Executive Summary
Kenya is a developing country located in the eastern part of Africa. It has a thriving economy and serves as the major communications and logistics hub in East Africa. It borders with Uganda, Tanzania, Somalia, South Sudan, and Ethiopia. According to government statistics released in 2016, Kenya has a population of 48.5 million (CIA, 2018). In the past decade, the economy of Kenya has experienced rapid growth primarily due to the passage of a new constitution in 2010 that has facilitated the devolution of power and the allocation of resources to rural areas.
Devolution has transformed political and economic governance, and enhanced the delivery of public services. The major pillars of Kenya’s economy include agriculture, industry and manufacturing, tourism, energy, financial services, mining and minerals, as well as forestry and fishing. An international company expanding in Kenya can benefit from the country’s infrastructure, manufacturing, transport and service industries, as well as its rapidly expanding skilled workforce. On the other hand, companies expanding in Kenya have to deal with a volatile political environment, rampant corruption, and GDP growth that is projected to decelerate due to drought and security concerns.
Macro Environment
Country Description
Kenya has been described as a country with great potential for foreign investment because of improved infrastructure, dynamic private sector, highly skilled workforce, and a young population that is growing fast. In addition, a new constitution that was passed in 2010 supports the distribution of resources to all areas around the country (Bhorat and Tarp, 2016). According to the Central Intelligence Agency (CIA) (2018), Kenya is the financial, economic, technology, and transport hub of East Africa.
The country’s GDP (78.4 billion USD in 2016) has grown at an average rate of 5% annually for the past 8 years, hence its promotion to a lower middle-income country (CIA, 2018). Its per capita GDP was estimated at $1,455.36 in 2016, thus making it the largest in East and Central Africa. Kenya’s annual population growth rate is estimated at 2.6% (CIA, 2018). The labor force is estimated at 19.82 million, while its industrial production growth rate is estimated at 7% (CIA, 2018).
The private sector is highly developed as its economy is comprised of numerous privately-owned enterprises (CIA, 2018). Its liberalized trade system offers a great platform to conduct business. The industrial sector is underdeveloped. However, it is currently growing at an annual rate of 7% (Farole and Winkler, 2014). The major economic pillars include agriculture and tourism.
Several factors make Kenya a favorable destination for foreign investment. First, a 2017 report released by the World Bank on doing business in Africa showed that Kenya had gained 16 places to rise to position 92 (World Bank, 2017). The improvement was attributed to simplified procedures for creating businesses as well as increased access to energy and financial services. Second, the arrival of fiber optics has improved communication and technology in the country.
In that regard, telecommunications is one of the most viable industries for foreign direct investment. China, The United Kingdom, Belgium, South Africa, and the Netherlands are some of the major nations that have invested in Kenya (World Bank, 2017). Third, a report released by the Consultancy firm Ernst &Young in 2017 ranked Kenya as the third most attractive country in Africa with regard to foreign investment (Kariuki, 2017). Kenya ranks highly in areas such as human development, economic diversification, business environment, and infrastructure. The ranking came even after a 57.9% decline in foreign investment in 2016 (Kariuki, 2017).
Several multinational corporations have headquarters in Kenya. They include IBM, General Electric, Nestle, Mitsubishi Motors, MasterCard, Intel Corporation, Coca-Cola, BlackBerry Limited, GSM Association, and United Nations (Kariuki, 2017). Others include the World Bank, Visa Incorporation, Rockefeller Foundation, Pfizer, Sony, Red Cross, and Toyota among others.
Political Factors
Kenya’s political environment is currently stable, and therefore, favorable for investment. Political instability was witnessed during the last quarter of 2017 after the country’s Supreme Court nullified the presidential election (CIA, 2018). The nullification led to a repeat presidential election between President Uhuru Kenyatta and his main rival Raila Odinga. Odinga boycotted the election by claiming that the government had failed to honor his demands. President Kenyatta won and he was sworn into office for a second term. Political uncertainty was experienced for a certain period after Raila Odinga claimed that he would be sworn in as the people’s president alongside his running mate Kalonzo Musyoka. The situation has stabilized and the economy is improving after a long period of decelerated growth.
Legislation
Kenyan policies toward foreign direct investment treat foreign investors the same as local investors. Moreover, foreign investors have access to government-financed research, funding, and they possess the right to own enterprises (World Bank, 2017). Prior to 2015, government regulations imposed a 75 percent foreign ownership limitation for companies that traded in the stock market (Kariuki, 2017).
However, this legislation was repealed in 2015 in order to encourage foreign investment. The signing into law of The Business Registration Services (BRS) and the Companies Act enhance the process of registering a new business (Kariuki, 2017). Informal trade barriers that affect foreign companies include high taxes, an ineffective judicial system, and lengthy business registration procedures. Currently, Kenya’s corporate tax is 30% (World Bank, 2017).
The creation of special economic zones (SEZ) by the Kenyan government means that foreign investors can enjoy several incentives from the national and county governments. The Special Economic Zones Regulations facilitate foreign direct investment. There are few trade barriers as Kenya is a member of the African Union (AU) and the Common Markets for Eastern and Southern Africa (COMESA) (Farole and Winkler, 2014).
