capital and financial performance. Each research questions were augmented by descriptive statistics and inferential statistics where both questionnaire and interview guide was used as instruments. 9/8/ Karanja Ngugi

25 Data Analysis, Findings & Discussion The study was guided by the following research questions; i. To what extent do managerial skills influence the growth of SMEs in Kenya? ii. iii. iv. How do Entrepreneurial skills influence the growth of SMEs in Kenya? What is the influence of innovativeness on the growth of SMEs in Kenya? To what extent does structural capital influence the growth of SMEs in Kenya? v. How does customer capital influence the growth of SMEs in Kenya? 25

26 Demographic data From the data collected, out of the 456 questionnaires administered, 320 were filled and returned, which represents 70% response rate. Supported by Mugenda and Mugenda (2003) Age, (46.6%) of the respondents were between years of age formed the highest percentage. Was in line with Muijanack, Vroonhof and Zoetmer (2003) who determined that the optimum age for entrepreneurs was Education most of the respondent possessed first degree or diploma and the study benefited that the respondent understood the instrument for data collection making the finding of the study valid and credible. Concur with King and McGrath (2002) who indicated education impact positively on growth of firms. 9/8/ Karanja Ngugi

27 Role of Managerial skills on growth of SMEs in Kenya The study was guided by the following Objectives Research Findings Inferential Statistics to show evidence Objective (i) i. To establish the influence of managerial skills as part of IC on the growth of SMEs in Kenya. ii. To Achieve the results, stepwise multiple regression was used results on show Technical Skills Interpersonal Skills and employees level of education is a key IC factor and important lever for SME s growth in Kenya. Literature by Papulova and Mokros (2007) ; Edvinsson 2000 ; and Svendsen, 2006 concurs with the findings. It can therefore be infered that growth of SMEs is associated by the level; of experience and education of the entrepreneurs. Knowledge of the entrepreneurs regarding markets and products 27 is a key factor for the growth of SMEs R 2 =.789; P value= F cal = > F crit = 1.85 Scatter diagram shows a positive gradient. This indicates, that entrepreneur owner/manager managerial skills is a key IC component that significantly influences the growth of SMEs in Kenya. 9/8/2013 Karanja Ngugi

28 Role of Entrepreneurial Skills as a component of IC on growth of SMEs in Kenya. Objective (ii) ii. To assess the influence of Entrepreneurial skills as a component of IC on the growth of SMEs in Kenya. Research Findings Results show that risk taking Propensity, Planning skills, Budgeting skills and maintenance of financial records which form a part of IC positively influences the growth of SMEs. The study findings concur with those of Hursky and Tuunanen, (2006); Wiklund and Shepherd, (2003). Inferences can therefore be made that entrepreneurial skills forms a key part of IC that is an important lever for SMEs growth. Inferential Statistics to show evidence R 2 = 0.753, and P value = F cal = > F crit = 1.85 Scatter diagram show a positive gradient. This implies that there is a strong linear relationship between owner/manager entrepreneurial skills on SMEs growth 9/8/ Karanja Ngugi

29 Role of Innovativeness as a part of IC on growth of SMEs in Kenya. Objective (iii) iii. To find out the influence of innovativeness as a part of IC on the growth of SMEs in Kenya. Research Findings The study findings reveal that provision of incentives for innovative employees, number of patents within the enterprise and level of new product to total sales form key part of IC that influences growth of SMEs in Kenya. Concur with Hyrsky & Tuunanen (2006) and Gans and Scott (2000) about the findings. Inferences can therefore be made that utilization of innovative employees boosts the growth of the entreprise. 29 Statistics to show evidence R 2 =.746. P value = F cal = F crit = 1.85 Scatter plot shows a positive gradient. This indicates that there is a strong linear relationship between innovativeness as part of IC on the growth of SMEs in Kenya. 9/8/2013 Karanja Ngugi

30 Role of Structural capital as a constituent of IC on growth of SMEs in Kenya. Objective (iv) iv. To establish the influence of structural capital as a constituent of IC on the growth of SMEs in Kenya. Research Findings Findings show that SMEs that reduce transaction cost, transaction time, have trademark and proprietary databases and data systems that facilitates access to relevant information as part of intellectual capital influence their growth. The findings concur to those by Hsu (2006); Shelley (2004) ;Edvinsson and Malone (2007). It can therefore be inferred that structural capital form a key integral part of IC that influences growth of SMEs. Statistics to show evidence R=.724 a and P value = 0. F cal = > F crit = 1.85 This is an indication that there is a strong relationship between structural Capital which is a constituent of IC on the growth of SMES in Kenya.

31 Objective (v) Role of Customer Capital as an element of IC on Growth Of SMEs In Kenya v. To find out the influence of customer capital as an element of IC on the growth of SMEs in Kenya. Research Findings The regression results reveal that its customer satisfaction, time taken to resolve problem, longetivity of relationships and understanding of target markets which are crucial components of IC positively influence the growth of SMEs in Kenya. The findings concur with those of Bontis (2000) ; Roos (1997) and William and Richardson (2000). Inferences can therefore be made that SMEs should develop strategies that lead to building a strong relationship between the enterprise and the customers to enhance their growth. 31 Statistics to show evidence R 2 = 0.636, P value = F cal = > F crit = 1.85 Scatter plot shows a positive gradient. This shows a strong positive relationship between SMEs growth and Customer Capital which is an element of IC. 9/8/2013 Karanja Ngugi

32 Inferential statistics for overall model Model Unstandardized Coefficients t Sig. B 1 (Constant) Managerial skills Entrepreneural skills Innovation Structural capital Customer capital a. Dependent Variable: GROWTH

