influence of intellectual capital on the...

INFLUENCE OF INTELLECTUALCAPITAL 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

INTRODUCTION

The study sought to investigate influence of intellectual capitalon 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 intellectualcapital (Robert & Michael 2009).

Intellectual capital is key resource to the growth and survivalof SMEs (WB, 2012).

SMES are engines of economic growth world wide throughjob creation and social democracy (World Economic Forum,(2011).

Intervenes in poverty alleviation through job creation (WEF2011).

This shows why the sector is important for economic

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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.

9/8/2013 Karanja Ngugi3

Kenyan Perspective World Bank Report shows that issue of concern for Kenya is low

intellectual capital utilization by SMES owners among key comparatorcountries that impact negatively on Gross domestic Product (WB, 2010).

A study by Ngari, Kamau & Gichira, (2013) on the Relationship betweenIntellectual Capital Accounting and Financial Performance: An empiricalreview of Kenyan pharmaceutical firms found that the relationshipsbetween the performance of a company’s intellectual capital andprofitability, employee productivity, and growth in sales are informative.

Gakure, (2012) show that creation of new knowledge or technologyforms intellectual asset that is key to competitiveness of the firm .

The above study is a manifestation that intellectual capital is an importantinput for growth of entreprises.


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).

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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 ofproducts and technology.

Huang and Wu, (2010) informs that intellectual capital is known tocontribute to the growth of SMEs.

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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 Kenya9/8/2013 Karanja Ngugi7

General ObjectiveThe study sought to investigate influence ofintellectual capital on the growth of small andmedium enterprises in Kenya.

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Specific Objectives

To establish the influence of managerial skills as part of ICon the growth of SMEs in Kenya.

To find out the influence of innovativeness as an element ofIC on the growth of SMEs in Kenya.

To assess the influence of Entrepreneurial skills asconstituent of IC on the growth of SMEs in Kenya.

To establish the influence of structural capital as factor of ICon the growth of SMEs in Kenya.

To find out the influence of customer capital as module ofIC on the growth of SMEs in Kenya.

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Research Questions

To what extent does managerial skills as a component ofIC influences the growth of SMEs in Kenya?

What is the influence of innovativeness constituent ofIC on the growth of SMEs in Kenya?

How does Entrepreneurial skills an element of ICinfluence the growth of SMEs in Kenya?

To what extent does structural capital module of ICinfluence the growth of SMEs in Kenya?

How does customer capital factor of IC influence thegrowth of SMEs in Kenya?

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Contribution of SMEs to economic development

Author and Year Country Percentage

Heneman, Tansky,& Camp, 2000

United States ofAmerica

99.7 % of the firms in the UnitedStates

Cunningham &Rowley, 2008

China 99%of the firms in china

(Rauch & Frese,2000

Europe 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

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The above table shows that SMEs contribute a major portion of the

Literature Review

Divided into the following parts:i. Theoretical review with respect to independent

variables

ii. The conceptual framework that guides the study.

iii. Empirical review of past studies

iv. Critique of the available literature and the research

gaps.

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Managerial skills•Planning and organizing•Level of Education.•Experience.•Human resourcemanagement practices.

Structural Capital•Cost per transaction•Social influence•Patents and trademark•proprietary databases

Entrepreneurial skills•Risk taking•Proactiveness•Need for achievement (NAch)

Customer capital•Customer loyalty.•Market rivalry.•Customer relationshipmarketing

Growth of SME•Sales revenue•Return on asset•Market share

Independent variablesIntellectual Capital Dependent Variable

InnovativenessEmergence of newproductsNew marketsResearch anddevelopmentIntellectual property

Supporting TheoriesResearch Question Supporting Theory

To what extent do managerial skills asa component of IC influences thegrowth of SMEs in Kenya?

Supported by Mintzberg Theory and

Human capital theory.

What is the influence ofinnovativeness constituent of IC onthe growth of SMEs in Kenya?

Instigated by Joseph Schumpeterian

Theory on Innovations 1934 about creative

destruction.

How does Entrepreneurial skills anelement of IC influence the growth ofSMEs in Kenya?

Was informed by psychological theory by

David McClelland (1961).

To what extent does structural capitalmodule of IC influence the growth ofSMEs in Kenya?

Was instigated by resource based view by

Penrose, (1959).

How does customer capital factor ofIC influence the growth of SMEs inKenya?

Was prompted by resource based view

Penrose, (1959).


Origin of Variables

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Variable Scholars Year Discussion

Managerialskills

Schultz 1961 Schultz argues that investment in education and trainingwhich is a key component of intellectual capital leads to anincrease in human productivity, which in turn leads to apositive rate of return and hence of growth of businesses.

Bontis 2002 Increased training of employees which is a part of IC mayleads to higher productivity and enhanced creativity.

Martin and Staines 2008 Managerial skills is a “business acumen,” which isdescribed as an intuitive understanding of howenterprises make money and a realization that acompelling vision can be effectively translated into anactionable strategy through utilization of IC.

Mintzberg 2009 Informs that decisional skills, technical skills, interpersonalskills and informational skills are key integral part ofintellectual capital that influences performance of enterprises.

