Conducting International Business in Tanzania: Possibilities for Organiz Flavoured Drink - Essay Example

?Conducting International Business in Tanzania: Possibilities for Organiz Flavoured Drink Introduction Company Background Organix Corporation based in Germany launched Organix drink in 1995. Organix is a refreshing fruity flavours drink that adopted an organic process of fermentation using the purity process of beer. It was launched as the first non-alcoholic and organically produced refreshment drink that borrowed age-old brewing techniques and fully organic fermentation process of beer. A brewer invented the product with his biotechnical knowledge. Organix is distributed in wholesale and retail supermarkets, restaurants and hotels and the product portfolio includes Nixberry, Lycheenix, Herbix, Ginger-Orangix, and Organix Aktiv which is a mineral drink. Organix is distributed in South Europe, West Europe, North Europe, USA and Japan with a production of 200 million bottles in 2007. Organix took Germany by storm as its annual production rose to 300% since 2003. The drink instantly appealed to health-conscious consumers who started to appreciate the merits of organic foods and drinks as Organix become a regular fixture in restaurants, bars, and trendy spots targeting various lifestyles. In its expansion process, the company decided to embark in Africa, specifically Tanzania. Historical Background of Tanzania Tanzania became independent from Britain in early 1960s, forming from the territories Tanganyika and Zanzibar in 1964. While there is an ongoing conflict with Zanzibar’s semi-autonomous status, a democratic election was held in 1995 won by the ruling party. Tanzania is located in eastern Africa and surrounded by the Indian Ocean, Kenya, Uganda, Zambia and Mozambique. It has a population of 41.89 million, with the capital city Dar al Salaam. The ethnicities are 95% Bantu with more than 130 tribes and Asian, European, and Arab mixes with spoken languages Kiswahili or Swahili, Kiunguja, English as official, primary language of commerce, administration, and higher education, Arabic and other local dialects. The main religions are mainland Christianity (30%), Muslim (35%), and indigenous beliefs (35%) whereas Zanzibar has 99% Muslim (CIA, 2011). Tanzania’s main sources of income are agriculture, gold production and tourism, with a recorded high gross domestic product growth at seven percent in 2000 to 2008. Despite this, Tanzania still is considered one of the world’s poorest economies as funding for infrastructure were provided by institutions World Bank and International Monetary Fund. Recent developments include the winning of the Millennium Challenge Compact grant in 2008 which was considered the world’s largest at $698 million, and a 6% GDP growth in 2009-2010 (CIA, 2010). Tanzania Business System Doing business in Tanzania requires usual clearances for business registration with about 12 steps or procedures as follows: registration with the Business Registration and Licensing Authority "BRELA" as well as Registrar of Companies, acquisition of taxpayer identification or TIN, PAYE, VAT certificate and stamp duty inspection, site inspection, regional license if applicable, inspection by the land and town-planning officer for the premises, inspection by health officer, obtain workmen’s compensation insurance at National Insurance Corporation or related agency, and registration at the National Social Security Fund (NSSF) (World Bank Group, 2010). Corporate income tax for residents and non resident enterprises is 35%, with dividends and interests 20% withholding tax. VAT – 20%, replacing sales tax and stamp duties for businesses exceeding annual turnover of 20 mi shilling or US$30,000. Withholding tax is 5 % charged before VAT. There are 4 publicly listed corporations on the Dar es Salaam Stock Exchange, one of which is the Tanzania Breweries Limited controlled by London-based SABMiller (Country Watch Inc., 2010). Oreku, Li, and Kimeli (2009) noted the improved business climate for foreign investment in Tanzania through government effort redrawing tax codes, floating the exchange rate, easing of foreign currency regulation, licensing foreign banks, establishing free trade zones, and creating investment promotion center. For 2011, Tanzania was ranked 122nd out of 183 countries for doing business in a global scale by the World Bank Group. It usually takes about 29 days to complete the process for new businesses. Knowledge about these details is necessary for a new entrant especially where culture difference and distance from headquarters are factors. Protection of investors has Tanzania ranked at 93 worldwide. Economic and structural reforms in 1986 have aimed at stabilizing politics in Tanzania for a positive investment and business environment. The growth of GDP and decline of inflation have been factors for investor confidence in the Sub-Saharan state. The WBG has recommended “further regulatory streamlining”. Tanzania need to address the lack of power access at only 14 % served, 75% transport infrastructure in poor condition, and a capital city that is severely congested making transport of goods stagnant (World Bank, 2010). Education too, is only a problem as only about five percent of adults were able to finish secondary education and only one percent was able to finish tertiary education (WB, 2010). There had been efforts from the international community such as the International Development Authority providing grants and loans to improve 88 % of transport