Financial Innovations and Performance of Small and Medium Enterprises in Embu County, Kenya
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Date
2024-10
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Publisher
Kenyatta University
Abstract
According to the Kenya National Bureau of Statistics Economic Survey in 2022, SMEs constitute 90 percent of all businesses in Kenya, contributing to 60 percent of the total employment. Despite their crucial role in economic growth and employment generation, Kenya's SMEs face substantial challenges, with a significant number failing to survive beyond their second year of operation. Financial innovations have therefore emerged as a potential solution to stabilize and bolster this sector. Financial innovations involve the development of new financial products and processes to enhance business operations, and they are increasingly necessary due to rapid technological changes. The study aimed at investigating the effect of financial innovations on the financial performance of SMEs in Embu County, Kenya. The specific objectives of the study were to determine the effect of product, process and system innovations on financial performance of SMEs in Embu County. The main theories of the study were: Diffusion of innovation theory, Schumpeter’s theory of innovation and the Contestable theory on innovation. The primary unit of observation is SMEs registered in Embu County, with a sample frame consisting of 250 SMEs within the County. The sample comprised of SMEs that were in operation since 2019, encompassing a five-year business cycle (2019-2023). Data was collected through structured questionnaires (primary data). Data analysis was done using SPSS Version 23.0. Various diagnostic tests including Multicollinearity, Normality, Stationarity Test, Heteroscedasticity, Autocorrelation and Test for Random or fixed Effect were carried out. Panel regressions analysis and Pearson’s product moment correlation analysis were used for inferential analysis while means and standard deviations were used for purposes of descriptive analysis. The results were presented in tables. Throughout the research process, the researcher adhered to ethical standards and principles, including integrity, informed consent, confidentiality and anonymity, privacy and research independence. The study acknowledged the contributions of other authors cited within the research. Correlation analysis indicated that both product innovations and process innovations had weak positive relationship with financial performance while system innovations had moderate weak relationship with financial performance. Feasible Generalized Least Square (FGLS) regression results indicated that product innovations (p=0.044, <0.05) and process innovations (p=0.034, <0.05) had a statistically significant positive effect on financial performance. On contrary, system innovation was found to have a statistically significant negative effect (p=0.012, <0.05) on financial performance. The study concludes that increasing both product and process innovations increases financial performance while increase in system innovations reduces financial performance. Consequently, the study recommends establishment of Embu SME Innovation and Growth Fund; For researchers and academia, it is crucial to conduct ongoing studies to identify the most effective process innovations; government should create incentives, such as grants and tax breaks; Researchers and academia should focus on understanding the underlying reasons for adverse effect of system innovations and disseminate their findings to inform better practices and lastly, SME owners should be cautious when implementing system innovations.
Description
A Research Study Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for Award of Master Degree in Business Administration (Finance) of Kenyatta University, October 2024.
Supervisor
Francis K. Gitagia