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The micro and small enterprises (MSEs) sector contributes about 18 per cent of GDP in Kenya. Further, the sector accounts for 87 per cent of all the new jobs created and it employs 77 per cent of the total number of employees in the country. In addition, the sector accounted for 85 per cent of the total number of employees in the manufacturing sector and 47 per cent of the manufacturing firms in 2005. The main concern is to improve the MSE sect or so that it can contribute more to GDP and employment creation. In the short run, there is need to create a conducive environment for MSE growth by reducing the cost of starting business and business registration. However, in the long run, the MSE sector must be integrated into the relatively larger firms within production and marketing arrangements beneficial to both categories of firms. The performance of the MSE sector is hindered by a number of factors, including inaccessibility to financial services, deficiencies in technical and management skills, dilapidated infrastructure, and increasingly volatile input and output markets. There has been a slow rate of capital formation and minimal investment activity in Kenya¶s small-scale manufacturing firms. Th e immediate policy issues include improving coordination of MSE activities, reducing the costs of doing business, encouraging formation of business linkages, and promoting creativity and innovation among MSEs.