conditions, education through increased enrolment, delivery of health and social services (WB, 2010). The following provides an overview of doing business in Tanzania: Source: World Bank Group, 2010. Tanzania Beverage Industry Source of drinking water is one of the major problems of Tanzania as majority of its population especially in the rural areas need to travel about ten kilometers to access water. Task is usually undertaken by children and women, and water accessed may not always be safe for drinking (Wetu, 2011, and Letarte, 2007). The problem on water access is addressed through intervention from external organizations such as that villagers were trained and assisted in “digging a hole for the well, the harnessing of springs, doing the installation of collective reservoirs and development of drinking water distribution points. The facilities are generally located near schools and health and social services centers,” (Letarte, 2007, P 2). However, even destruction of water reserves lead to migration or relocation of Tanzania villagers as this often meant a water crisis (Ismailly, 2011). Currently, beverages in Tanzania include chai or tea, kahawa or coffee, and other native beverage that are identified per region. Beers also exist and commercial ones include the Kilimanjaro, Safari, Serengeti, Konyagi, and Banana wine. Tea is often taken at breakfast with breads or eggs while coffee is common in the evenings taken with Kashata or coconut or groundnuts rolls. Other native beverages are specific to certain regions and tribes. There also various beers, wines and spirits produced in Tanzania. These include Kilimanjaro beer, Safarai beer, Serengeti beer, Konyagi, Banana Wine and many more (Tanzania Embassy, 2010). Costs of commercial drinks in Tanzania vary from beer at $3, drinks at $1, and soft drinks at $.50 (Briggs, 2009). The food and the beverage industry is considered one of the most volatile in the consumer price index of Tanzania that even year-end festivals could push prices at 7.3 % and an increase of inflation overall index from December 2009’s 96.35 to 101.70 for the same 2010 period (Elinaza, 2011). This price increase covers food and non-alcoholic beverages. This was seen as negative as increased rate on consumption of food and beverage at 6.3% from the previous year’s six percent was pointed out as a result of the inflation as there was a diminishing disposable income (Elinaza, 2011). Where transport services and manufacturing cost for source of local raw materials may become possible, the beverage industry makes a possible business exploration in Tanzania. National Culture Differences Differences of culture and work environment factor in the global business. German executives and their staff must integrate well with their local counterpart. It is therefore important for the German nationals to understand the culture and work environment of the Tanzanians. In greetings, men may exchange handshakes, and so does women with fellow women. As for men and women, it is enough to exchange bows and greetings. It was suggested that Tanzanian greetings may have a length from one to ten minutes. Indirect approach of communicating your purpose through provision of a story of your state is much more appreciated than direct and blunt presentation. The Tanzanians enjoy humor in their social and business interactions. When addressing Tanzanians, it is best to call them by their last or surname and a business card may be given and received using the right hand. Showing up on time for a business meeting is better although it is highly probable to wait. Very formal opening and closing speeches and prayers are common which are usually given by government officials. When buying, haggling or negotiating may sometimes be considered necessary and should be enjoyed in a polite manner (Culture Crossing, 2010). Trade Patterns Germany is not new to African culture although its former colonies East Africa, Southwest Africa, Cameroon and Togo do not include Tanzania. Africa and majority of its countries including the western colonies did not demand much from their colonizers for imported (West-sourced) products, as it was noted that “Therefore, as many other European countries in Africa, German traders were not familiar with the African want pattern,” (Gilroy and Bauer, Oreku et al, p 158). YOUR INDUSTRY AND FIRM Foreign Direct Investment There is insufficient indication for any foreign direct investment on the beverage industry in Tanzania except for SABMiller. SABMiller was founded in Africa and has grown to become the second largest brewing corporation globally (Lawrence, 2010) and one of the only 4 corporations listed in the Dar al Salaam Sock Exchange. Other indications of increased FDI for Tanzania include the Feed the Future (FTF) program of the United States which enlisted Tanzania as one of its benefits for a $3.5bn worth of aid and lateral projects under the 2015 Millennium Development Goals. Sustainable food security is one of the focuses of the FTF (Angyangwe and Ford, 2010) that may encompass provision of drinkable water among Tanzanians. Despite continuing reports about poverty and slow growth, Africa has been seen with a growing middle class (Smith, 2010) that could soon afford necessities such as commercial beverages. Affordability is one of the main factors that shall be considered in the Organix approach towards establishing a commercial drink in Tanzania. Aside from its advantage as flavoured or energy drink contributing to the health and well-being of consumers; it shall be