Economic Factors
The Kenyan economy has grown steadily over the past decade (See Appendix A). However, weak credit growth, drought, and political instability have led to decelerated growth. Government projections show that the economy will improve in 2018 due to a rebound in tourism, political stability, and the commencement of numerous government-funded infrastructure development programs (World Bank, 2017). GDP growth is expected to rebound to 5.8% in 2018 and grow by a further 0.3 percent in 2019 (Kariuki, 2017).
Cultural Factors
The population of Kenya is approximately 47.6 million and comprises 44 ethnic groups (CIA, 2018). English and Kiswahili are the official languages. There are several religions, including Christianity, Islam, and Buddhism among others. 83% of Kenyans are Christians, 11.2% are Muslims, 1.7% are traditionalists, and 2.4% are non-religious (See Appendix C). Approximately 40% of the population is comprised of people under the age of 15 due to factors that include early marriages, high fertility, and poor family planning.
Factor Endowments
Basic Factors
Kenya has a wide range of natural resources that include oil, wildlife, gemstones, soda ash, salt, diatomite, limestone, hydropower, zinc, and fluorspar. These resources are a reason why mining is one of the Kenya’s key economic pillars. Despite the availability of numerous natural resources, Kenya’s manufacturing industry is underdeveloped. Agriculture is the major economic activity that accounts for 30% of its GDP (World Bank, 2017). As mentioned earlier, Kenya has a large labor force of approximately 19 million workers.
Advanced Factors
The literacy level of youths aged between 15 and 24 years is between 80-83% because primary and secondary education is free. Technological advances and government funding have increased the number of people who pursue higher education. Stiff competition for top jobs has increased the demand for tertiary education. Many graduates are pursuing masters programs in order to compete effectively in the labor market.
Therefore, the Kenyan labor force is highly educated. Terrorism is one of Kenya’s major security concerns because the decision to aid in fighting al-Shabaab militants in Somali caused severe security concerns as the militants fought back. However, Kenya’s military groups (Kenya Defense Forces, Kenya Air Force, Kenya Navy, and Kenya Army) have fought hard to keep its borders secure and its citizens safe.
Analysis
Benefits
The benefits of investing in Kenya include a rapidly growing economy, a stable political system, and a robust educated population. Kenya is a market economy that serves as the commercial and technological hub of East Africa (World Bank, 2018). Its financial and industrial bases are strong, and its legal system supports foreign direct investment. For example, foreign investors receive the same treatment that local investors receive.
It has a well-developed road infrastructures and transport system. Kenya has signed 14 bilateral investment conventions that facilitate the conduction of international trade (World Bank, 2017). Kenya has a strong knowledge and technology base because the majority of its population has access to education and the Internet. Participation in online business has experienced a surge in the past decade because the younger generation has access to mobile phones and advanced technologies.
Risks
Corruption, an ineffective judicial system, high rates of unemployment, security challenges, and poverty are some of the risks of investing in Kenya. Other risks include poor infrastructure, costly skilled labor, and government restrictions (World Bank, 2018). Kenya is ranked number 145 in sub-Saharan Africa with regard to the level of corruption (See Appendix B). Corruption is a major factor that could hamper the success of a foreign company in Kenya. (Transparency International, 2016 ).
Foreign investors might be discouraged by policies that prevent them from owning land in Kenya or policies that require them to invest a certain amount of money in order to enjoy government incentives. Terrorism and inter-ethnic clashes are some of the major security concerns in Kenya. According to the CIA (2018), the rate of unemployment and under-employment is as high as 40%. Poor infrastructure is another challenge to Kenya’s attainment of an annual growth rate of 8-10% and the eradication of poverty and unemployment (CIA, 2018). The rate of inflation is very high (7% in 2017) primarily due to drought and slow economic growth (CIA, 2018). Cultural factors are another risk that foreign companies have to face because of the ethical volatility experienced in Kenya.
Recommendation and Conclusion
Based on the foregoing analysis, it is proposed that an expansion of business operations to Kenya is a viable idea. Kenya is one of the African countries that are currently experiencing rapid economic growth. Factors that could support the establishment of a company’s operations in Kenya include the various bilateral trade agreements that Kenya has signed with other nations, a thriving financial and telecommunications industry, growing GDP, and a favorable business environment. Risks such as insecurity, political uncertainty, poverty, and high rates of unemployment are among the government’s current areas of focus.
Kenya’s security agencies have enhanced border security, hence the decline in the number of terrorist incidences reported. It would be necessary for the company to develop measures to mitigate the potential effects of the aforementioned risks on business operations.
References
Bhorat, H., & Tarp, Finn. 2016. Africa’s Lions: Growth Traps and Opportunities in Six African Economies. Washington, DC: Brookings Institution Press.
Central Intelligence Agency. 2018. Africa: Kenya. Web.
Farole, T., & Winkler, D. (2014). Making Foreign Direct Investment Work for Sub-Saharan Africa: Local Spillovers and Competitiveness in Global Value Chains. New York, NY: Worldbank Publications.
Kariuki, J. 2017. Kenya Still a Favourite for Foreign Investors, EY says. Business Daily. Global Markets section. Web.
Transparency International. 2016. Corruption Perceptions Index 2016: Sub Saharan Africa. Web.
World Bank. 2017. Kenya Economic Update: Poised to Bounce Back? : Reviving Private Sector Credit Growth and Boosting Revenue Mobilization to Support Fiscal Consolidation. Web.
World Bank. 2018. The World Bank in Kenya. Web.