Essays on Manufacturing Production in a Developing Economy: Kenya 1992-94

Abstract: The dissertation consists of five separate empirical papers based on panel data from Kenyan manufacturing firms in the food, wood, textile and metal sectors, collected during the early 1990s, and an overview of the economic literature on small firms in developing countries. The principal tools of analysis are the microeconomic theory of production and econometrics. Although the main thrust is empirical, the papers may also be of some independent methodological interest. The first two papers investigate whether technical efficiency is increasing in firm size and age. The evidence supports this claim with respect to firm size, but not age, which is consistent with previous evidence reviewed. These results, obtained using a stochastic frontier production function model in paper 1, are confirmed in paper 2 using data envelopment analysis combined with second-step regression models. Paper 3 addresses factor intensities and substitution. There exists a positive relationship between firm size and capital intensity. The evidence suggests this is due to non-homothetic technologies and to different input factor prices for small and large firms. Skilled and unskilled workers can be more easily substituted between each other than with capital, which contests the claim that scarcity of skill is a more critical constraint in production than scarcity of capital. Paper 4 is a broad analysis of the performance of the subsectors in terms of technical efficiency and productivity. Small and informal firms are comparably inefficient. Food, followed by metals, is the most productive sector. Growing firms are more productive than contracting ones, suggesting that high turnover may increase overall sector productivity. Several variables do not explain the variation in productivity, including exporting, credit and foreign ownership. Textiles regressed after the trade liberalisation. Paper 5 addresses the debate on the usefulness of the informal sector concept by conducting a comparative analysis of formal and informal small firms. Informal firms are younger, less capital-intensive, almost never run by Asians, pay less skilled wages and no taxes, have poor access to credit and have less educated managers. They invest more often and are less efficient than Asian-managed formal firms, but more efficient than those managed by Africans. This suggests that formality status, independent of size, matters. Also important is how ethnicity affects these differences and the graduation of firms from the informal to the formal sectors.