Entrepreneurship and Informal Sector in Kenya Entrepreneurship Entrepreneurship is derived from ‘entrepreneur’ which refers to "one who undertakes

innovations, finance and business acumen in an effort to transform innovations into economic goods". The most obvious form of entrepreneurship is that of starting new businesses. However, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. It has also been extended to include elements not related necessarily to business formation activity such as conceptualizations of entrepreneurship as a specific mindset resulting in entrepreneurial initiatives. Entrepreneurial activities are substantially different depending on the type of organization and creativity involved. Entrepreneurship ranges in scale from solo projects to major undertakings creating many job opportunities. The behavior of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture. Entrepreneurs emerge from the population on demand, and become leaders because they perceive opportunities available and are well-positioned to take advantage of them. An entrepreneur may perceive that they are among the few to recognize or be able to solve a problem. They are widely regarded as an integral player in the business culture of life, and particularly as an engine for job creation and economic growth. Given entrepreneurship's potential to support economic growth, it is the policy goal of many governments to develop a culture of entrepreneurial thinking both formal and informal. The Informal sector Definitions One of the key issues that emerge from literature is the difficulty in defining the informal sector. This difficulty arises whether one attempts to define the informal sector in terms of the nature of activities, the type and level of skill requirements, the size of enterprise in

Although the term is not amenable to generalization. which lead to the formation of an informal sector that didn’t solely include marginal work and . and family ownership of enterprises.terms of personnel and capital. family ownership of enterprises. Clearly. labor-intensive and adapted technology. reliance on indigenous resources. characterized by: ease of entry. On the one hand. the nature and status of employment. skills acquired outside the formal school system and unregulated and competitive markets. in a legal and social environment in which similar activities are regulated. small-scale operation. History of the Informal sector The informal sector has been expanding as more economies have started to liberalize. and labor intensity. the informal sector has certain common key defining features which are ease of entry. dependence on indigenous resources. small-scale operation. or the nature of organizational and operational regulation associated with the sector. looking at the above definitions. On the other hand. family ownership of business and ease of entry into the activity concerned. a broad understanding of key characteristics can be drawn from the array of definitions of the informal sector. The International Labor Organization (1998) defines informal activities as "a way of doings things". the informal sector is formed by the coping behavior of individuals and families in economic environment where earning opportunities are scarce. reliance on indigenous resources. Castells and Portes (1989). This pattern of expansion began in the 1960s when a lot of developing countries didn’t create enough formal jobs in their economic development plans. A further definition of the informal sector has been offered by Kekana (2001) who contends that informal sector economic activities are characterized by small-scale labor intensive operations. The informal sector covers a wide range of labor market activities that combine two groups of different nature. on the other hand. the informal sector is a product of rational behavior of entrepreneurs that desire to escape state regulations. state that the informal sector is unregulated by the institutions of society.

Informal activities involve different types of economic activity which among others include trading. the largest part of informal work. the percentages rise. 51% in Latin America. The majority of informal economy workers are women. Estimates for developed countries are around 15%. Finally. and 72% in sub Saharan Africa. Policies and developments affecting the informal economy have thus a distinctly gendered effect. The informal economy under any governing system is diverse and includes small-scaled. the informal economy is said to account for more than half of the newly created jobs in Latin America.actually contained profitable opportunities. the sector grew alongside formal sectors. In the 1990s. as well as informally employed personnel of formal enterprises. around 70%. It is possible that the kind of development that has been occurring has failed to support the increased labor force in a formal manner. employers could be turning toward the informal sector to lower costs and cope with increased competition. Informal Sector conceptualization The term informal sector encompasses a plurality of activities. In the 1980s. or a combination of both. occasional members as well as larger. regular enterprises. in developed countries. If agricultural employment is included. In Africa it accounts for around eighty percent. often relying more heavily on the informal sector. non-wage workers. . wage employment predominates. Many explanations exist as to why the informal sector has been expanding in the developing world throughout the past few decades. an increase in global communication and competition lead to a restructuring of production and distribution. is self-employed. Informal economies include garment workers working from their homes. and many sub-Saharan African countries beyond 90%. Over the past decade. In developing countries. 65% in Asia. Employees working in the informal sector can be classified as wage workers. yet they can provide a tentative picture of its relevance: For example. Statistics on the informal economy are unreliable by virtue of the subject. informal employment makes up 48% of non-agricultural employment in North Africa. collecting. in some countries like India. Expansion can also be explained by the increased subcontracting due to globalization and economic liberalization.

