Why innovation investment falters despite businesses’ thirst - study
Developing countries encourage far less innovation as firms and governments appear to be leaving billions of dollars on the table in forgone productivity growth.
Despite being hailed as a key driver of economic transformation, innovation investment in developing countries such as Kenya continues to lag behind.
According to a study by the World Bank, developing countries encourage far less innovation as firms and governments appear to be leaving billions of dollars on the table in forgone productivity growth.
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The state-owned research firm, Kenya Institute for Public Policy Research and Analysis (KIPPRA), in its 2024 policy brief on innovation, underscores that innovation levels in Kenya are low.
“This is evidenced in the Micro, Small and Medium Enterprises (MSME) Survey 2016, which reveals that only 10 per cent of licensed MSMEs undertake any form of innovation,” the brief reads.
Also, the firm’s County Business Environment for Micro and Small Enterprises (MSEs) and County Business Environment for Micro and Small Enterprises (CBEM) Survey 2022 indicates an innovation score for MSEs to be low at 1.64. This is out of a possible 100.
Sectors such as robotics, biotechnology, and parts of the manufacturing industry reportedly face significant innovation challenges, largely due to insufficient funding, limited expertise, and inadequate infrastructure.
Additionally, rural areas continue to lag behind urban centres in terms of digital inclusion, which hampers innovation across multiple sectors, particularly those that depend heavily on technological advancement.
Thirst for innovation
The reporter spoke to two bold entrepreneurs attempting to disrupt traditional farming systems who identified themselves as Joseph and Hyles.
Located in Kenya’s rural Western region, Joseph, a 27-year-old graduate, has been engaged in the production and distribution of African leafy vegetables for nearly five years, supplying markets as far as neighbouring counties since completing his studies.
He also partly engages in poultry farming as a supplementary venture.
Joseph explains that since starting his ventures, he has increasingly felt the need to approach both production and supply differently, prompting him to explore innovative solutions along his production chain.
“When I started, especially when it came to weighing my leafy vegetables, I used to rely on my hands, but now, I use a weighing scale,” Joseph said.
Joseph, a 27-year-old graduate, has been engaged in the production and distribution of African leafy vegetables for nearly five years. (Photo: Handout)
“I have also changed my mode of transport and had to adopt preservation methods too. I now use a cooler to store excess produce, which can last up to seven days.”
He explains that adopting the storage innovation has been crucial in reducing post-harvest losses.
As part of his strategy to diversify income, Joseph shares that in addition to farming, he serves as a youth leader, offering training sessions to young people interested in agriculture.
While he currently conducts these sessions voluntarily, he is working towards getting certified to eventually monetise the initiative.
Hyles’ story is quite similar. At 32 years old, she has been managing a poultry farming business for the past three years.
She emphasises that the growing demand has pushed her to stay innovative in order to increase production, with a focus on achieving long-term growth.
Over the years, Hyles says she has found ways to diversify her business income streams by offering consultancy services.
While she doesn’t charge a set fee, she receives thank-you tokens from the trainees as a form of compensation.
“I've also diversified in reproducing organic manure from the chicken waste,” Hyles said.
Impediments to innovation
Despite their enthusiasm and drive for greater innovation to fuel their growth, they reckon that the journey has its downsides.
Joseph mentions that obtaining licensing for certain products or innovation processes is a major challenge, particularly for startups.
He therefore urges the government to simplify the licensing process for small-scale farmers while at the same time calling for the introduction of subsidy programs in the space, particularly targeting youth, to help scale up their businesses through innovation.
“We should also have regular innovation boot camps and competitions to help accelerate the scope of innovation among emerging enterprises,” Joseph added.
Hyles, on her end, highlighted the lack of scale-up funding as one of the major impediments towards innovation.
Cause of slow adoption
The World Bank study highlights that critical complements to investments in innovation that are needed to achieve high potential returns in the country, as well as other developing nations, are missing.
“The key firm capabilities, managerial and organisational practices, required to pursue innovation and take it to market successfully are weak,”the World Bank said.
It adds that government capabilities for implementing effective innovation policies are also weak and limited.
Economic analyst Mihr Thakar also points out that for innovation to succeed, there needs to be a ready market and available funding for Research and Development.
“Innovation proves more viable when the spending power of consumers is higher, thereby giving entrepreneurs a larger mass market to innovate for in many ways. A mass market with low spending power tends to constrain entrepreneurs in innovating for the low end,” Mihr said.
“Secondly, lower interest rates mean more abundant funding, in which case, taking risks becomes more common.”
Rethinking innovation policies
To foster innovation, the global lender emphasises that countries like Kenya need to rethink their innovation policies along three key dimensions.
First, it suggests that strengthening innovation in emerging economies requires a broader approach than in advanced economies.
It thus highlights the importance of innovation complementarities, stating that National Innovation Systems (NIS) should go beyond just science and technology policies.
“Governments need to focus on enabling the accumulation of all types of capital, physical, human, and knowledge, and ensure that supporting markets for each are both functional and inclusive.”
Second, the World Bank stresses the importance of cultivating managerial and technological capabilities within firms.
This is crucial to encouraging a continuous process of technological adaptation and quality upgrading, which are necessary for long-term competitiveness.
Finally, it underscores the need for a balanced approach in a country's policy, suggesting that nations should prioritise addressing selective sets of issues rather than attempting to adopt a full set of institutions and policies from other countries.
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