Politics and Business in Kenya - Example

Table of contents 1.0 Introduction……………………………………………………………………………….2 2.0 Political ideology in Kenya……………………………………………………………….2 3.0 Legal and regulatory environment………………………………………………………3 4.0 Political risk……………………………………………………………………………….5 5.0 Entry strategy for a multinational wishing to move into Kenya………………………7 References ……………………………………………………………………………………9 Political issues that might face a multinational wishing to move into Kenya 1.0 Introduction Kenya is a less developed country in east Africa that is the strongest economy in the region. There are a variety of political issues that may face a multinational wishing to open shop in Kenya as will be discussed in this paper. In light of this issues and other relating factors such as cost of doing business and the economy in general, this paper will briefly outline some entry strategies that can be adopted in entering the Kenyan market by an international firm. 2.0 Political ideology in Kenya A look into Kenya’s history provided in Kenya: Economy (2013) Kenya was colonized by Britain and got its independence some 50 years ago. From 1963 to 1993 Kenya remained under one party rule. It was an era full of political instability as pressure mounted on the government to adopt multiparty democracy. Multiparty democracy was adopted in 1993 and is still the ideological system today. According to the U.S. Department of State (2013) on Country Background notes, Kenya’s democracy has not been without its share of challenges though as ethnic rivalry is still rife threatening to destroy the democratic system in the country like it was the case in the year 2007 when Kenya experienced post election violence caused by disputed general election. This period resulted in deaths of citizens and destruction of properties including commercial properties. The country is now enjoying a stable economic and political environment having gone through elections in 2013 that were peaceful and democratic. Kenya is one of the most sable democracies in Africa together with several; other nations like South Africa and Ghana. The state has liberalized the economy to enable the private sector play its role in the generation of GDP and provide the much needed employment to the population. There is minimal control of the economy by the state either directly or indirectly. There are few firms in the economy owned by the government but they don’t control a considerable chunk of the economy nor do they contribute substantially to the GDP of the country. The state has a percentage of ownership in the profitable sectors of the economy such as banking, agriculture, insurance, telecommunications and mining and manufacturing. Several blue chip companies have the state as a major shareholder in Kenya (Ndwiga, 2013). 3.0 Legal and regulatory environment The legal system in any country is to a large extent determined by the politics of a country. Governments enact and implement laws that will enable them achieve their objectives with the constraints of international laws and respect for the dignity and rights of its people. Kenya is governed by a constitution that was enacted by the people of Kenya in the year 2010. The constitution is based on common and civil laws and the African customs. The law to a large extent provides individual rights like the ones granted by western nations (Ndwiga, 2013). There is no state religion and people are not required to behave in ways prescribed by state for as long as they adhere to the rule of law. According to the World Bank’s ease of doing business report for Kenya in 2013 (www.doing business.org, 2013) Kenya has a strong and independent judicial system after the judicial reforms in the year 2011. Judicial officials go through public vetting to ensure they are competent and suitable for the positions. Labor laws are not very restrictive but the Central organization of Trade Unions (COTU) an umbrella body for all workers is very vocal in agitation of workers rights and better pay. Any dispute between workers and companies including multinationals can be resolved in the industrial court. The judiciary in Kenya can to a large extent be considered independent for the state and state bodies. However, corruption is very high in Kenya such that you can not have a 100% trust in the country’s system. In the past 2 decades it has been very difficult to set up an international firm in Kenya a lot of bureaucracies and politicization of matters have more than often stifled efforts by international firms to set up shop in Kenya. Driven by rising levels of unemployment especially among the young population, the government has made efforts to reduce the bureaucracies by making the process of registering a company simple and fast. Kenya’s vision 2030 is an economic blue print that seeks to make Kenya a middle economy by the year 2030. It has laid out a plan that promotes establishment of international companies in the country. The government is more than willing to review taxation and other factors that may affect multinationals (Anyango, 2007). Firms such as Pepsi have already started their operations in Kenya. Samsung has announced its interests to have a local subsidiary to serve several Africa markets. It should be noted that the regulatory framework is not very certain now as the country moves towards a devolved system of government where the county governments have influence on policy framework to be used in their regions (Ndwiga, 2013). The country is bound by several trade agreements with its regional neighbors that seek to protect industries in respective countries and also stimulate economic growth in the region. These agreements might to a large extent influence the plans of a multinational wishing to set up base in African countries to serve the continent (Williams & Sallah. 2011). 4.0 Political risk According to the National Economic and Social Council of Kenya (nesc.go.ke, 2013) since the inception of a new government in the year2002, multinationals have not received any form of intimidation or unfair policies save for the uncertain political environment and high costs of electricity. The government policies have been geared towards promoting foreign investment in the country. Companies setting up in the Kenya’s Export Processing zones have a ten year tax holiday and a 25% corporation tax to pay in the subsequent years, 5% lower than the other companies. The government has also set up a technology park (Konza city) where multinational and local technology companies are expected to invest in setting up high-tech firm that will take advantage of cheap labor to outsource for international markets. With all this efforts and many others it is clear that the government of Kenya is committed towards developing and implementing policies that favor foreign investors although constrained by the interests of the local population in terms of economic growth and provision of employment (Ndwiga, 2013). There are no major political decisions for the time been that can destabilize the macro political environment of the country. It is worthy noting though that the country has just