One characteristic common to all definitions is that informal sector activities are small in scale and elude government regulatory requirements such as registration. social benefits. Skinner & Valodia. For this reason. Workers in informal enterprises are generally not covered by social . the line distinguishing formal from informal becomes blurred. In a situation in which a number of activities within the formal sector are becoming more informal and private. different employment relations and activities with different economic potential. Skinner and Valodia (2005) prefer to use the term informal "economy" rather than informal "sector" as it partially addresses such concerns. For instance. tax and social security obligations. the skills requirements of a street hawker are different to a skilled motor mechanic who owns an enterprise and employs skilled and semi-skilled workers (Barasa & Kaabwe. 2003). First. The informal sector is integrally linked through supply or customer networks to the formal sector. different employment relations and activities with varied degrees of economic potential (ranging from survivalist to successful small enterprises) (Devey. If both formal and informal activities are seen as part of the economy we are better able to see the linkages between the two.providing a service and manufacturing. 2001). Skinner and Valodia (2005) who identified two problems in the conceptualization of informal sector. This analysis ties with that provided by Devey. The term "economy" implies a greater range of activities than "sector". union protection and regular employment. There are also marked differences in the skills requirements of people working in the informal sector depending on the nature of economic activities. A second and related problem is the distinction between formal and informal activities as if there was a clear line dividing the two. Informal activities encompass different types of economic activity. Devey. Closer analysis of the phenomenon demonstrates that they are integrally linked. it is more appropriate to consider formality and informality as opposite poles of a continuum with many mixed cases in between. they argue that the term disguises a significant degree of heterogeneity. Eapen (2001) states that there is a tendency to define informality in terms of the absence of characteristics that belong to formal sector activities such as security.

As early as the1930s. was led by the ILO and World Bank which sees the informal sector as both a nursery wherein entrepreneurial skills are fostered and an adjunct to the formal sector whereby savings may be made through import substitution. a capitalist form of production and it could not function independently of the capitalist system (Kekana. 1989). In other words. Skinner & Valodia. This claim projects a positive image of the informal sector. This view builds on and in some way challenges the earlier dualist perspective on informal sector which asserted that the formal and informal sectors are separate. The informal sector was seen as dependent on the formal sector. known as the reformist school.security or protected by labor legislation (Devey. The sector is capable of vast potential of employment creation and growth not only in its own right as a sub-sector of the general economy but also giving impetus for growth to certain elements of the formal sector (May & Stavrou. 1987). the informal sector plays an important welfare and redistributive role in that it provides income for otherwise unemployed and unemployable urban residents. replaces the formal/informal dichotomy with a model reflecting the articulation of different forms and modes of production which are asymmetrically interwoven by relations of dominationsubordination (Rogerson. essentially. The popularity of dualist thinking in the 1970s provided a fertile battleground for a set of conflicting ideologies and interpretations in relation to developing countries. possibly creating further income distribution within rural households receiving remittances from urban migrants. This point of view. the informal sector was hailed as an integral part of the urban formal sector and had an important role to play in the solution of the problems of developing countries (May & Stavrou. some researchers were claiming that capitalist development was not absorbing informal economic systems but existing side by side in a dual system (Drakakis-Smith. Furthermore. It is argued that this petty commodity production sector . The formal/informal dualism was ratified in the International Labour Organisation (ILO) Report (1998) on the informal sector in Kenya. 1989). For the first time. thus driving the working class into informal sector activities in order to reduce unemployment. 1986). 2005). An opposing viewpoint is held by the Marxist school which. 2001). capitalism produces unemployment.

It has become enshrined in the new rules of the game being formulated and implemented by the World Trade Organisation (Stiglitz. To achieve a degree of consensus in the conceptualization of the informal sector. has the backing of the industrialized nations. The term informal sector can thus be defined as comprising of all those in informal employment without secure employment contracts. the informal economy comprises informal employment of two kinds. lower trade tariffs. . Neo-liberalists maintain that the best strategy for all countries and in all situations is to liberalize their markets. 2002). the only legitimate role for the state is to provide macroeconomic stability. In this approach. the vast majority of small-scale enterprises. promote privatization. 2003). This approach. both inside and outside informal enterprises. open domestic markets to competition and furnish essential public goods like basic human capital and infrastructure (Lall. The Keynesian orientation emphasized market failures and the role of the government in job creation. In describing the nature of its relationship to the capitalist mode of production. of the type described as being in the informal sector. work-related benefits and social protection. That is informal employment in informal enterprises and informal employment outside of informal enterprises (the unregistered and undeclared workers). was replaced by the free market mantra of the 1990’s that signaled a radically different approach to economic development. Also of significance in the theoretical literature on informal sector are two broad economic traditions. According to the Marxist school. which prescribed the "right" policies for developing countries. 1978).is not independent of the capitalist production sector but is fully integrated and subordinated to it. fit into the category of "petty commodity production". the International Labor Organization: STAT Working Paper No 1 (2002) and the International Conference of Labor Statistics (ICLS) proposed a definition based on the characteristics of the worker. According to this definition. namely: neo-liberalism and Marxist structuralism. petty commodity production is identified as a transitional mode with linkages and dependent relationships between these forms of production (Moser.