Research Gap: Future research should attempt to further explore role of managerial skills (whichis a key component of IC) on SMEs growth in other transition economies.

Origin of VariablesVariable Scholars year discussion

Innovativeness Schumpeter’s 1934 Emphasized the role ofIntellectual capital throughcreative destructions andinvolves seeking outopportunities for novel value.

Lehtimaki 1991 Attributed the emergence ofIC such as new productsthrough research anddevelopment for increasedgrowth.

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 forlearning were the major forces thatinfluenced firms in adopting aprocess innovation for IC.

Chanaron 1998 Close working relationships with akey customer and close analysis ofcompetitor products are the majordrivers of innovation in SMEs.

Danneels & Kleinschmidt 2001 Innovations led to emergence ofnew markets.

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Origin of Variables

Variable Scholar Year Discussion

Entrepreneurial Skills McClelland 1961 Growth of firms canbe explained interms of ‘need forachievement’ whichcomprises of IC.

Zahra 2005 Entrepreneur’sindustrial tenure ofIC is associatedwith risk takingpropensity.

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RESEARCH GAPS: Related studies should be carried on SMES since the abovestudies were on large enterprises .

Origin of the Variables (Cont’d)

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Customercapital

Fatoki 2011 SME owners should always ensure that theymaintain strong network ties with customers,suppliers, commercial banks and governmentagencies which an intellectual capital componentthat enhances growth.

Ann, Ling-ChingChan, Wen-YingWang

2012 IC components of customer capital such ascustomer loyalty and market intensityinfluences growth of SMEs.

Gap: The study only concentrated on large firms hence a study needs to becarried out in small firms.

Structural Capital


Structuralcapital

Desouza &Awazu.

2006 The structural capitalcomponent of IC in SMEs isprimarily developed andmaintained by its employees.

Hsu 2006 The main focus of structuralcapital is to embrace a soundenterprise foundation whichtranslates to enhanced growthof the firm.

Gap: The studies have not given a clear link between structuralcapital and SMEs growth.

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SME Growth


DependentVariable

Scholars Year Discussion

SME growth Romer 1993 New Growth theory showeconomic growth results fromutilization Of IC associatedwith new knowledge whichinfluences SMEs growth

Research Design

The study adopted both descriptive and exploratory research design as road map in answering theresearch questions

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ResearchDesign

Scholar Year Discussion

Descriptive

Exploratory

Mugenda &MugendaCreswell

Orodho

Matak &Gilaninia

2003

2003

2003

2012

-determines and reports the way things are

-is used when data are collected to describepersons, organizations, settings orphenomena

-allows the researcher to consider manydifferent aspects of a problem.

-was philosophized by a similar study onExamination of Relationship betweenIntellectual Capital and the Small BusinessEnterprises Performance in Guilan Province,Iran.

Research Design (Cont’d)

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Population Sekaran 2010 -Entire group of individual or objects havingcommon observable characteristic. include2500 SMEs in Manufacturing, 1500 SMEsTrade, 560 SMEs in other services (RoK,2012)

StratifiedrandomSampling

Orodho

Fatoki

2003

2011

-A technique used where the population isnot homogeneous.

-Used same technique when givenhomogenous population to study role ofIC on growth of SMEs in South Africa.

Sample size Kerlinger 1986 -10% of the target population is sufficient

i.e 250 SMEs in Manufacturing, 150SMEs Trade, 56 SMEs in other services

Research Design (Cont’d)

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Data collection McNamara

Fowler

1999

2002

-Interview guide since in-depthinformation-Postulates questionnaires as

scientifically and objectivelythan other forms instruments.Bontis (1998) and Bontis etal.(2000) used questionnaire insimilar study of IC and Growthof SMEs

Pilot testing Cooper &Schindler 2010 -Detect weaknesses in design andinstrumentation

Mugenda &Mugenda 2003 -The Kunder-Richardson (K-R) 20formulas used to access internalconsistency of an instrument

Cooper & Schilder,,Creswell,

2011 and2003

-1% of the sample should constitutethe pilot test

Data Analysis

First, data was analyzed by descriptive in line in asimilar study by Daud &Yusoff 2011 in Malaysia

Then multiple regression in line with Ahangar (2011)who studied the relationship between intellectualcapital and financial performance.

Each research questions were augmented bydescriptive statistics and inferential statistics whereboth questionnaire and interview guide was used asinstruments.


Data Analysis, Findings &Discussion

The study was guided by the following researchquestions;

i. To what extent do managerial skills influence thegrowth of SMEs in Kenya?

ii. How do Entrepreneurial skills influence thegrowth of SMEs in Kenya?

iii. What is the influence of innovativeness on thegrowth of SMEs in Kenya?

iv. To what extent does structural capital influencethe growth of SMEs in Kenya?

v. How does customer capital influence the growthof SMEs in Kenya?

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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 26-36 years of ageformed the highest percentage. Was in line with Muijanack, Vroonhofand Zoetmer (2003) who determined that the optimum age forentrepreneurs was 25-35.

