INFLUENCE OF INTELLECTUAL CAPITAL ON THE GROWTH OF SMALL AND MEDIUM ENTERPRISES IN KENYA NGUGI JOHN KARANJA STUDENT NO. HD413/0224/2010 SUPERVISORS: PROF. R.W. GAKURE DR. KAHIRI
INFLUENCE OF INTELLECTUALCAPITAL ON THE GROWTH OF SMALL
AND MEDIUM ENTERPRISES IN KENYA
NGUGI JOHN KARANJA
STUDENT NO. HD413/0224/2010
SUPERVISORS:
PROF. R.W. GAKURE
DR. KAHIRI
INTRODUCTION
The study sought to investigate influence of intellectual capitalon the growth of SMEs in Kenya.
SMEs make up over 90 per cent of all enterprises in the world(Daley, 2001).
Entrepreneurship is the process of utilization of intellectualcapital (Robert & Michael 2009).
Intellectual capital is key resource to the growth and survivalof SMEs (WB, 2012).
SMES are engines of economic growth world wide throughjob creation and social democracy (World Economic Forum,(2011).
Intervenes in poverty alleviation through job creation (WEF2011).
This shows why the sector is important for economic
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Global Perspective
Wealth and growth in today's world economy are driven by intellectual
capital (Eberhart, Maxwell & Sidique, 2004).
Intellectual capital is recognized as the foundation of entrepreneur
enterprise growth and competitiveness in the twenty-first century
(Bounfour & Edvinsson, 2005).
In a knowledge-based economy, intellectual capital is a key driver for the
success of the organizations (Wu, 2010).
The above global studies is an illustrative evidence of influence of IC on
growth of SMEs.
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Kenyan Perspective World Bank Report shows that issue of concern for Kenya is low
intellectual capital utilization by SMES owners among key comparatorcountries that impact negatively on Gross domestic Product (WB, 2010).
A study by Ngari, Kamau & Gichira, (2013) on the Relationship betweenIntellectual Capital Accounting and Financial Performance: An empiricalreview of Kenyan pharmaceutical firms found that the relationshipsbetween the performance of a company’s intellectual capital andprofitability, employee productivity, and growth in sales are informative.
Gakure, (2012) show that creation of new knowledge or technologyforms intellectual asset that is key to competitiveness of the firm .
The above study is a manifestation that intellectual capital is an importantinput for growth of entreprises.
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Introduction (Cont’d) SMEs contributed 70% GDP in 2011 in Kenya which is a manifestation of
economic development of the country(RoK ,2012).
United States, 99.7 per cent (Heneman, Tansky, and Camp, 2000)
China, 99 per cent (Cunningham & Rowley, 2008),
Europe, 99 per cent (Rauch and Frese, 1998),
countries with over 90% growth of GDP achieved the rate from high
utilization of intellectual capital by SME owners (WB, 2012).
Intellectual capital has capability to innovate and offer a better competitive
advantage (Subramanian & Youndt, 2005).
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Statement of the Problem Collapse ratio of SMEs in both developed and developing
countries is alarming (Hodgetts & Kuratko, 2004).
SMEs fail within first five years of their business operation(Zimmerer, Searborough &Wilson 2008; Hodgents & Kuratko,2004).
IC is a key factor in enterprise success and lever for value creation(Marco Montemari, 2010 ).
High utilization of IC yields to growth of SMEs (WB, 2010).
Bontis, (2000) show that low utilization leads to poor quality ofproducts and technology.
Huang and Wu, (2010) informs that intellectual capital is known tocontribute to the growth of SMEs.
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Statement of the Problem cont’d
Evidence from Kenya shows that three out of five SMEs fail within their first three years
of operation in Kenya (ROK, 2005). This collapse rate is alarming (WB, 2012)
SMEs in Kenya are evidence of a “missing middle”: a shortage of middle - sized growth
- oriented SMEs that could make an important contribution to development (Khalique,
Shaari, Bin M Isa & Agee (2011).
PWC (2012) show that SMEs employ employees with low education and less motivated
that reveal that IC is wanting.
Failure rate leads low economic development and loss of jobs (RoK, 2012).