marketed as an alternative for drinkable water which is scarce. Organix can capitalize on its experience with other countries when it comes to dealing with Tanzania. It will focus on adoption of global distribution system, marketing strategies that fit its overseas markets, and establishing a global branding. It will address these challenges to turn these into opportunities in order to establish operational procedures, distribution system, marketing, and continued growth. Regional Integration Tanzania is a member of the East African Community (EAC). EAC members also include Republics of Kenya, Uganda, Rwanda and Burundi. It was ratified in July 2000 with its headquarters in Arusha, Tanzania (EAC, 2011). EAC aims “to widen and deepen Economic, Political, Social and Culture integration in order to improve the quality of life of the people of East Africa through increased competitiveness, value added production, trade and investments,” (EAC, 2010, P 1). As can be noted, this integration is regional and a location-based cooperation between states within proximity in order to promote the area’s socio-political and economic concerns. The European Union and the North American Trade Agreement are the most popular regional integrations. De Lombaerde and Langehove (2007) suggested several characteristics of regional integration: strengthen trade through integration, enabling private sector development, strengthening the private sector through good governance, promotion of civil society and decrease of social exclusion, increase peace and security, development of unified environmental programs, and strengthen interaction. Africa consists of less developed countries (LDCs) including Tanzania, although the continent in general has performed well even in the recent global economic crisis (Afrik News, 2008). Improved performance is always aspired in order to further growth and competence in the global economy. The success of regional integrations such as that of the EU, NAFTA, and the ASEAN has inspired other regions to follow suit. Integration is not an end in itself. Its legitimacy is dependent on the socio-economic and political interests achieved through regional cooperation. Local powerful hegemonic groups, foreign economic and political governments and multinational corporations (MNCs) play crucial role in the whole process as well as in the outcome of regional cooperation (Vaitsos, 1987). Less developed countries integrate with the objectives, activities and tasks requiring “programmed yet not comprehensive harmonization policies, a subordination of trade to a planned and significant expansion of economic activities in new fields, and the pursuit of certain outcomes whose values are not adequately reflected by the market system and whose inducement requires more explicit government intervention,” (Vaitsos, 1978, p 719). Parallel with globalization, regional integration breaks down territorial barriers, economic boundaries, liberalised trade, growth of finance and production, as well as the increase of power among MNCs and financial institutions (Khor, 2000). It was observed that previous regional cooperation was conflict-prone and subject to strong polarization forces. Member countries' governments need continuous commitment and manifestation of political support (Vaitsos, 1978). Several studies indicated blurred results of integration that allows co-movement or parallel developments between countries in a given bloc. One study focused on financial co-movement found that evidence on real co-movement is blurred and controversial (Brooks et al, 2003) whilst another study on the asymmetric relationship between the European Monetary Union and sub-Saharan African countries that tested whether evidence on business cycle convergence exists pointed out that there were no obvious transmission of fluctuations even for main trading partners (Nyembe and Kholodin, 2004). Another trend that has become an obstacle instead of being an aid towards development in the integration process is the overlapping of memberships between different regional organizations as goals may not be parallel or similar. Increasing African Trade amongst African Nations To increase trade between nations, it is important that each member in an economic bloc be dependent on one another with regards to products and services or at least complementary in their production processes. One country may produce excessive raw materials which another country can process into finished products that are useful for other or even the states producing them. There is also a goal to become independent among other blocs of products and services so that arrangements are made to complement each other. However, as pointed out earlier, comprehensive harmonization policies, subordination of trade to a planned and significant expansion of economic activities in new fields, and the pursuit of certain outcomes all contribute to lopsided or otherwise unrealized goals (Vaitsos, 1978). The advantages of integration are the removal of trade restriction, abolition of tariffs, and increased efficiency as best practices are easily sought where there are available. Tariff discrimination, however, is one result of regional integration as non-members become discriminated upon, relocating a probable optimized resource allocation between contracting or integrated states? This is in connection with foreign direct investment where MNCs are usually involved (Kreinin and Plummer, 2008). Instead of being integrated into the world economy during the globalisation boom