the conditions of the . Government interventions are needed to improve market outcomes (Lall. that is. in addition to representing an alternative body to neo-liberalism. also provided a substantial part of the macroeconomic foundation for the theory fragments that appeared during the 1970s concerning the informal sector and basic needs. Structuralist theories. In response. Structural Marxism views problems of developing countries as a consequence of economic structural imbalances. poverty elasticity of the poorest quintile relative to growth is approximately equal to one. the redistribution of assets must be radically changed for improvements to occur. Government. Markets are powerful forces but are not perfect. 2003).Economists such as David Dollar and Aart Kraay (2001) maintain that free trade as well as macro-economic policies favored by the World Bank and International Monetary Fund tends to promote the kind of growth in which the poor share equally with everyone else. economic and political framework. whilst unnecessary exposure to the forces of globalization is hobbling the economy and leading to job losses and near-jobless growth. Hence. Moreover. which cannot be overcome within the existing social. A similar pattern has evolved in the debate over macro-economic policy in South Africa. 2003). critics charge that the government's macroeconomic policies are slavishly neo-liberal with the result that fiscal conservatism has restricted necessary investment in poverty reduction. questioning their interpretation of their own results and re-analyzing the data using different techniques (Sumner. It argues that greater reliance on markets does not pre-empt a proactive role for the government. government points out that too much is made of fiscal stringency as a constraint on poverty-directed spending because the amount of money channeled into social grants and social services is large and ever rising (DBSA. asserts that its policies are misconstrued in that fiscal conservatism is not a choice but a reality forced on government and the country by circumstances. The structuralists view puts less faith in free markets as a driver for development and more in the ability of governments to mount interventions effectively. there has been a flood of critique variously criticizing Dollar and Kraay's methodology and dataset. 2005). On the one hand. on the other hand. Seen from this perspective.

De Soto (2001) makes a persuasive argument that a major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. these assets readily turned into capital. The informal sector in Kenya The informal sector is a crucial sector of most of the developing countries. there is ambiguity of operation associated with the informal sector especially in Kenya. Notwithstanding. Because the rights to these possessions are not adequately documented. and the informal sector stepped in to fill in the gap. which he terms the extra-legal sector. have remained "cut off from the whole market economy. More recently. economists have sought to explain why the informal sector. Such . However. cannot be traded outside the narrow local circles where people know and trust each other. industries located where financiers and investors cannot see them. mostly foreign-owned and uses imported technology. The organized private sector has been unable to absorb the growing numbers of jobseekers.masses in the developing world are not purely a matter of material want. cannot be used as collateral for a loan and cannot be used as a share against an investment. but also of subordination. The liberalization and privatization processes have resulted to the states’ failure to be the employer. exploitation and disregard (Moser. De Soto however notes that the poor are still able to make a contribution to the economy. This is usually concentrated on large-scale. oppression. this. unincorporated businesses with undefined liability. capital intensive industry. He argues that the poor already possess assets that are needed to make a success. The private sector is left to take up this role. The sector has both activities which are associated with the formal sector as well as other activities which are considered purely as informal sector activities. Kenya like any other developing country follows an import substituting industrialization strategy for industrial development. 1978). The world's poor hold their assets in defective forms: houses built on land whose ownership rights are not adequately recorded.

But they are considered jobless because they are not registered and hence they do not officially exist. sale and processing. According to Dorothy. Small retailers or hawkers who sell cereals.32-33) According to a book by Kenneth King. (World Bank. The Government and the Federation job creation. During the 1980’s the term Jua kali-Swahili meaning “hot sun” came to be used of the informal sector artisan such as car workers and metalworkers who lacked premises. Currently however banks and insurance companies are busy developing new products streamlined towards the sector. In Kenya there are nearly 6 million people with businesses. fuels and other goods. Small manufacturing. 2006. As a result of the employment inadequacy. Water kiosks. production. Professor Dorothy McCormick of the University of Nairobi has studied the informal sector for years. The FKE started getting involved in the informal SME in 1989. Retirement Benefits Authority [RBA] has been targeting of Kenya Employers [FKE] now sees linkages between the formal and informal economies as an opportunity to contribute to industrialization and .activities associated with the informal sector include: Selling fruits and vegetables. At this time unemployment in the country was rising due to reduction in private sector formal employment. the director of the Centre of African Studies at the University of Edinburgh. Jua kali industry consist of thousands of small workshops where people bang out pots. auto parts and handicrafts literally under the hot sun day in day out. construction and repair of goods. Kiosk selling various items. home suppliers. most people have opted to start their own businesses without any relevant training or enough capital to establish profitably feasible ones. She found out that the sector has expanded to become a major economic power in Kenya. the Jua kali artisans did not have to fear the global credit crunch since the Kenyan economy apparently largely depends on what they do in the sector Many banks until last year had shunned the informal sector in the East African countries. In the past SME’s have been seen as competitors for larger companies. p. Selling clothes and shoes (both second-hand and new). Kenya was where the term “informal sector” was first used in 1971. Food operation. pans.