Would lack of utilization of intellectual capital be the contributor of this high SME
mortality rate in Kenya?
Therefore the study seeks to find out the influence of intellectual capital on the growth of
small and medium enterprises in Kenya9/8/2013 Karanja Ngugi7
General ObjectiveThe study sought to investigate influence ofintellectual capital on the growth of small andmedium enterprises in Kenya.
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Specific Objectives
To establish the influence of managerial skills as part of ICon the growth of SMEs in Kenya.
To find out the influence of innovativeness as an element ofIC on the growth of SMEs in Kenya.
To assess the influence of Entrepreneurial skills asconstituent of IC on the growth of SMEs in Kenya.
To establish the influence of structural capital as factor of ICon the growth of SMEs in Kenya.
To find out the influence of customer capital as module ofIC on the growth of SMEs in Kenya.
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Research Questions
To what extent does managerial skills as a component ofIC influences the growth of SMEs in Kenya?
What is the influence of innovativeness constituent ofIC on the growth of SMEs in Kenya?
How does Entrepreneurial skills an element of ICinfluence the growth of SMEs in Kenya?
To what extent does structural capital module of ICinfluence the growth of SMEs in Kenya?
How does customer capital factor of IC influence thegrowth of SMEs in Kenya?
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Contribution of SMEs to economic development
Author and Year Country Percentage
Heneman, Tansky,& Camp, 2000
United States ofAmerica
99.7 % of the firms in the UnitedStates
Cunningham &Rowley, 2008
China 99%of the firms in china
(Rauch & Frese,2000
Europe 99%of the firms in the Europe
Lin, 1998 Philippines 95%of the firms in Philippines
Lin, 1998 Taiwan 96.5%of the firms in Taiwan
Man & Wafa, 2007 Malaysia 99.2%of the firms in Malaysia
World Bank , 2012 Kenya Over 70% of the GDP
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The above table shows that SMEs contribute a major portion of the
Literature Review
Divided into the following parts:i. Theoretical review with respect to independent
variables
ii. The conceptual framework that guides the study.
iii. Empirical review of past studies
iv. Critique of the available literature and the research
gaps.
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Managerial skills•Planning and organizing•Level of Education.•Experience.•Human resourcemanagement practices.
Structural Capital•Cost per transaction•Social influence•Patents and trademark•proprietary databases
Entrepreneurial skills•Risk taking•Proactiveness•Need for achievement (NAch)
Customer capital•Customer loyalty.•Market rivalry.•Customer relationshipmarketing
Growth of SME•Sales revenue•Return on asset•Market share
Independent variablesIntellectual Capital Dependent Variable
InnovativenessEmergence of newproductsNew marketsResearch anddevelopmentIntellectual property
Supporting TheoriesResearch Question Supporting Theory
To what extent do managerial skills asa component of IC influences thegrowth of SMEs in Kenya?
Supported by Mintzberg Theory and
Human capital theory.
What is the influence ofinnovativeness constituent of IC onthe growth of SMEs in Kenya?
Instigated by Joseph Schumpeterian
Theory on Innovations 1934 about creative
destruction.
How does Entrepreneurial skills anelement of IC influence the growth ofSMEs in Kenya?
Was informed by psychological theory by
David McClelland (1961).
To what extent does structural capitalmodule of IC influence the growth ofSMEs in Kenya?
Was instigated by resource based view by
Penrose, (1959).
How does customer capital factor ofIC influence the growth of SMEs inKenya?
Was prompted by resource based view
Penrose, (1959).
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Origin of Variables
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Variable Scholars Year Discussion
Managerialskills
Schultz 1961 Schultz argues that investment in education and trainingwhich is a key component of intellectual capital leads to anincrease in human productivity, which in turn leads to apositive rate of return and hence of growth of businesses.
Bontis 2002 Increased training of employees which is a part of IC mayleads to higher productivity and enhanced creativity.
Martin and Staines 2008 Managerial skills is a “business acumen,” which isdescribed as an intuitive understanding of howenterprises make money and a realization that acompelling vision can be effectively translated into anactionable strategy through utilization of IC.
Mintzberg 2009 Informs that decisional skills, technical skills, interpersonalskills and informational skills are key integral part ofintellectual capital that influences performance of enterprises.