elected a new president who together with the deputy president is facing charges at the international criminal court (ICC). Needless to say, change is never always desired especially where political interests are involved. So it might be uncertain how the government of the day is going to change policy frameworks and also how the government is going to deal with the ICC cases. The government has pledged to promote the growth of the private sector and promote small and medium size companies that will generate employment for the population. The government also reiterated its commitment to ensure that the level of exports increases to reverse the unfavorable balance of trade currently defining international trade. According to World Bank Group data, Kenya ranks 121 out of 185 countries n ease of doing business (doingbusiness.org, 2013). The local currency- Kenya Shilling is not very strong against the dollar although it has maintained a stable exchange rate of 85 shillings against the dollar having plunged to a high of 115 shillings against the dollar a year ago. The base lending rate set out by the central bank of Kenya is at 13%. The lending rate is regularly changed to reverse inflation in the economy. There are a lot of unemployed youths. Most citizens depend on agriculture as a source of income. With the increasing pressure on land the majority of the youths who make up 75% of the population of 40 million people are unemployed. It is a challenge to the government which has had to deal with a wave of industrial unrests in the public sector for the better part of 2012. Some sections of citizens have lost hope in the government and have resulted to devoting loyalty to local terrorists groups like the Mombasa Republican council that seeks to annex the coastal region. The government has decisively dealt with the groups but much need to be done to secure the nation from internal threats as noted by the CIA (cia.gov, 2013). According to the CIA World factbook available on Central Intelligence (cia.gov, 2013) Kenya borders Somalia to the east. Somalia is an unstable country which has not had a government for two decades. It has been a haven for pirates and warlords out to control the horn of Africa country. In the year 2010 Kenya had an incursion into Somalia where it deployed its army to flash out Alshabaab terrorist group accused of several kidnappings of tourists along the Kenyan coast and in other boarder towns. The mission was successful resulting in election of a government in Somalia aided by the United Nations forces. The terrorist group has in the past threatened to attack Kenya for interference in Somalia issues but the threats have so far not materialized. It remains an uncertain issue as far as threats to Kenya by a foreign terrorists group are concerned. Many African countries are net importers of consumer goods due to local inefficiencies in the domestic economy (Yilmaz, 2003). Kenya imports so much of consumer products due to inefficiencies in local production. The government is mainly concerned with reversing this phenomenon through restrictive importation of commodities that will add value to production process in the country. There is a zero rate on importation of raw materials to be used for production of export commodities. Technology items such as computers and mobile phones are zero rated too to ensure growth of the information technology sector (Ndwiga, 2013). The government wage bill is expected to rise as new positions are going to be created by the new system of government. Although the government has not indicated raising the taxes, it has indicated an intention of increasing the tax sources. This may mean some activities that were exempted from tax may be considered for tax. 5.0 Entry strategy for a multinational wishing to move into Kenya Export processing zones For companies intending to use Kenya a s abase to serve the regional eastern Africa and central Africa markets, the best option will be to set up at the export processing zones of Kenya where they will be sure to get a ten year tax holiday and a reduced taxation rate of 25% corporation tax. The infrastructure is quite developed and the local politics don’t affect foreign firms as such if the firm is not highly reliant on the domestic market (Anyango, 2007). Exporting (Kerr & Gaisford, 2012) argue that this is the most appropriate strategy for multinationals setting up in developing economies since the economy is underdeveloped and relies so much on imported goods. Production cost is high in the country due to expensive electricity cost. The taxation regime is not so harsh for importers and therefore it is imperative for multinational starting operations in Kenya starts by importing from home since production costs and political risks will be minimal. Exporting from home also gives a firm the opportunity to learn the dynamics of an overseas market (Ndwiga, 2013). Several foreign companies from China have benefited form liaising with the government to offer affordable solution to infrastructure development even though much of their technology and raw materials have been imported into the country. Licensing A multinational firm may as well agree to permit a company in Kenya to use the manufacturing, processing, trademark, know-how or skill provide by the multinational. This is less involving and provides an excellent a low risk manufacturing relationship. Capital is also not tied up in a foreign nation full of uncertainties. Coca-Cola is the best example of this in Kenya. Coca-Cola has licensed several companies in Kenya to such as Rift-Valley Bottlers to produce its soft drinks and other beverages (Ndwiga, 2013). References Anyango, R., 2007. Challenges of strategy implementation: A Survey of multinational manufacturing companies in Kenya. Ph. D. University of Nairobi. Viewed from: http://erepository.uonbi.ac.ke/handle/123456789/7450‎ Central Intelligence Agency 2013, The world fact book, Viewed 1 May 2013 https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html Global Edge 2013, The Global Edge, Kenya: Economy, viewed 1 May 2013, https://globaledge.msu.edu/countries/kenya/economy/ Kerr, W., & Gaisford, J. 2012. Handbook on international trade policy, Edward Elgar Publishing National Economic and Social Council of Kenya 2013, The National Economic and Social Council of Kenya, viewed 1 May 2013, http://www.nesc.go.ke/ Ndwiga, C., 2013. Foreign market entry strategies used by British multinational corporations in Kenya: a case study of British Multinationals in Kenya. Ph. D. University of Nairobi. Viewed from: http://erepository.uonbi.ac.ke:8080/xmlui/handle/123456789/14143 U.S Department of State, The U.S Department of State, Viewed 1 May 2013, http://www.state.gov/r/pa/ei/bgn/ Williams, C., & Sallah, A. 2011, The Illusion of Capitalism in Contemporary Sub-Saharan Africa: a case study of the Gambia, Foresight, Vol 13, no. 3, pp. 39-46 World Bank Group 2013, Ease of Doing Business, Viewed 1 May 2013, http://www.doingbusiness.org/data/exploreeconomies/kenya Yilmaz, A. Ed. 2003. Developing countries and world trade: performance and prospects, Zed Books Read More