Macroeconomic determinants of SME performance in Kenya

Abstract

This paper explores the relationship between SME performance, as measured by growth in total annual sales, growth in the number of permanent full-time employees and capacity utilization, and macroeconomic factors- the real effective exchange rate and the terms of trade, using a sample of 45 SMEs in Kenya over a period of 3 years. The random effects estimation technique is used and it is discovered that the real effective exchange rate has an inverse relationship with SME performance and the terms of trade variable has a positive relationship with performance. However, none of the estimates are statistically significant. In addition, the data do not confidently support the conclusions that macroeconomic factors exert a causal impact on SME performance.