of the 1980s, African countries including Tanzania regressed to marginalization, slow growth as well as stagnation thereby prompting the many to continue searching for ways to accelerate their development towards globalized economy (JBIC, 2008). The past recent year however, indicated progress in African efforts at integration and economic performance. In a study conducted by Kabundi and Loots (2007) that examined co-movement of integrated states in Africa, it found that integration influenced strong synchronization of business cycle. Regional integration in this context was driven by the need to promote cooperation in the region, national development, and for effective strategies towards complex regional and global environment (Delport, 1999). Regional economic integration tends to be more successful when member countries are more or less on the same level of development (Kabundi and Loots (2007). It was suggested that the state plays a key role in development even in the integrated process. It was further suggested that “markets and their rationally competing business actors are best left to themselves for the economy to grow; (b) undistorted markets are what underlie successful economic development; and hence (c) the role of the state should be limited to preventing market distortion,” (JBIC, 2008, p 5). JBIC (2008) strongly push for selective government intervention and letting economic fundamentals of creating market-friendly environment. The former is discouraged by WB no matter how replicating appropriate interventionist policies to address market failures for developing countries were seen to have contributed to the success of regional integrations (JBIC, 2008). As JBIC reiterates, “The effectiveness and outcome of policies depend on multiple factors originating from internal domestic conditions and external environments, specific to countries and regions,” (p 6). It would do well to analyse motives for trade integration drawing on an attempted United States Trade Representative point of view with regards to a target African country: catalyst for increased free trade; deepen US economic and political ties to the region; build on the success of the African Growth and Opportunity Act or AGOA through expansion of US access to the region’s market; address barriers to US exports and advance US objectives for the WTO multilateral negotiations in order to keep up with EU exports and imports (Brown, Kiyota and Stern, 2007, p 462). Nowhere in the motives was there any consideration for empowering or improving the region’s or any of its member state’s economic conditions. As Brown et al (2007) suggested, “…objective […] focus on expanding market access […] for US goods and services and shaping the regulatory environment in [target…] countries to conform to US principles and institutions,” (p 462). Tariff or trade barriers are common characteristics of integration. It was suggested that “when tariffs or other trade barriers are reduced in a sector, domestic buyers (both final and intermediate) substitute towards imports and the domestic competing industry contracts production while foreign exporters expand,” (Brown et al, 2007, 466). In a change of trade scenes, continuing shifts follow from producing to outsourcing, exporting and importing. Businesses, which are often the main players in regional integrations, have to be wary of changes, thereby, the need to be bullish, predict markets, diversify, or be all three. It is to be remembered that increase of private sector is another integral characteristic of integration and it may not always mean “private sectors” in a given LDC. There are also various reasons seen in the African region integration as impeding growth and development: political instability, less developed infrastructure, i.e. transportation and communication, and proper government interventions that address issues. Instead, what was seen was that growth and trade development results from global and country specific components (De Lombaerde, P. and Van Langenhove, 2007). Impact of Regional Integration on Organix When conducting business with the intention to serve the needs of consumers, Organix may prove profitable in Tanzania and its neighbouring countries. Local production and manufacturing is rich in possibilities in Tanzania and in Africa in general. Specifically, the beverage industry has not been exploited to offer alternative for drinking water and an affordable beverage is highly needed by Tanzanians who have very poor access to drinking water. Aside from offering the drink, setting up manufacturing plant and sourcing of local materials and workers will also contribute to the growth, parallel to what is sought by these integrated countries. Organix proposes to use as much local sources or raw materials and labour as possible in order to sustain affordable prices for the beverage and establish a locally sustainable work environment. Parallel to the goals of the company about sustainability and responsibility to the community where it operates, Organix may do well to follow standards and cooperate in the achievement of goals of the local government and the community towards a better trade as well as consumer relations. References: Angyangwe, Eliza and Ford, Liz. Does US food security strategy go far enough? The Guardian, March 21, 2010. Accessed from http://www.guardian.co.uk/katine/katine-chronicles-blog/2010/may/21/us-food-security-strategy Briggs, Philip. 2009. Tanzania: With Zanzibar, Pemba & Mafia. 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