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KIPPRA

An International Centre of Excellence in Public Policy and Research

Leveraging on ICT to promote innovations amongst MSMEs in Kenya

There is a growing pool of literature establishing ICT as an enabler of innovation. For example, a 2019 KIPPRA study on The Role of Information Communication Technologies (ICT) in Innovation in Kenya’s Micro, Small and Medium Establishments[1], found that ICT stimulates innovation; specifically, the use of mobile phones and mobile money, websites, computers, tablets and even video camera’s is positively correlated with innovation. ICT introduces capabilities which would not have been practical in its absence and can further enhance efficiency and productivity. Kenya Vision 2030 recognizes this and identifies ICT as amongst the enablers or foundations of economic growth, given its catalytic role in enhancing productivity and lowering costs. Kenya’s Vision 2030 also recognizes the role of Science, Technology, and Innovation (STI) in enhancing productivity and efficiency in the economy. Vision 2030 calls for knowledge driven economic growth and therefore ICT and STI are expected to take the center stage. The appreciation of STI in development is also recognized in EAC Vision 2050 and Agenda 2063 of the Africa Union as an enabler, as well as in Sustainable Development Goals (SDGs) where it is identified as a driver of industrialization and economic growth and development.

Kenya’s private sector, which is highly ranked within the region in innovation, is key in achieving knowledge driven economic growth. The Global Innovation Index 2020 ranks Kenya the 3rd most innovative country in Sub Sahara Africa. Innovation activity in Kenya is carried out by both formal and informal private sector enterprises. These enterprises introduce significantly improved products and services, new or significantly improved methods of production, or new marketing methods. However, the proportions of enterprises innovating are low. For instance, as indicated in the 2016 Kenya National MSME survey, 9.4% of the micro, small and medium size enterprises (MSMEs) participate in product/service innovation, 5.4% in marketing innovation and 3.9% in process innovation. Over half of the enterprises undertaking product or process innovation are informal.

A study by KIPPRA, titled County Business Environment for Micro and Small Enterprises in Kenya, finds low average score for innovation and patenting at 0.5 and 0.09, respectively; the score ranges from zero (0) and one hundred (100). Innovation and use of IP is therefore relatively low amongst MSMEs. High costs of innovation, lack of incentives to innovate, limited finance to fund innovation and low levels of awareness on IP are identified amongst the challenges facing these enterprises. A 2004 IP Audit for Kenya had similar findings. The audit established that several Kenyan inventors and innovators are unaware of the different options that they need to protect and/or commercialize their innovations. Thus, awareness of IP as challenge is yet to be effectively addressed.

What is the role of the government in supporting innovation amongst MSMEs? The role can be classified as direct for instance through provision of grants or tax incentives or indirect through having in place enabling laws and policies. An example of direct assistance can be drawn from Organisation for Economic Co-operation and Development (OECD) where over 75% of OECD countries have introduced tax incentives for R&D.[2] This takes the form of R&D allowances, R&D subsidies, or tax credit. The business enterprises expenditure on R&D (BERD) in these countries is consequently high, often around 70%. A stark comparison to Kenya, where BERD is low at 8.7% as reported in the 2014 African Innovation Outlook. Some OECD countries also offer nontax incentives such as grants, loans, loan guarantees and venture capital to stimulate private R&D investments. The government also supports innovation indirectly through enabling laws as is the case in the US with the provisions of the 1980 Bayh-Dole Act. The Act enables universities and other institutions to patent and commercialize inventions that resulted from federally funded activities. Prior to this Act, these discoveries were federal property. The Act which also requires universities to share royalties with the inventors, has contributed to an increase in the number of universities owned patents and the commercialization of inventions by universities.[3] Business expenditure on R&D(BERD) is an important activity for many sectors, particularly ICT industries which top the list of companies with high BERD but also top the list of most innovative sectors.

How can the government leverage on ICT to promote innovation, use of IP and thereby facilitate knowledge-driven economic growth? ICT infrastructure, according to the 2020 National ICT Policy, fosters an innovation ecosystem. A key priority in the Kenya Vision 2030 is generation of knowledge by leveraging on an innovative information and communication infrastructure capable of accessing, processing, and communicating knowledge. This article therefore presents three priority areas for consideration by the government.