33 Summary, conclusions and Recommendations To what extent do managerial skills influence the growth of SMEs in Kenya? Managerial skills of the owner/managers positively influence the growth of SMEs in Kenya. According to the findings,seventy eight decimal nine per centum (78.9%) of the corresponding change in growth of SMES can be explained by a unit change in managerial skills. What is the influence of innovativeness on the growth of SMEs in Kenya? The finding of the study indicate that innovativeness influences the growth of SMEs in Kenya. According to the findings, Seventy four decimal six per centum (74.6%) correspondence on growth of SMES can be explained by a unit change in innovativeness. 33

34 Summary, conclusions and Recommendations cont d How does customer capital influence the growth of SMEs in Kenya? Customer capital influences the growth of SMEs in Kenya. According to the findings sixty three decimal six per centum (63.6 %) correspondence on growth of SMES can be explained by a unit change in customer capital. How do Entrepreneurial skills influence the growth of SMEs in Kenya? Entrepreneurial skills have a great positive influence the growth of SMEs in Kenya. According to the findings, fifty six decimal six per centum (56.8%) correspondence on growth of SMES can be explained by a unit change in entrepreneurial skills. To what extent does structural capital influence the growth of SMEs in Kenya? Structural capital influence the growth of SMEs in Kenya. According to the findings, fifty two decimal four per centum (52.4 %) correspondence on growth of SMES can be explained by a unit change in structural capital. 9/8/ Karanja Ngugi

35 Overall Effect of the Variables The study found out that there was 83.9% of corresponding change in the growth of SMEs for every change in all the five predictor variables jointly. Test of overall significance of all the five variables jointly, managerial skills, entrepreneurial skills, structural capital, customer capital, and innovativeness using ANOVA, at 0.05 level of significance found the model to be significant 9/8/ Karanja Ngugi

36 Recommendations IC should make entreprenuers seize opportunities, be proactive in the market place, make new product and process innovations. IC component such as technical, interpersonal, and conceptual skills should guide entreprenuers effectively plan, lead, organize and control the enterprise effectively leading to increased performance and consequently growth. promote customer capital which is an important element of intellectual capital that entails establishing a solid stock of connections, interactions, relationships, linkages, closeness, goodwill, and loyalty between a firm and its customers, downstream clients, strategic partners or other external stakeholders as this has a positive and significant influence on the growth of SMEs in Kenya. 36

37 Policy Implications Owner entrepreneur should embrace knowledge and IC in handling critical issues in management of SMEs. Entrepreneur owner/manager should actively explore new product ideas by conducting customer and close analysis of competitor products as this positively influences SMEs growth. Owner/managers should pursue a close and direct contact with their customers and even know them socially and personally through developing a stronger knowledge channel to improve their ability to capture such customer knowledge and consequently enhance the growth of the enterprise. 9/8/ Karanja Ngugi

38 Publications Ngugi, J. K., Gakure, R. W., Were M. S., Ngugi, P. K., Kibiru C. R., (2012).The Influence of Intellectual Capital on the Growth of Small and Medium Enterprises in Kenya. Journal of Business Management and Corporate Affairs, Volume 1, Issue 1, pp MC Orege M.O, Muiru J.M & Ngugi J.N, (2013) The Influence of Innovativeness on the Growth of SMEs In Kenya; International Journal of Business and Social Research Volume.3 Number, 2013 Gakure, R. W., Ngugi, J. K., Musangi, P. N., & Waithaka, S. M. (2012). Effect of Credit Risk Management Techniques on the performance of unsecured Bank Loans employed Commercial Banks in Kenya. International Journal of Business and Social Research, 2 (4). ISSN: 2078:7049 volume 2, number 2, 2012 Gakure, R. W., Ngugi, J. K., Waithaka, S. M., & Wambui, M. M. (2012). A Study on the importance of customer loyalty on Fast Moving Consumer Goods in the era of Globalization: A Case Study of Unilever Nairobi Kenya. Prime Journal of Business Administration and Management (SSN: ). Ngugi J K, Kiambati K.K. and Mugo H.W.,(2012). The effect of Globalization on the Performance: Strategies of Commercial Banks in Kenya Journal of Public Procurement and Contract Management ISSBN: ISSN: 2078:7049 volume 1, number 2, Ngugi J.K, Gakure R.W. and Mugo H.W. (2012) Competitive intelligence practices and their effect on profitability of firms in the Kenyan banking industry: Journal of business and social research ISSN: 2078:7049 volume 1, number 1, Ngugi J.K, and Mugo H.W. (2012) Internal Factors Affecting Procurement Process of Supplies in The Public Sector; A Survey of Kenya Government Ministries. Paper presented at 5th International Public Procurement Conference was held on August 17th, 2012 in Seattle, USA. 38

39 Continued Ngugi J.K., (2012) Strategies for curbing public procurement fraud and corruption in Kenya: Journal of Public Procurement and Contract Management ISSBN: volume 1, number 1, Ngugi, J. K., Gakure, R. W., Waithaka, S. M., & Nyambura, A. K. (2012, August). Application of Shapiro Model in Expalining Entrepreneurial Intention among University Students. International Journal of Business and Social Research. ISSN: 2078:7049 volume 2, number 2, 2012 Gathai, E. W., Ngugi, J. K., Waithaka, S. M., & Kimingi, C. N. (2012). Analysis of Factors That Influence Implementation of Performance Contracts In State Corporations (A Case of Kenya Civil Aviation Authority). (S. Mims-Cox, Ed.) International Journal of Humanities and Social Science, 2 (17), Waithaka, S. M., Ngugi, J. K., Aiyabei, J. K., Itunga, J. K., & Kirago, P. (2012). Effects of dividend policy on share prices: A case of Companies in Nairobi Securities Exchange. Prime Journal of Business Administration and Management, Vol. 2 (8),