Environment Business Analysis of Kenya - Research Paper Example

Introduction Growth in international business has formed one of the most significant and dramatic trends in the world since the early 1990s. Aswathappa (2008) states that globalisation has hit the world markets like a storm with increased flow of goods and services from one country to another with relatively less ease. Within the same period there has been notable increase in market interpenetration which has increasingly made it impossible for countries to avoid external impacts on their economies. Technology has been one of the most significant factors that have helped facilitate the rapid growth in the international trade. These interrelationships that countries have adopted have on the other hand made countries vulnerable to global economic trends be they beneficial or detrimental. Those involved in international business have been forced to embrace the uniqueness that lies within individual countries’ markets and cope with the challenges faced as a result while trying to capitalise on the benefits that these markets offer. This paper shall look into the business environment of Kenya and the audience in this respect will be New Zealanders wishing to invest or engage in trade in Kenya. In doing so the paper shall explore the Kenyan economy, banking and finance, the country’s trade regime, investment climate, trade and investment and risks that the market poses. It is important to note that at some points some comparisons will be made with New Zealand. Kenya’s Business Environment Overview Kenya is an East African country that boarders Uganda, Tanzania, Ethiopia, Somalia, Sudan and the Indian Ocean. Kenya has a population of almost 40 million people making it a potential market for goods and services (World Bank, 2010). Kenya’s capacity in tourism and agriculture surpasses other sectors in revenue generation but the economy is fundamentally agricultural dealing mainly with crops like tea and coffee as well as horticultural produce. The country had been regarded as relatively stable politically since its independence in 1963 as compared with its immediate neighbours. According to Yabs (2007) the country has had its share of unfortunate times in its political history with first surviving an attempted coup in 1982, instability brought by the emergence of multiparty democracy in the early 1990s and the 2007 post election violence. Some of the notable highs include the peaceful transition of power from the 24 years service of former President Daniel Moi to current president Mwai Kibaki in December 2002. After the 2007 post elections turmoil there developed successful power sharing agreement between the government and the opposition of the day which is running the government to date according to Amies (2010). The coalition government on August 4th 2010 conducted a successful referendum that saw the ushering in of a new constitutional dispensation for the country. This feat alone analysts claim that it shall make Kenya one of the leading countries of the developing world in all spheres of a country’s existence if the constitution is followed since it is being regarded as one of the most superior ones in the world. The economic reforms that have been taken since 2003 have made Kenya increasingly attractive for investment. The country also has a master plan dubbed Vision 2030 which aims at ensuring the country grows to be a fully industrialised by then while having improved the social and economic standards of the people significantly. The country 10 years ago had a substantial number of citizens living under a Dollar per day but in the last 2 years this has rose to 2 Dollars a day. The average economic growth since 2003 has been 4.5 percent with 2007 recording the highest growth rate of 7 percent according to Yabs (2007). The country acts as the East Africa’s economic power house and with the establishment of the East African Community, investors in Kenya stand the best chance of accessing the East and Central African markets. The Mombasa port along the Indian Ocean coast, superior transport, insurance, banking and information sectors make is an ideal player in international trade. The Kenyan Economy Kenya’s GDP stands at over 60 billion dollars with an inflation rate of 3.2 percent by end of June 2010 (World Bank, 2010). The service sector’s contribution to the GDP currently stands at 62.3 percent while agriculture takes the second position at 21.4 percent. Of importance to note is that the agricultural sector has absorbed more than 75 percent of the labour force while the service and industry sectors combined take the rest. This therefore shows the significance of each sector in respect to GDP contribution and in employment creation although the unemployment rate is round 40 percent. The country’s export market is dominated by tea, coffee, petroleum products, cement, horticultural products and fish mostly to UK, US, Netherlands and Pakistan. The import sector on the other hand is dominated by machinery, motor vehicles and plastics mostly from UAE, China, India and Japan. In this respect China, USA and Japan are markets that are shared by Kenya and New Zealand. For an investor from New Zealand the best export business to conduct with Kenya is in machinery while agricultural investment would offer a viable option as well as the service industry or manufacturing sector. Structure of the Kenyan economy Agricultural sector Agriculture as earlier stated forms the backbone of the Kenyan economy in terms of employment creation. It goes on to give a 24 percent contribution to the GDP states Yabs (2007). Kenya has a variety of ecological zones that favour different types of agricultural activities from tea farming to sisal and cotton farming all of which require completely different climatic conditions i.e. cool and hot and humid temperatures respectively. Tea and coffee have been the leading exports for many years although the horticultural sector is becoming significant with more investors joining this line. Textile industry is one picking fast with the establishment Export Processing Zone that is mandated to revamp the sector and increase textile production. The body has taken advantage of the AGOA opportunity and has captured a good portion of the US market. As quotas under WHO become relaxed New Zealand being a heavy importer of textile goods will form a good export market for Kenya. This is actually an area that is currently not adequately tapped e.g. the cotton sector and investors can reap a great deal especially to ready markets like New Zealand. Manufacturing sector This sector is emerging to be increasingly significant