Firstly, there is need to continue facilitating ICT investment to address the digital divide. The government has over the years invested in ICT infrastructure. The 2020 ICT Policy in fact reports Kenya as amongst one of Africa’s fastest growing ICT markets. Closing Kenya’s digital divide is an important policy agenda for Kenya particularly in rural areas and amongst MSMEs where access or use of ICT is not optimal. This calls for investments in quality ICT infrastructure. Leveraging on proposed policy tools such as integrated infrastructure master plan, the national incubation policy and innovation hubs (Constituency Innovation Hubs), for instance, the government can ensure the ICT infrastructure is relevant and capable of supporting Industry 4.0 also referred to as the 4th Industrial revolution. Goal 4 of AU Agenda 2063, under the first aspiration for a Prosperous Africa, based on Inclusive Growth and Sustainable Development, is cognisant of this and calls for STI driven manufacturing, industrialization, and value addition. Such government support would consequently promote smart manufacturing, smart transport, innovative construction technologies and support the transition into a digital economy. This from a policy point of view calls for heightened data security, which Kenya is currently prioritizing, and cyber security as well as policies that enable investment in ICT. The country also needs human resource to support MSMEs in smart technology driven innovative products. The government’s commitment to strengthen ICT integration in education and training established in Sessional Paper No. 1 of 2019 on Reforming Education, Training and Research for Sustainable Development need therefore to be prioritised.

Secondly, provision of appropriate financing mechanisms that would support research, innovation and product development is important. According to the study by Gitonga and Moyi on Role of Information Communication Technologies (ICT) in Innovation in Kenya’s Micro, Small and Medium Establishments, financing is positively associated with innovation. The OECD experience show that industries in ICT have high research intensity [4]. This is due to the dynamic nature of the sector. For example, IBM’s, total expenditure on research, development and engineering reported in their 2020 Annual Report was USD 6,333 million in a single year. A figure similar to what the African Innovation Outlook  established as the BERD for Kenya’s private sector as at 2010. Financing innovation is, however, a challenge amongst MSMEs in Kenya especially given majority of MSMEs operate informally. The government can however play a role by offering R&D incentives or funding that is designed to meet the needs of MSMEs. The recently launched Credit Guarantee Scheme also provides an opportunity to finance innovation given its objective is to reduce the collateral requirements.

Kenya’s ICT Policy reveals the government’s intent of establishing an ICT Co-Fund aimed at enhancing access to capital and technical assistance and further promote the adoption and utilization of local innovations. Despite the government interventions aimed at enhancing access to finance, including the enactment of Movable Property Security Rights Act 2017, which recognizes intellectual property as possible collateral, the financing products have not been designed to meet the needs of innovative MSMEs. Depending on the design the ICT fund will take therefore, enhanced awareness and utilization of intellectual property by MSMEs and capacity for IP valuation by MSMEs and financial service providers, may then form an important priority agenda for the government. As for R&D, incentives by the government that promote BERD need to be reviewed since they are very limited.

Thirdly, an approach that can support innovate MSMEs through ICT is, by proving e-market support. Market access is a challenge for majority of MSMEs, according to the 2016 MSME survey which indicate that majority of MSMEs do not utilizing any marketing mechanism. Additionally, there are limited digital interventions by the government that market MSME. There are however opportunities in the 2017 Buy Kenya, Build Kenya Strategy, which calls for the creation of a database of ‘all goods/services produced locally. Further, the Science, Technology, and Innovation Act. No. 28 of 2013 calls for the establishment of an Innovation Database. These initiatives if established digitally would strengthen Kenya’s e-commerce which as indicated in the 2019 Kenya Digital Economy Blueprint is largely underdeveloped.

Author: Anne Gitonga, Senior Policy Analyst, Private Sector Department
Photo: Courtesy of World International Property Organization (WIPO)


[1] KIPPRA Discussion Paper 215

[2] https://www.oecd.org/sti/rd-tax-stats-database.pdf

[3] Bayh B., Allen J. P. and Bremer H. W. (2009), ‘Universities, Inventors and the Bayh-Dole Act’ Life Sciences Law and Industry Report. Vol. 3 no 24

[4] https://www.oecd-ilibrary.org/docserver/sti_scoreboard-2017-24-en.pdf?expires=1619013719&id=id&accname=guest&checksum=9D61BF0899A0D2C2DCAE8D6E2868C08D

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