Research Gap: Future research should attempt to further explore role of managerial skills (whichis a key component of IC) on SMEs growth in other transition economies.
Origin of VariablesVariable Scholars year discussion
Innovativeness Schumpeter’s 1934 Emphasized the role ofIntellectual capital throughcreative destructions andinvolves seeking outopportunities for novel value.
Lehtimaki 1991 Attributed the emergence ofIC such as new productsthrough research anddevelopment for increasedgrowth.
Lumpkin & Dess 1996 Emphasized on IC through creative
processes that may result in new
products, services or technological
processes.
Vonortas & Xue 1997 Linkage to sources of expertise forlearning were the major forces thatinfluenced firms in adopting aprocess innovation for IC.
Chanaron 1998 Close working relationships with akey customer and close analysis ofcompetitor products are the majordrivers of innovation in SMEs.
Danneels & Kleinschmidt 2001 Innovations led to emergence ofnew markets.
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Origin of Variables
Variable Scholar Year Discussion
Entrepreneurial Skills McClelland 1961 Growth of firms canbe explained interms of ‘need forachievement’ whichcomprises of IC.
Zahra 2005 Entrepreneur’sindustrial tenure ofIC is associatedwith risk takingpropensity.
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RESEARCH GAPS: Related studies should be carried on SMES since the abovestudies were on large enterprises .
Origin of the Variables (Cont’d)
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Variable Scholars Year Discussion
Customercapital
Fatoki 2011 SME owners should always ensure that theymaintain strong network ties with customers,suppliers, commercial banks and governmentagencies which an intellectual capital componentthat enhances growth.
Ann, Ling-ChingChan, Wen-YingWang
2012 IC components of customer capital such ascustomer loyalty and market intensityinfluences growth of SMEs.
Gap: The study only concentrated on large firms hence a study needs to becarried out in small firms.
Structural Capital
Variable Scholars Year Discussion
Structuralcapital
Desouza &Awazu.
2006 The structural capitalcomponent of IC in SMEs isprimarily developed andmaintained by its employees.
Hsu 2006 The main focus of structuralcapital is to embrace a soundenterprise foundation whichtranslates to enhanced growthof the firm.
Gap: The studies have not given a clear link between structuralcapital and SMEs growth.
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SME Growth
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DependentVariable
Scholars Year Discussion
SME growth Romer 1993 New Growth theory showeconomic growth results fromutilization Of IC associatedwith new knowledge whichinfluences SMEs growth
Research Design
The study adopted both descriptive and exploratory research design as road map in answering theresearch questions
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ResearchDesign
Scholar Year Discussion
Descriptive
Exploratory
Mugenda &MugendaCreswell
Orodho
Matak &Gilaninia
2003
2003
2003
2012
-determines and reports the way things are
-is used when data are collected to describepersons, organizations, settings orphenomena
-allows the researcher to consider manydifferent aspects of a problem.
-was philosophized by a similar study onExamination of Relationship betweenIntellectual Capital and the Small BusinessEnterprises Performance in Guilan Province,Iran.
Research Design (Cont’d)
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Scholar Year Discussion
Population Sekaran 2010 -Entire group of individual or objects havingcommon observable characteristic. include2500 SMEs in Manufacturing, 1500 SMEsTrade, 560 SMEs in other services (RoK,2012)
StratifiedrandomSampling
Orodho
Fatoki
2003
2011
-A technique used where the population isnot homogeneous.
-Used same technique when givenhomogenous population to study role ofIC on growth of SMEs in South Africa.
Sample size Kerlinger 1986 -10% of the target population is sufficient
i.e 250 SMEs in Manufacturing, 150SMEs Trade, 56 SMEs in other services
Research Design (Cont’d)
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Scholar Year Discussion
Data collection McNamara
Fowler
1999
2002
-Interview guide since in-depthinformation-Postulates questionnaires as
scientifically and objectivelythan other forms instruments.Bontis (1998) and Bontis etal.(2000) used questionnaire insimilar study of IC and Growthof SMEs
Pilot testing Cooper &Schindler 2010 -Detect weaknesses in design andinstrumentation
Mugenda &Mugenda 2003 -The Kunder-Richardson (K-R) 20formulas used to access internalconsistency of an instrument
Cooper & Schilder,,Creswell,
2011 and2003
-1% of the sample should constitutethe pilot test
Data Analysis
First, data was analyzed by descriptive in line in asimilar study by Daud &Yusoff 2011 in Malaysia
Then multiple regression in line with Ahangar (2011)who studied the relationship between intellectualcapital and financial performance.