as time goes by and more and more investors go on board. The sector dictates about 13 percent of the GDP which is growing every day. The major players are medium size enterprises while large scale ones are still important to consider. US, EU and Asian countries have been increasingly investing in the Kenyan manufacturing sector which is a representative of global presence in the country according to the World Bank (2010). Other countries like Brazil and Libya have also shown interest and started investing in the country. Tourism sector This is the sector that for the last two decades has come to overtake agriculture due to increased marketing campaigns by the Kenya Tourism Board both domestically and in foreign countries. Currently the sector is the highest foreign exchange earner making it quite a significant line to venture into. This endeavour has bore fruits after the government shifted its marketing from the West to the East. Kenya has become a tourist destination for many from a global perspective which was not the case in the 1980s and before. Kenya’s macroeconomic framework For an investor it is important to consider the macroeconomic framework of a country so as to establish the various factors that may affect a business or an investment. The Kenyan economy in general terms has been on the rising trend from the stagnation witnessed in the 1990s. The GDP growth had been stagnating at around 1 percent but after the 2002 elections the average has been 4.5 percent (McCollum, 2008). Inflation rates have been falling steadily with corresponding lowering of interest rates on various securities and bills e.g. treasury bills. Development expenditure on the other hand has been increasing with the government engaging in massive infrastructural developments especially in the communication and transport sectors. Infrastructure (physical and otherwise) There are huge efforts being directed towards rehabilitation of already dilapidated infrastructural facilities as well as maintenance efforts being carried out. Others are being upgraded as others are being expanded like road networks, airports and the railways system. This is what is leading to increased expenditure by the government on development projects. Airports Kenya has three major airports that handle international air flow and they are evenly distributed since one at the south – Mombasa at the coast, Central – Nairobi (Capital city) and the other one in Eldoret which is in the northern region. This has makes it easy for people to travel directly to the part of Kenya they wish from other international destinations. The country is also served with over 150 airstrips making other areas accessible from local flights that are relatively cheap. The airports combined have been able to handle a passenger capacity of almost 10 million per year. Seaports Mombasa port is one of the busiest and most modern in Africa and it acts as connecting route to land locked countries like Uganda, DRC and Sudan says Yabs (2007). This enables Kenya to be strategically placed geographically. The government has current plans to expand the port to handle generation three ships meaning that it will be a world class port and the biggest in Africa. Roads and railway Most parts of the country are well connected with road network. Most of this is unfortunately weather roads which render some activities impossible like transportation of agricultural produce to the markets. This problem is however being solved with the increased rehabilitation and expansion of the road network which is being undertaken mostly by Chinese companies. The railway network is a single network that was built during the colonial times and has not been expanded since. The system runs through various major towns cutting across the Rift Valley into Uganda while another section goes into Tanzania. Trade regime Kenyan market has been for a long time overregulated by the government and this hindered growth in investment. However, since the year 2003 donors’ calls to liberalise the market were heard and by 2010 the government’s involvement has drastically reduced. There is however customer rules more so in manufacturing under bond that are rigid and unattractive in today’s world. The export market as stated earlier is dominated by agriculture while imports are dominated by petroleum and machinery. Trade tariffs and barriers are based on HS i.e. harmonised system which is an international standard and imports’ standardisation is inspected by the Kenya Bureau of Standards (Yabs, 2007). Investment climate The investment climate of Kenya has been favoured by many factors for example Kenya being one of the emerging markets, strategic location, Export Processing Zone Authority, abundant natural resources, highly qualified and developed and yet mobile human resource pool and relatively good physical and social infrastructure. The government has also been undertaking measures to make the Kenyan environment more favourable. This has been by removing and abolishing price and exchange controls respectively, abolishing import licensing while giving a chance for foreign participation in capital markets. According to The World Bank (2010) corruption however has been a thorn in the flesh that seems not to be ending anytime soon although there are many measures being put in place to curb the vice. Conclusion and recommendation The Kenyan economy is one that offers future growth opportunities for investors more so in agriculture, tourism and manufacturing. The economic growth projections are quite promising and both economic and political stability are in offing in the foreseeable future. The economy has however been criticised to rely heavily on agriculture that is rain fed and tourism both of which are seasonal and have boom and bust cycles. Corruption, poor governance, huge gaps between the rich and the poor and high population growth rate that does not match economic growth are all factors that are tarnishing the other positive factors while doing business in Kenya. New Zealand investors can make good investments in horticulture and manufacturing as these are the two sectors that New Zealanders can be good in while in Kenya. References Amies, N. (2010). Kenyans vote on new constitution amid fears of a return to chaos. Retrieved 4 Aug 2010 from www.dw-world.de Aswathappa (2008). International business. 3rd edn. Tata McGraw-Hill. McCollum, S. (2008). Kenya, Lerner Publications. Yabs, J. (2007). International business operations in Kenya. 2nd edn. Lelax Global Ltd. World Bank (2010). Doing Business in Kenya 2010. Retrieved 22 Aug 2010 from http://www.doingbusiness.org/ExploreEconomies/?economyid=101 Read More