which affect their growth and profitability and hence. Challenges facing the informal sector It is generally recognized that the informal sector face unique challenges. their management style is likely to be more intuitive than analytical. About 80% of the work force in Kenya lack any form of pension plan and without any social security plan.Lack of access to credit is almost universally indicated as a key problem for SMEs. most people normally retire to poverty. people need to be well informed in terms of skills and management. more concerned with dayto-day operations than long-term issues. Study suggests that those with more education and training are more likely to be successful in the sector (King and McGrath 2002). immovable equipment . The following are some of the major challenges facing the informal sector businesses in developing economies. even where credit is available. Research shows that majority of owners of small enterprises in Kenya are not quite well equipped in terms of education and skills.the informal sector that began last year as it seeks to put more people on retirement plan. Inadequate Education and Skills . As a result. the entrepreneur may lack freedom of choice because the lending conditions may force the purchase of heavy. Although this attitude is the key strength at the start-up stage of the enterprise because it provides the creativity needed. Hence they may not well equipped to carry out managerial routines for their enterprises (King and McGrath 2002). it may present problems when complex decisions have to be made. In some cases. Many companies in the informal sector may use an inappropriate technology because it is the only one they can afford. The typical owner or managers of small businesses develop their own approach to management. As such.Education and skills are needed to run micro and small enterprises. Lack of Credit . for small businesses to do well. diminish their ability to contribute effectively to sustainable development. This affects technology choice by limiting the number of alternatives that can be considered. and more opportunistic than strategic in its concept (Hill 1987). Lack of Managerial Training and Experience . through a process of trial and error.Many small business owners or managers lack managerial training and experience.

They include the high cost of credit. Even with change in technology.The national policy and regulatory environment have an important impact on technology decisions at the enterprise level. Lack of access to long-term credit for small enterprises forces them to rely on high cost short term finance. inadequate electricity supply. Kenya inclusive. SAPs tend to severely affect vulnerable groups in the short run and have been associated with the worsening living conditions in many African countries (USAID 1991). There is digital divide between the rural and urban Kenya. Credit constraints operate in variety of ways where undeveloped capital market forces entrepreneurs to rely on self-financing or borrowing from friends or relatives. Those who seem to be well positioned. With no power supply in most of the rural areas. 2005). Poor Infrastructures . they are most often unaware of this technology and if they know. though meant to bring about economic change even among the rural lot. high bank charges and fees. Scanty Markets Information – Lack of sufficient market information poses a great challenge to small enterprises. There are poor roads. Foreign firms still remain in the forefront in accessing the new technologies. In most of the African nations. does not appear to answer to the plight of the rural entrepreneurs. The provision of better infrastructures has lagged behind over years in developing economies.that can serve as collateral for the loan. many small business entrepreneurs appear to be unfamiliar with new technologies. There are various other financial challenges that face small enterprises. Since the mid-1990s there has been a growing concern about the impact of technological change on the work of micro and small enterprises.Poor infrastructures pose a major challenge to small enterprises. National Policy and Regulatory Environment . The structural adjustment programs (SAPs) implemented in many African countries is aimed at removing heavy policy distortions. which have been viewed as detrimental to the growth of the private sector. Technological Change . the challenge of connecting indigenous small enterprises with foreign investors and speeding up technological upgrading still persists (Muteti. Thus technological change.Change of technology has posed a great challenge to small businesses. Despite the vast amount of trade-related information available and the . it is next to impossible to have Internet connectivity and access to information and networks that are core in any enterprise. it is not either locally available or not affordable or not situated to local conditions.

possibility of accessing national and international databases. 2005) and poor connectivity especially in rural areas. . This is due to inability to interpret the statistical data (Muteti. many small enterprises continue to rely heavily on private or even physical contacts for market related information.

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