Each research questions were augmented bydescriptive statistics and inferential statistics whereboth questionnaire and interview guide was used asinstruments.
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Data Analysis, Findings &Discussion
The study was guided by the following researchquestions;
i. To what extent do managerial skills influence thegrowth of SMEs in Kenya?
ii. How do Entrepreneurial skills influence thegrowth of SMEs in Kenya?
iii. What is the influence of innovativeness on thegrowth of SMEs in Kenya?
iv. To what extent does structural capital influencethe growth of SMEs in Kenya?
v. How does customer capital influence the growthof SMEs in Kenya?
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Demographic data
From the data collected, out of the 456 questionnaires administered,320 were filled and returned, which represents 70% response rate.Supported by Mugenda and Mugenda (2003)
Age, (46.6%) of the respondents were between 26-36 years of ageformed the highest percentage. Was in line with Muijanack, Vroonhofand Zoetmer (2003) who determined that the optimum age forentrepreneurs was 25-35.
Education most of the respondent possessed first degree or diplomaand the study benefited that the respondent understood the instrumentfor data collection making the finding of the study valid and credible.Concur with King and McGrath (2002) who indicated education impactpositively on growth of firms.
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Role of Managerial skills ongrowth of SMEs in Kenya
The study was guided by the
following Objectives
Research Findings Inferential Statistics to show
evidence
Objective (i)
i. To establish the influence of
managerial skills as part of IC on
the growth of SMEs in Kenya.
ii. To Achieve the results, stepwise
multiple regression was used
results on show Technical Skills
Interpersonal Skills and
employees’ level of education is
a key IC factor and important
lever for SME’s growth in
Kenya. Literature by Papulova
and Mokros (2007) ; Edvinsson
2000 ; and Svendsen, 2006
concurs with the findings.
It can therefore be infered that
growth of SMEs is associated
by the level; of experience and
education of the entrepreneurs.
Knowledge of the entrepreneurs
regarding markets and products
is a key factor for the growth of
SMEs
R2=.789; P value= 0.045. F
cal = 4.063 > F crit = 1.85
Scatter diagram shows a
positive gradient. This
indicates, that entrepreneur
owner/manager managerial
skills is a key IC component
that significantly influences
the growth of SMEs in Kenya.
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Role of Entrepreneurial Skills as a component of ICon growth of SMEs in Kenya.
Objective (ii)
ii. To assess the
influence of
Entrepreneurial skills
as a component of IC
on the growth of
SMEs in Kenya.
Research Findings
Results show that risk –taking
Propensity, Planning skills,
Budgeting skills and
maintenance of financial records
which form a part of IC
positively influences the growth
of SMEs .
The study findings concur with
those of Hursky and Tuunanen,
(2006); Wiklund and Shepherd,
(2003). Inferences can therefore
be made that entrepreneurial
skills forms a key part of IC that
is an important lever for SMEs
growth.
Inferential Statistics to show
evidence
R2 = 0.753, and P value = 0.003.
F cal = 8.856 > F crit = 1.85
Scatter diagram show a positive
gradient. This implies that there
is a strong linear relationship
between owner/manager
entrepreneurial skills on SMEs
growth
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Role of Innovativeness as a part ofIC on growth of SMEs in Kenya.
Objective (iii)
iii. To find out the
influence of
innovativeness as
a part of IC on the
growth of SMEs in
Kenya.
Research Findings
The study findings reveal that
provision of incentives for
innovative employees, number
of patents within the enterprise
and level of new product to
total sales form key part of IC
that influences growth of SMEs
in Kenya. Concur with Hyrsky
& Tuunanen (2006) and Gans
and Scott (2000) about the
findings. Inferences can
therefore be made that
utilization of innovative
employees boosts the growth of
the entreprise.
