The role of ICT for the performance of SMEs in East Africa: Empirical evidence from Kenya and Tanzania

Abstract

Small and medium enterprises are an important factor in the East African economies especially with respect to employment. The increasing competition through globalisation puts them under considerable pressure. Through the rapid spread of information and communication technologies (ICT) and ever decreasing prices for communication, markets in different parts of the world become more integrated. Therefore, one basic question is whether the use of ICT (as production technology, as information processing technology or as information communication technology) can help them to cope with these new challenges. Information asymmetries are one of the major causes for high transaction costs, uncertainty and therefore market failure. A reduction of the information gap also reduces the ability of the better informed to extract rents from the less informed be it buyers or sellers of goods or factors. A reduction of information asymmetry will also create new opportunities and therefore enhance the efficiency of resource allocation. On a macro level this will then lead to faster growth and diversification of the economy. Our sample of 300 SMEs in East Africa shows that the use of ICT by SMEs in Kenya as well as in Tanzania is increasing over time. The usage of fixed phone lines nearly reaches the saturation point but is still lower in Tanzania than in Kenya. The percentage of firms that uses mobile phones is increasing fast in both countries. Especially in Tanzania, despite its late start only in 1994 it has already outgrown the usage of fax machines. Those enterprises that use different forms of ICT rate their effects mostly positive. On top are computer applications that are assumed by 88 % and 76 % of users to considerably increase management efficiency and competitiveness respectively. Mobile phones are considered to contribute significantly to regional market expansion by most enterprises, followed by fixed phones and faxes. For all sectors in both countries the average size of enterprises is generally bigger for users of more advanced ICTs. The average years of schooling also increase with the use of advanced ICTs with only small differences between sectors. Also with respect to exporting the relation with ICT is positive and similar for all sectors. By regressing a Cobb-Douglas production function on a dataset of Kenyan and Tanzanian enterprises we analyse determinants of productivity. Our main empirical findings are that investment in ICT has a negative sign in different specifications of the regression but is never significant. However, the use of fax machines that gives managers access to formal information has a significant positive relationship with productivity in both countries.