Determinants of Technical Efficiency in Kenyan Manufacturing Sector

Abstract This paper uses World Bank's 2007 Regional Program for Enterprise Development survey data for Kenya to investigate the efficiency levels of Kenya's manufacturing sector and establish the sources of its variations across firms. Using a two‐stage nonparametric approach, we establish the average technical efficiency of Kenya's manufacturing sector to be 68.3 percent with the least being 53 percent. Also, we find that 63 percent of the firms operated under increasing returns to scale, 35 percent of firms operate under decreasing returns and 2 percent under constant returns. Second stage results from Tobit estimation show that age of the enterprise and size enter the efficiency function negatively and their coefficients are significant. Technical efficiency is established to be concave with respect to these variables as well. The results also show that firms located in Nairobi are more efficient than their counterparts in Mombasa are. The implications of these findings for the design of policies that influence firm performance and location decisions are briefly discussed.