Statistics to show
evidence
R2=.746. P value =
0.007. F cal = 6.099 F
crit = 1.85 Scatter plot
shows a positive
gradient.
This indicates that there
is a strong linear
relationship between
innovativeness as part
of IC on the growth of
SMEs in Kenya.
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Role of Structural capital as a constituent ofIC on growth of SMEs in Kenya.
Objective (iv)
iv. To establish the
influence of
structural capital as
a constituent of IC
on the growth of
SMEs in Kenya.
Research Findings
Findings show that SMEs thatreduce transaction cost,transaction time, havetrademark and proprietarydatabases and data systemsthat facilitates access torelevant information as partof intellectual capitalinfluence their growth. Thefindings concur to those byHsu (2006); Shelley (2004);Edvinsson and Malone(2007). It can therefore beinferred that structural capitalform a key integral part of ICthat influences growth of SMEs.
Statistics to show evidence
R= .724a and P value = 0.
F cal = 42.099 > F crit = 1.85
This is an indication that
there is a strong relationship
between structural Capital
which is a constituent of IC
on the growth of SMES in
Kenya.
Role of Customer Capital as an element of IC onGrowth Of SMEs In Kenya
Objective (v)
v. To find out the
influence of
customer capital
as an element of
IC on the growth
of SMEs in
Kenya.
Research Findings
The regression results reveal that its
customer satisfaction, time taken to
resolve problem, longetivity of
relationships and understanding of
target markets which are crucial
components of IC positively influence
the growth of SMEs in Kenya. The
findings concur with those of Bontis
(2000) ; Roos (1997) and William and
Richardson (2000). Inferences can
therefore be made that SMEs should
develop strategies that lead to building a
strong relationship between the
enterprise and the customers to enhance
their growth.
Statistics to show evidence
R2 = 0.636, P value = 0.000.
F cal = 22.227 > F crit =
1.85 Scatter plot shows a
positive gradient. This
shows a strong positive
relationship between SMEs
growth and Customer
Capital which is an element
of IC.
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Inferential statistics foroverall model
Model Unstandardized Coefficients t Sig.
B
1 (Constant) .119 .168 .867
Managerial
skills
.251 6.255 .000
Entrepreneural
skills
.120 4.849 .036
Innovation .216 6.210 .023
Structural
capital
.110 4.141 .040
Customer
capital
.196 5.414 .032
a. Dependent Variable: GROWTH
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Summary, conclusions andRecommendations
To what extent do managerial skills influence the growth of SMEs inKenya?
Managerial skills of the owner/managers positively influence the growthof SMEs in Kenya.
According to the findings,Seventy eight decimal nine per centum (78.9%)of the corresponding change in growth of SMES can be explained by aunit change in managerial skills.
What is the influence of innovativeness on the growth of SMEs inKenya?
The finding of the study indicate that innovativeness influences the growthof SMEs in Kenya.
According to the findings, Seventy four decimal six per centum (74.6%)correspondence on growth of SMES can be explained by a unit changein innovativeness.
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Summary, conclusions andRecommendations cont’d
How does customer capital influence the growth of SMEs in Kenya?
Customer capital influences the growth of SMEs in Kenya.
According to the findings sixty three decimal six per centum (63.6 %) correspondenceon growth of SMES can be explained by a unit change in customer capital.
How do Entrepreneurial skills influence the growth of SMEs in Kenya?
Entrepreneurial skills have a great positive influence the growth of SMEs in Kenya.
According to the findings, fifty six decimal six per centum (56.8%) correspondence ongrowth of SMES can be explained by a unit change in entrepreneurial skills.
To what extent does structural capital influence the growth of SMEs in Kenya?
Structural capital influence the growth of SMEs in Kenya.
According to the findings, fifty two decimal four per centum (52.4 %) correspondenceon growth of SMES can be explained by a unit change in structural capital.
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Overall Effect of the Variables
The study found out that there was 83.9% ofcorresponding change in the growth of SMEs forevery change in all the five predictor variables jointly.
Test of overall significance of all the five variablesjointly, managerial skills, entrepreneurial skills,structural capital, customer capital, andinnovativeness using ANOVA, at 0.05 level ofsignificance found the model to be significant
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Recommendations
IC should make entreprenuers seize opportunities, be proactive in the market place,make new product and process innovations.
