Investing in China and Kenya
When making investments, various factors come into play. Such factors as infrastructural services, ease of doing business, labour, markets and expected return on investment are critical in decisions that investors make. The model an economy that a country runs is also an important factor that investors consider in deciding investment destinations. The current paper speculates the theories of Foreign Direct Investment to assess different positive and negative attributes that influence investment decisions of investors, considering China and Kenya as possible investment destinations.
Many theories can be applied in explanation of foreign direct investment. The FDI theories that relate to investment which are considered include Theory of Monopolistic Advantage, Eclectic theory, Product Life Cycle Model and Oligopoly Theory of Advantage. The Theory of Monopolistic Advantage applies to horizontal foreign investments. Based on the theory, investing organisations have a relative monopolistic leverage against existing local organisations (Ott 2002). In particular, foreign firms enjoy superior knowledge backed with advance technology. Secondly, such firms enjoy the benefits associated with economies of scale owing to large scale operations spanning many parts of the world.
Superior knowledge relates to intangible skills in the form of intellectual capital and state of the art technology (Ott 2002). Put differently, foreign firms, seeking to invest in other regions/countries, have capabilities that grant them a competitive advantage. From such a vantage point, foreign firms are able to create unique and differentiated products (Dunnin & Lundan 2008). Thus, such firms are in a position to outcompete the local ones since the marginal cost attributable to transferring superior knowledge to other countries is lower compared to what the local firms require in investing in a new set of technology products. The implication is that the cost of investing in new technologies is much higher as compared to the cost of transfer of such technologies. Hence, firms, hoping to utilise superior knowledge and technological capacities, need to consider adopting horizontal FDI.
The Oligopoly Theory of Advantage relates to vertical Foreign Direct Investment. Based on the theory, big oligopolistic firms appear to dominate global markets because of entry barriers (Feenstra 1999). To begin with, big firms are viewed as keen on retaining their monopoly power in order to sustain existing entry barriers. Hence, big firms prevent the occurrence of a vacuum which may invite new entrants. For that reason, big firms are concerned with growth maximisation. Often, it is held that the relative size of a firm influences its relative size as well as market power. It is, thus, not surprising that firms employ the strategy of vertical investment with an intention of capturing and enlarging their share of the world markets. This behaviour is common among multinationals which employ defensive investment approaches to starve off competition.
Briefly, the monopolistic advantage theory reflects on the behaviour of investment firms seeking opportunity in foreign countries (Ott 2002). Further, the theory affirms that the defensive behaviour is to retain existing monopoly powers. Relying on vertical and horizontal FDI, firms can utilise economies of scale and comparative advantage to their advantage. Through the adoption of backward integration and forward integration, oligopolistic firms can individualise economies of scale.
The Product Life Cycle Model (PLCM) is useful in explaining FDI and trade. The theory adds a time element to the monopolistic advantage theory (Ott 2002). Thus, the theory can offer insights into a firm’s decision to shift from exporting/importing to foreign direct investment. After taking over home countries’ markets, firms favours investing in new markets in order to protect their monopolies. Home country rivals may follow suit, leading to an oligopolistic structure in foreign countries.
The eclectic theory takes a holistic and analytic view on foreign direct investments (Feenstra 1999). The theory concentrates on three variables: internalisation, country and company specific variables. The country-specific variable captures geographical environment, cultural environment, political environment, government's regulatory structure, taxation and fiscal policies, production and transport costs, state of research and development. On the other hand, company-specific attributes include firm structure, managerial effectiveness, firm processes, and technology advantages (Feenstra 1999). The internalisation variable relates to the flexibility and marketing capabilities of a firm.
China has progressed to become one of the fastest emerging economies in the globe. In the past two decades, China posted single-digit economic growth. However, China is expected to overtake the United States to become the world’s largest economy in the coming few years (Zhu & Lague 2012). Backed by a huge population, China’s economic progression is not expected to slow anytime soon. Despite the rapid growth, China’s stock market has not matched the other sectors. For instance, in 2010, Shanghai Composite registered significant losses having lost 15%, an aspect that indicated it was among the worst performers at the time (Branstetter 2007). However, the government took major steps to remedy the situation. In particular, the government raised interest rates, a decision that sparked a revival since the stock markets became bearish thereafter.
