The Business Experience of Firms in Kenya - Research Paper Example

? International Finance is trade between business partners in more than one country and it involvesgovernments who partner multi-national institutions in providing services and goods in the targeted market (Hoffman, 2008). In conducting international trade, there are procedures and techniques multi-national organizations employ to achieve their objectives and this includes market research involving the consumption, use and purchase of their product. Research has to be conducted on their competitors and the various legal channels to be followed to acquire trading license in the mentioned market. Engaging in International trade is important for the economies of the two or more countries involved; because there is an exchange of foreign currencies, creation of jobs and enhancement of revenues through taxation of the business profits. For multi-national organizations to survive in this import and export trade, they have to employ financial tools in their assessments, and this includes financial agreements and use of security exchanges. A product of trade in international finance varies depending on locations, legal requirements of operating in such destinations and transaction requirements. This paper seeks to assess the impact of selling beverages from United States of America into the Kenyan market. Abinam Inc. has been in the beverage industry for over 20 years, and recently decided to expand its operations in Africa, and specifically East Africa. To start its operations, the company identified Kenya as a convenient starting point because of its economic dominance in East Africa, and the high quality its infrastructure, which includes roads and telecommunications. The Kenyan political structure advocates for liberalization and a free market economy and all this are conducive for our operations. Kenya is a lucrative destination of the beverage industry because of the financial capabilities of its citizens and their thirst for new ideas and products. In analyzing the practicality of beverage sale in Kenya, this paper seeks to identify the different methods of International Business that Abinam Inc. will employ in the Kenyan market. It will assess Kenyan balance of current account in the last ten years to determine whether the planned beverage product is an export of the country. This paper will analyze Kenyan main exports and thereafter use them to predict the profitability rate of the beverage products. In achieving this, this paper will scrutinize the import data of Kenya for the last ten years and thereafter make a conclusion regarding the beverage products. This paper will review the import control mechanisms of the Kenyan State in order to assess the possibility of Abinam Inc. in conducting trade in the and its effects in its operations. In analyzing these mechanisms, this paper will identify specific controls set by the Kenyan government, giving an explanation of its intended objectives and thereafter its effect in the operations of beverage sale of Abinam Inc. This paper will review the changes in the various currencies of the two states, i.e. American Dollar and the Kenyan Shilling. This will help in analyzing the type of currencies to use, since changes in currencies can affect the profitability of a business organization. In understanding the foreign exchange rates of the two currencies, Abinam Inc. will be able to develop currency features which will minimize risks associated with fluctuations in foreign exchange rate. This paper has a conclusion, which highlights the process of registering a business organization in Kenya. Kenyan economy is agriculturally based and it imports most of its products from Europe and Asia, because of this, most of its international trade is skewed in favor of the industrialized states. In the last ten years, the Kenyan current account has seen a deficit (Goswami and Matoo, 2012). A current account is the balance between values of the country’s imports compared to the revenues generated from its exports. The current account deficit facing Kenya emanates from the country’s high consumption of imported goods and efforts to correct this through restriction of money supply leaves the Kenyan government with risky options of imposing legal measures to curtail high level importation of goods and services (Goswami and Mattoo, 2012). This is unlikely succeed because the Kenyan constitution, which is a supreme law, recognizes the notion of a free market economy. In 2007, Kenya had a strong shilling which stood at 68 shillings against the dollar, but it sunk lower, and in September 2011, the Kenyan shilling traded at 107 against the dollar, and in November, the same year, inflation rose to 19%. This is an indication of a weak current account system, where imports are the major drivers of the economy. In 2011, The Kenyan National Bureau of Statistics estimated that the value of imports grew by 25% in December, as compared to the import value of December 2010. This was an estimated value of 116.944 billion, in just one month. In the earlier months of the year 2011, the values of imports were higher than that of December 2011. With the objective of correcting its current account deficit, Kenyan policy makers have agreed that the best way is to reduce the value of goods imported and increase the percentage of exportation. According to Goswami and Mattoo (2012), industrial supplies consist of the largest importation by Kenya. It stands at 32% of the total importation. Importation of machines stands at 14% , while that of petroleum products, a key driver of countries’ economies stands at 29% and between 2010 and 2011, Kenyan Current account deficit grew to 12%. The table below shows Kenyan imports for the last ten years (Goswami and Mattoo, 2012). Import Petroleum Aircraft Oil Vehicles Medicals Wheat Polymers Value in terms of billions $. $580 $100 $580 $170 $105 $106 $97 From the above graph, the Kenyans import more of petroleum and oil products as opposed to agricultural products such as wheat. Production of beverages lies under industrial imports, where oil is found, and therefore chances are high that our product will find acceptability in the market. The following is a graph, indicating the Kenyan current account status for the last ten years. The Kenyan current account has three features, namely, differences of incomes Kenya acquires in regard to trading with other nations, the exports of goods and services minus the import of goods and services and the difference in value of financial transfers that countries make in regard to engaging in international trade. The table below indicates the performance of Kenyan current account for the last ten years (Goswami and Mattoo, 2012). Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Value -0.16 -0.15 -0.10 0.00 1.20 -1.90 -0.50 -4.00 -6.30 -5.9 -9.0 In exclusion are periods 2011, because the balance has not been officially released by the Kenyan government. The minus sign shows a deficit while the positive sign shows a surplus. From the graph, the Kenyan economy is not stable and performs poorly. This is an opportunity for a beverage company to gain entry into the Kenyan market and exploit the opportunities presented by Kenyan current account deficit. In response to this trend, the Kenyan government has introduced financial control measures aimed at improving its current account balance. One such measure is increase in the financial interest rate. This measure is aimed at restricting importation of goods and services to only essentials, like petroleum (Goswami and Mattoo, 2012). This move is unlikely to succeed in relation to selling beverage products in the Kenyan market, since in calculating the price of our products, well need to factor in the changes in interest rate, to our advantage. There is an aspect of high taxation imposed on imported products that can be found in Kenya, such as cereals and horticulture products. Our company dealing with beverages will open processing plants in Kenya, and localize our products, therefore being shielded from high taxation rates. These trade regulations will to some extent affect the operations of our business, since it will increase the costs of doing business in the country. The solution lies in transferring such costs to consumers (Carter, 2011), but this is in the short run, since other techniques will be required to enhance the profitability of the beverage business, and diversifying our production to include goods and services related to beverage use. In conducting this trade, our organization will have to roll its shares it in the country’s stock exchange. The Kenyan stock exchange is the most vibrant in Africa and chances are high that we can raise additional capital from this venture and the Kenyan public will have a sense of ownership of the project. Our organization will be the first foreign beverage company to allow local participation in its affairs. Another strategy is to establish business contacts with leading Kenyan business men, so that they can act as our distributors because of their familiarity of the country’s markets. The company will need to invest directly into the infrastructures for use in beverage production. This usually involves large transfers of money, personnel and machineries. The demand of our products will be influenced by the quality of our beverage in the Kenyan market. In Kenya, beverage companies do not produce high quality consumption goods and therefore there is a need of a company that has the resources to do so and ours is a perfect example. The process of conducting business in Kenya is simple and it involves an eleven step process. The first stage involves registering the organization as a legal entity with the center for public registration, and it’s from here that the organization is registered for taxation purposes (Hudson et al, 2007). From this stage, statement of the nominal capital of the organization is taken to the Kenya revenue authority for stamping, and this process takes a maximum of two weeks and thereafter the stamp duty is paid for at the central bank of Kenya. After this, the directors of the company are required to sign a declaration of compliance form before a commissioner of oaths and thereafter, at the registrar of companies, file the company’s incorporation deed and this takes a period of seven to fourteen days. After this process, the company will be required to register for a pin number and a VAT certificate with the Kenya Revenue Authority, after which, they can apply for a business permit (Hudson et al, 2007). Before the company seal is issued by the Kenyan government, the company will be required to register with the Kenyan National Security Fund and the National Hospital Fund, as a sign of commitment for social responsibility. This is for the benefit of its employees, whom majority will be Kenyan. The company will need a mechanism of remitting taxes of its employees to the country’s government, and therefore registering for Pay As You Earn is mandatory. From this analysis, it is important for the company to initiate measures of introducing our beverage product into the Kenyan market. From this country, the company will manage to expand into Uganda, Tanzania, Rwanda and Burundi. This is because of the strategic location of Kenya. It is also to the advantage of the company because there is a surety of making profits in the first year of operation. References Carter, R. G. (2011). Contemporary cases in U.S. foreign policy: from terrorism to trade (4th ed.). Washington, D.C.: CQ Press. Goswami, A. G., & Mattoo, A. (2012). Exporting Services A Developing Country Perspective.. Washington: World Bank Publications. Hoffman, S. L. (2008). The law and business of international project finance (3rd ed.). New York: Cambridge University Press. Hudson, J., & Grobbelaar, N. (2007). East Africa's hub: the experience of South African firms doing business in Kenya. Braamfontein [South Africa: South African Institute of International Affairs. Read More