Linkage Dynamics between Small and Large firms in Kenya

This paper is concerned with small enterprise development in developing countries, focusing on the question of the potential for using linkages with large enterprises as part of a strategy for the development of the small business sector. The paper will review existing literature and policy experience on this topic, whilst also reporting some results from a longitudinal pilot investigation, undertaken in Kenya in 2005 and in 2014. The paper will draw on empirical evidence from a longitudinal pilot investigation in Kenya. At least five large firms from different industries were purposively selected and a series of qualitative interviews conducted in 2005 and in 2014 to determine: 1) their experiences in collaborating with micro and small enterprises (MSEs) and their assessment of the potential for doing so in the future; (2) groups of MSEs that they work with; 3) how they built the relationships and (4) whether or not the relationship has worked and the factors influencing this, from their perspective. The potential benefits of Foreign Direct Investment (FDI) to host economies is summarised here and five main types of linkage and spillover effects, by which MNCs can affect the development of businesses in the host economy are identified: Backward linkages with suppliers, which can range from arms length market transactions to deep, long-term inter-firm relationships; Forward linkages with customers, such as marketing outlets, which may be outsourced, such as petrol stations and restaurant chains; Linkages with competitors, since foreign investors may set new standards, which local firms may seek to compete with; Linkages with technology partners, since some MNCs may initiate common projects with indigenous SME partners, which are an important potential source of technology and know-how for local firms; Other spillover effects, including demonstration effects, as inward investors demonstrate new and better ways of doing things to local firms and human capital spillovers, when, for example, trained personnel leave the inward investor to work for a local enterprise and/or set up their own business. The evidence of positive spillovers, where it exists, is strongest in the case of backward linkages, with local suppliers in developing countries. Positive benefits stem from the information, technical assistance and training provided by MNCs to help raise the quality of supplier's products and services. More generally, empirical evidence suggests that the positive spillover effects from FDI do not necessarily occur in practice, influenced by the specific conditions pertaining in the host country as well as the rationale for the foreign company making the investment. The implications for policy will be considered, paying attention to the potential role of national governments, in both developing and developed countries, as well as international development agencies.Whilst this is not a new topic, a number of recent trends suggest there may be greater scope for developing such linkages in the future than in the past. These include the emergence of new sources of FDI in developing and emerging economies themselves, increasing signs of SMEs internationalising their operations rather than simply exporting from their domestic base, as well as a continued increase in outsourcing by MNCs. Key Words: FDI; SME; Developing Economies, Impact of MNCs on SMEs, SME Linkages.