Chinese Economy in Perspective
Historically, China has been among the world’s top powers. However, in the 19th and 20th centuries, civil unrest, military defeats and famines pulled the country back (Brandt & Zhu 2000). With the coming into power of Deng Xiaoping in 1978, China shifted attention to market-oriented development, signalling its comeback to the world map in an economic sense.
Currently, the Chinese economy is famous for the manufacturing sector, which has overtaken the US, making it the largest across the world (World Investment Report 2013). Although, the government retains ownership of many enterprises, the government has increasingly embraced free market policies (Dong, Song & Zhang 2006). With the turn of events regarding economic openness, foreign direct investment flow into China has increased considerably. At the moment, the challenge for the Chinese economy is to show sustainability in consumer-driven growth.
Based on the economic statistics of 2010 by the World Investment Report, the country’s Gross Domestic Product was (PPP) $10.08 Trillion, GDP’s Real Growth Rate was 10.46%, GDP per Capita stood at $7,518, Inflation Rate (CPI) was 4.9% and Unemployment Rate was 4.2%. Considering the abovementioned statistics, it becomes clear that the Chinese economy was robust and among the best performers at the time.
Investing in China
Despite the positive signs shown by the Chinese economy, investment must be made prudently. This position is supported by the idea that the economy of China has been robust although its stock market record has been mixed (Hsu 2007). As already indicated, in 2010, an attempt of the government to control the Shanghai Composite preceded a loss estimated to be around 15%. The implication is that international investors need to be informed about the pros and cons of entering the Chinese market.
Investing in China would be advised, since the economy is strong as exemplified by a rapid growth. Over the last two decades, the Chinese economy has been registering impressive economic performances rarely matched (Starr 2001). The growth has come at a time when other players such as the US, Britain and Germany, dominant in the past, are facing economic hurdles. Thus, the sheer strength of mustering growth when other major powers are shrinking makes the economy an attractive investment destination.
Coupled with the strong economic performance, China is experiencing an unprecedented rise in its global status. Its rising superiority is clear since it has become a major lender to world powers such as the United States (Flanigan 2011). A rise of this nature is likely to boost the country and lead to an increase in the attractiveness of its products.
The country’s big population is a huge asset that is helpful in terms of both labour and market. Put differently, a big population provides investors with human capital necessary to provide labour in various industrial activities. In addition, the big population provides a good market that investors can sell their products to.
Investing in China poses risks to investors. For instance, governments in China have proved to be less predictable (Flanigan 2011). Unlike in Europe or the US where democracy is embraced, China is different. As observed in the Eclectic theory of foreign investment, governance is a significant attribute investors need to consider before investing. Despite the shortcoming, from 1978, successful governments have made significant efforts towards market deregulation.
Another concern for investors gravitates around social instability. A socially unstable country is not a commendable place to invest. In China, the richest people are few compared to the whole population (Sat%u014D & Li 2006). The people from the lowest walks of life make a big percentage, which is likely to be a cause for concern. A major problem is that in the event of social unrest, the country is likely to encounter capital outflows. Such scenario implies that investing in the country is based on expectations that social stability prevails.
Demographics also influence investment decisions. In China, changing demographics may pose a danger to investments. It should be noted that the economic success that China has enjoyed is attributable to the existence of cheap labour from its young population. With the prospect of an aging population, changing demographics are likely to threaten future investments.
Ilan and McIntyre (2008) observed that he proposed reform package which would pave the way for deregulation of capital controls. Another proposed policy change likely to have far-reaching implications is the policy on one-child. Despite the potential gains of the latter policy change, its effects are likely to take time to materialise. However, the deregulation of capital control will allow foreign direct investment inflow into the country to increase substantially.
By deregulating capital controls, the Chinese economy would have lower interest rates (Ilan & McIntyre 2008). Hence companies and individuals will find the borrowing to be cheap. Doing business in China will also become cheaper and will lead to an increase in profits. Thus, the possibility of overseas companies boosting their expertise and raising competition becomes real.
