Determinants of Investment for Nairobi's Informal Manufacturing Subsector

Abstract

This paper studies the informal manufacturing subsector. As the informal manufacturing subsector is heterogenous, the paper, therefore, subdivides it into woodwork, metalwork and general blacksmith branches. A survey questionnaire was used to collect data from Nairobi area alone. An investment determination model was developed from existing literature on investment functions. The model was then estimated for the entire manufacturing subsector using two stage least squares (2SLS). This model is refered to in the text as the general model. Three sets of three equations, for each homogenous branch within informal manufacturing were regressed to cater for the sectors heterogeneuity ",The significant variables in the general model are output, credit, and training. The significant variables in the metalwork branch estimations were income, output, and savings. Those in the woodwork branch are output and credit The investment function for general blacksmith (BS) was unique in comparison to metalwork and woodwork investment functions. This could be attributed to very low demand for investments in the branch. In the GBS model; only training was a significant determinant of investment. Several policy recommendations are then given, such as: changing the relative prices of capital-intensive versus labour intensive capital goods which would shift investment toward the latter, the increased use of extant institutions in the informal sector -i.e., jua-kali co-operatives--would enable more effective credit provision and savings mobilisation, and increasing the range of products through introduction of new products, thereby, generating employment.