IC component such as technical, interpersonal, and conceptual skills should guideentreprenuers effectively plan, lead, organize and control the enterprise effectivelyleading to increased performance and consequently growth.
promote customer capital which is an important element of intellectual capital thatentails establishing a solid stock of connections, interactions, relationships,linkages, closeness, goodwill, and loyalty between a firm and its customers,downstream clients, strategic partners or other external stakeholders as this has apositive and significant influence on the growth of SMEs in Kenya.
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Policy Implications Owner entrepreneur should embrace knowledge and IC in
handling critical issues in management of SMEs.
Entrepreneur owner/manager should actively explore new
product ideas by conducting customer and close analysis
of competitor products as this positively influences SMEs
growth.
Owner/managers should pursue a close and direct contact with
their customers and even know them socially and personally
through developing a stronger knowledge channel to
improve their ability to capture such customer knowledge
and consequently enhance the growth of the enterprise.
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Publications Ngugi, J. K., Gakure, R. W., Were M. S., Ngugi, P. K., Kibiru C. R., (2012).The Influence of Intellectual
Capital on the Growth of Small and Medium Enterprises in Kenya. Journal of Business Management andCorporate Affairs, Volume 1, Issue 1, pp 11-19
MC’Orege M.O , Muiru J.M & Ngugi J.N, (2013) The Influence of Innovativeness on the Growth ofSMEs In Kenya; International Journal of Business and Social Research Volume .3 Number, 2013
Gakure, R. W., Ngugi, J. K., Musangi, P. N., & Waithaka, S. M. (2012). Effect of Credit Risk ManagementTechniques on the performance of unsecured Bank Loans employed Commercial Banks in Kenya.International Journal of Business and Social Research , 2 (4). ISSN: 2078:7049 volume 2, number 2, 2012
Gakure, R. W., Ngugi, J. K., Waithaka, S. M., & Wambui, M. M. (2012). A Study on the importance ofcustomer loyalty on Fast Moving Consumer Goods in the era of Globalization: A Case Study of UnileverNairobi Kenya. Prime Journal of Business Administration and Management (SSN: 2251-1261).
Ngugi J K, Kiambati K.K. and Mugo H.W.,(2012). The effect of Globalization on the Performance:Strategies of Commercial Banks in Kenya Journal of Public Procurement and Contract ManagementISSBN: ISSN: 2078:7049 volume 1, number 2, 2012.
Ngugi J.K, Gakure R.W. and Mugo H.W. (2012) Competitive intelligence practices and their effect onprofitability of firms in the Kenyan banking industry: Journal of business and social research ISSN:2078:7049 volume 1, number 1, 2012.
Ngugi J.K, and Mugo H.W. (2012) Internal Factors Affecting Procurement Process of Supplies in ThePublic Sector; A Survey of Kenya Government Ministries. Paper presented at 5th International PublicProcurement Conference was held on August 17th, 2012 in Seattle, USA.
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Continued
Ngugi J.K., (2012) Strategies for curbing public procurement fraud and corruption in Kenya:Journal of Public Procurement and Contract Management ISSBN: 2219 – 7230 volume 1,number 1, 2012.
Ngugi, J. K., Gakure, R. W., Waithaka, S. M., & Nyambura, A. K. (2012, August). Applicationof Shapiro Model in Expalining Entrepreneurial Intention among University Students.International Journal of Business and Social Research . ISSN: 2078:7049 volume 2, number2, 2012
Gathai, E. W., Ngugi, J. K., Waithaka, S. M., & Kimingi, C. N. (2012). Analysis of FactorsThat Influence Implementation of Performance Contracts In State Corporations (A Case ofKenya Civil Aviation Authority). (S. Mims-Cox, Ed.) International Journal of Humanitiesand Social Science , 2 (17), 345-360.
Waithaka, S. M., Ngugi, J. K., Aiyabei, J. K., Itunga, J. K., & Kirago, P. (2012). Effects ofdividend policy on share prices: A case of Companies in Nairobi Securities Exchange. PrimeJournal of Business Administration and Management , Vol. 2 (8), 642-648.
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