Another key area to be reformed is government ownership of corporations. Under the proposed changes, the government is to step aside from the corporations’ activities to allow involved entities to focus on generating value for investors (DeWeaver 2012). This move is likely to lower the involvement of politicians and make the running of such corporations more efficient.
Milelli, Hay and Shi (2010) conducted a study regarding emerging markets in reference to foreign direct investments. Based on Milelli, Hay and Shi (2010), foreign direct investment in China and India were more constrained to those targeting Europe. Based on the researchers’ findings, the arrival of Indian and Chinese firms in Europe coincided with the high level of restrictions in the home economies. It was also found out that large European markets were preferred to emerging markets. Market access was the main pull factor among firms that chose to invest in Europe. The scholars also concluded that the preference for the European destinations to the Chinese and Indian destinations rested on the comparative advantage enjoyed by the former.
Kenya Economic Overview
Kenya’s economic terrain is much different from that of China. The East African country has a total population of roughly 1 million people. The country’s GDP is 71.4 billion. In the last five years, its growth rate has averaged 5.0%. Its per capita income is 1,746 dollars. Unemployment rate stands at 40% while the rate of inflation averages 14.0%. FDI inflows stand at 335 million in a year (World Investment Report 2010).
Investment in Kenya requires from an investor to identify an opportunity and raise the necessary capital before venturing into business. In the past decade, the Kenyan economy has shown signs of improvement (Branch 2011). The economy is bound to get stronger, thus, it offers an array of investment opportunities. Unlike in the developed world, where investors require a huge resource base before contemplating making investments, in Kenya, not much funds are required. From as little as 10, 000 US dollars, an investment can be initiated (Branch 2011).
The Kenyan economy relies heavily on the agricultural industry (Branch 2011). The agricultural and food processing industry caters for approximately seventy-five percent of the needs of the Kenyan people. The industry has a wide scope for diversification through accelerating production, processing and marketing. Moreover, the industry is not overly developed. Hence, there are investment opportunities in technological infrastructure particularly in transportation, packaging, as well as storage. Investors may also consider exploring opportunities in value addition and processing.
Kenya has also registered significant growth and development in the construction industry (Bigman 2002). With high rates of population growth, investments in building and construction industry would allow investors an opportunity to reap the benefits of a burgeoning economy. Investors would be interested in residential, industrial, commercial and prefabricated affordable-cost housing. Being a country pervaded by slums, Kenya offers investors an opportunity to invest in the industry with a view to offering housing facilities for commercial gain. Apart from actual construction, investors would gain from investing in the supply of building and construction materials.
The tourism and hospitality industry is another area that investors should consider. The industry is a top income earner for Kenya, an aspect that proves how useful or lucrative the industry is (Bigman 2002). Coupled with liberal policies, the industry offers enormous opportunities for investment. For instance, film production, entertainment and recreation facilities, conference tourism, cruise ship tourism, cultural tourism, eco-tourism and tour travel tourism are some of the opportunities that investors need to consider.
On the basic of eclectic theory taking a holistic and analytic approach on foreign direct investments is commendable. As already established, the theory focuses on three variables such as internalisation, country and company specific variables. The country-specific variable captures geographical environment, cultural environment, political environment, government's regulatory structure, taxation and fiscal policies, production and transport costs, state of research and development.
Under the geographical attributes, Kenya is strategically located and is accessible to the outside world through sea, land and air (Himbara 1993). This implies that investors, those interested in investing in Kenya, will not have concerns about transportation of supplies or goods to and from established premises. Regarding the country’s cultural environment, Kenya is a country that embraces western ideas and would gladly accept external products or services. The implication is that the investment in the country would be welcome since the population supports external ideas/products/services. Despite the positives for the country’s cultural and geographical elements of the environment, the political environment is slightly questionable. For instance, in 2007, the country erupted into post election violence. In the process several gains were washed away. However, apart from the election fiasco of 2007, Kenya has remained a relatively stable country in Africa. Hence, it was deemed an attractive investment destination. Regarding political environment, the country has adopted a liberal approach, making it a viable investment hub and thus a major attraction for investors.
