Kenya

Introduction

This paper is an analysis of the risks associated with doing business and/or starting a business in Kenya. I will first give a geographical and historical background before I go through different types of risks that are currently present in Kenya. This includes risks of economic, political, cultural, environmental, and competitive nature. The paper will show that there are a multitude of risks involved, and my conclusion to this risk analysis is to be very well prepared before one enters the country with business intentions.

Background

Land and climate. Kenya is about the size of Texas, stretching from the Indian Ocean in the east, to 5,199 meters at the peak of the snow-capped Mount Kenya. From the coast, the altitude changes gradually through the coastal belt and plains (below 152 metres above sea level), the dry intermediate low belt to the Kenya Highlands (over 900 metres above sea level). Kenya has a tropical climate, being hot and humid at the coast, temperate inland and very dry in the north and northeast parts of the country. Settlement is confined to places where water can be found, and wildlife are masters of the greater part of the low belt. Kenya is located approximately 8-10 hours flying time from major European cities, and about 16-20 hours flying time from North American cities. (Background note: Kenya, 2005)

History. Kenya has like many other African countries been in the hands of different countries, specifically the Portuguese (1498-1729), Arabs (1729-1887) and the British. Kenya became a British protectorate in 1895, and was then organized as a crown colony in 1920. The British introduced Christianity and brought people from India and other parts of its empire to work on large infrastructure projects, such as the railroad. (Background note: Kenya, 2005)

Kenya was under a state of emergency during the violent partisan uprisings of the Mau Mau rebellion against British colonial rule in the 1950s. During this period, African participation in the political process increased rapidly. Great Britain granted Kenya independence in 1963. It remained in the Commonwealth as a sovereign republic. Jomo Kenyatta, leader of the independence struggle, served as the first president until his death in 1978. He formed a strong central government under one political party, the Kenya African National Union (KANU). Upon his death, he was followed by Daniel Toroitich arap Moi in 1978. In 1982, Moi declared KANU the only legal political party, citing a need to avoid having political parties based on tribes. Under international pressure, Moi opened the country to multiparty democracy in 1992. A fragmented opposition failed to take the power back from KANU in 1992 and 1997. This was not surprising as most observers declared the balloting unfair due to vote rigging and political harassment. Politicians instigated ethnic conflict as a means of intimidating voters. Throughout the country there were being thousands killed as a result of ethnic violence. (Background note: Kenya, 2005)

In late 2002, a coalition of opposition parties joined forces with a faction which broke away from KANU to form the National Rainbow Coalition (NARC). In December 2002, the NARC candidate, Mwai Kibaki, was elected the country's third President. Since taking office, Kibaki has sought to reverse the nation's economic decline, combat corruption, reduce unemployment, provide free public education, and improve roads and other infrastructure. (Background note: Kenya, 2005)

Risks of starting business in Kenya

Economic and competitive risks. With a population of 34 million people and being the size of Texas, Kenya in general continues to be the primary communication, trade and finance hub of East Africa. Especially Nairobi, the country's capital, enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, even though these advantages have become less prominent in the last few years. A wide range of foreign firms maintain regional branch or representative offices in Nairobi. More than 5,000 U.S. citizens live in Kenya, and as many as 25,000 Americans visit Kenya annually. About two-thirds of the resident Americans are missionaries and their families. U.S. business investment is estimated to be more than $285 million, primarily in commerce, light manufacturing, and the tourism industry. The U.S. Government assists Kenya by promoting broad-based economic development as the basis for continued progress in political, social, and related areas of national life. (Background note: Kenya, 2005)

Kenya has an unemployment rate of 40 % as of 2004, and 50 % live below the poverty line, according to estimates by CIA. CIA also estimates the amount of literate people of the population to be 85 %. The inflation rate was 9 % in 2004, which is rather high compared to Western standards, but not out of proportions. The GDP composition by sector was 19.3 % from agriculture, 18.5 % from industry, and 62.4 % from services. (CIA: The World Factbook, 2005)

Political risks. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East African Cooperation (EAC). The EAC's objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement. Such agreements may help businesses get a wider and maybe more close-knit network in the region. (Background note: Kenya, 2005)

Kenya, even though the region's hub of trade and finance, has been vulnerable by corruption and by reliance upon several primary goods whose prices have remained low. IMF has repeatedly punished the Kenyan government's failures to maintain reforms and curb corruption. Droughts that come and go every other year have compounded Kenya's problems, causing water and energy rationing and reducing agricultural output. Strong rains in 2001, weak commodity prices, widespread corruption, and low investment limited Kenya's economic growth. Growth lagged in 2002 as well because of erratic rains, low investor confidence, meager donor support, and political power struggle up to the elections. The 2002 elections ended arap Moi's 24-year-old reign. The new opposition government took on the formidable economic problems facing the nation, trying to root out corruption and encourage donor support, with the GDP growing a moderate 2.2% in 2004. (Background note: Kenya, 2005)

Kenya will have a referendum on 21st November 2005 to where Kenyans will give their final verdict on the proposed new constitution. The opposition wants people to vote no, as they believe the