Education most of the respondent possessed first degree or diplomaand the study benefited that the respondent understood the instrumentfor data collection making the finding of the study valid and credible.Concur with King and McGrath (2002) who indicated education impactpositively on growth of firms.


Role of Managerial skills ongrowth 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

is a key factor for the growth of

SMEs

R2=.789; P value= 0.045. F

cal = 4.063 > 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.


Role of Entrepreneurial Skills as a component of ICon 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

R2 = 0.753, and P value = 0.003.

F cal = 8.856 > 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


Role of Innovativeness as a part ofIC 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.

Statistics to show

evidence

R2=.746. P value =

0.007. F cal = 6.099 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.


Role of Structural capital as a constituent ofIC 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 thatreduce transaction cost,transaction time, havetrademark and proprietarydatabases and data systemsthat facilitates access torelevant information as partof intellectual capitalinfluence their growth. Thefindings concur to those byHsu (2006); Shelley (2004);Edvinsson and Malone(2007). It can therefore beinferred that structural capitalform a key integral part of ICthat influences growth of SMEs.

Statistics to show evidence

R= .724a and P value = 0.

F cal = 42.099 > 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.

Role of Customer Capital as an element of IC onGrowth Of SMEs In Kenya

Objective (v)

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.

Statistics to show evidence

R2 = 0.636, P value = 0.000.

F cal = 22.227 > 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.


Inferential statistics foroverall model

Model Unstandardized Coefficients t Sig.

B

1 (Constant) .119 .168 .867

Managerial

skills

.251 6.255 .000

Entrepreneural

skills

.120 4.849 .036

Innovation .216 6.210 .023

Structural

capital

.110 4.141 .040

Customer

capital

.196 5.414 .032

a. Dependent Variable: GROWTH

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Summary, conclusions andRecommendations

To what extent do managerial skills influence the growth of SMEs inKenya?

Managerial skills of the owner/managers positively influence the growthof 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 aunit change in managerial skills.

What is the influence of innovativeness on the growth of SMEs inKenya?

The finding of the study indicate that innovativeness influences the growthof 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 changein innovativeness.

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Summary, conclusions andRecommendations 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 %) correspondenceon 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 ongrowth 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 %) correspondenceon growth of SMES can be explained by a unit change in structural capital.


Overall Effect of the Variables

The study found out that there was 83.9% ofcorresponding change in the growth of SMEs forevery change in all the five predictor variables jointly.

Test of overall significance of all the five variablesjointly, managerial skills, entrepreneurial skills,structural capital, customer capital, andinnovativeness using ANOVA, at 0.05 level ofsignificance found the model to be significant


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 guideentreprenuers effectively plan, lead, organize and control the enterprise effectivelyleading to increased performance and consequently growth.

promote customer capital which is an important element of intellectual capital thatentails 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 apositive and significant influence on the growth of SMEs in Kenya.

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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.


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 andCorporate Affairs, Volume 1, Issue 1, pp 11-19

MC’Orege M.O , Muiru J.M & Ngugi J.N, (2013) The Influence of Innovativeness on the Growth ofSMEs 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 ManagementTechniques 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 ofcustomer loyalty on Fast Moving Consumer Goods in the era of Globalization: A Case Study of UnileverNairobi Kenya. Prime Journal of Business Administration and Management (SSN: 2251-1261).

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 ManagementISSBN: ISSN: 2078:7049 volume 1, number 2, 2012.

Ngugi J.K, Gakure R.W. and Mugo H.W. (2012) Competitive intelligence practices and their effect onprofitability of firms in the Kenyan banking industry: Journal of business and social research ISSN:2078:7049 volume 1, number 1, 2012.

Ngugi J.K, and Mugo H.W. (2012) Internal Factors Affecting Procurement Process of Supplies in ThePublic Sector; A Survey of Kenya Government Ministries. Paper presented at 5th International PublicProcurement Conference was held on August 17th, 2012 in Seattle, USA.

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Continued

Ngugi J.K., (2012) Strategies for curbing public procurement fraud and corruption in Kenya:Journal of Public Procurement and Contract Management ISSBN: 2219 – 7230 volume 1,number 1, 2012.

Ngugi, J. K., Gakure, R. W., Waithaka, S. M., & Nyambura, A. K. (2012, August). Applicationof Shapiro Model in Expalining Entrepreneurial Intention among University Students.International Journal of Business and Social Research . ISSN: 2078:7049 volume 2, number2, 2012

Gathai, E. W., Ngugi, J. K., Waithaka, S. M., & Kimingi, C. N. (2012). Analysis of FactorsThat Influence Implementation of Performance Contracts In State Corporations (A Case ofKenya Civil Aviation Authority). (S. Mims-Cox, Ed.) International Journal of Humanitiesand Social Science , 2 (17), 345-360.

Waithaka, S. M., Ngugi, J. K., Aiyabei, J. K., Itunga, J. K., & Kirago, P. (2012). Effects ofdividend policy on share prices: A case of Companies in Nairobi Securities Exchange. PrimeJournal of Business Administration and Management , Vol. 2 (8), 642-648.

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