Kenya has a wide range of tax and investment agreements that aim at promoting FDI (Rogers & Sedghi 2011). In particular, exports from the country enjoy preferential treatment in world markets as a result of a number of pacts signed by the government. Similarly, Kenya is a signatory of several regional trading blocs such as the East African Community which makes it a large market where investors should be interested.
UNCTAD (2010) indicates that Kenya has been a member of the Multilateral Trade Systems such as WTO. This ensures that trade flows without any hindrances. Based on the Cotonou Partnership Agreement, Kenya’s exports enjoy duty reduction when exporting to the European Union market. Such agreements are advantageous to investors seeking opportunities in Kenya.
A key hallmark of the Kenyan system is the adherence to the rule of law. Under the Kenyan constitution, life and property are protected. In particular, Foreign Investment Protection Act protects investments against expropriating private. In addition, the country abides by World Bank provisions on investments, implying that FDI are protected (Rogers & Sedghi 2011). As a signatory to the Settlement of Investment Disputes, the country appreciates the role of finding amicable solutions to disputes involving foreign direct investments.
The country has embarked on a major infrastructural facelift. In particular, the country is working on the Lamu port, Kenya Airways and railway constructions (Rogers & Sedghi 2011). With major improvements to the railway, road network, ports and airports, Kenya is emerging as a potential investment destination that international investors cannot ignore.
On the other hand, company-specific attributes include firm structure, managerial effectiveness, firm processes and technology advantages. The internalisation variable relates to the flexibility and marketing capabilities of a firm. Other scholars such as Adegbite, Ayadi and Ayadi (2008) have investigated the influence of debt on growth of firms in a Nigerian context. In their research, Adegbite, Ayadi and Ayadi (2008) found that the debt burden was a restraint to economic progress. In this regard, a country like Kenya, which has a considerable foreign debt, may be constrained in terms of progress it can achieve.
Similarities and Differences/ Positives and Negatives
China has many positive attributes that investors should look for. In the last few decades, the Chinese economy has been on an upward trend. Its development record has been impressive. Hence, investors will know that a largely progressive economy has many opportunities to exploit. The same aspect applies to the Kenyan economy which has been registering significant economic progress over the last few years. Although the level of growth does not match that of China, the country is doing well and has a number of investment opportunities that investors need to consider.
China has another positive aspect of its numerous population. As demonstrated in the paper, a big population has immense benefits to investors. On the one hand, a big population guarantees cheap labour. On the other hand, big population offers a wide market. The implication is that investors do not have to worry about labour and markets for their products or services. However, China is faced with the problem of an aging workforce, an aspect that has forced the country to reconsider its one-child policy. Hence, investors should be wary about this, although the effects are not likely to be felt any time soon. In the case of Kenya, there is a considerably high population which can also guarantee the same benefits although on a minor scale. However, the high number of trade agreements the country has entered implies that it has access to many markets. Hence, investors would be attracted by the positive attributes associated with wider markets.
One major downside visible in the Chinese economy is volatility. As the paper establishes, in 2010, the stock market came under intense speculation following a 15 percentage loss. This attracted governmental intervention in regulating interest rates. The implication is that investors cannot be content with such markets, whose fluctuations cannot be anticipated. In the case of Kenya, a major concern is about social and political stability. Although social stability is an issue in China owing to the unique nature of the society, the Kenyan society is highly unequal. The problem with such inequalities is that they enhance the negative sides that make investors wary. In regards to political instability, the paper finds that in 2007, Kenya experienced violence after holding its presidential elections. Since not much time has passed, investors should be wary of a possibility of a recurrence of violence.
Issues of regulation are critical regarding investments. The Chinese economy is more regulated than the Kenyan market. This relates to the free-enterprising approach adopted by the countries. Regulations are a negative aspect when considered in reference to foreign direct investments. After realising the significance of deregulating its markets, the Chinese state is accelerating private control of corporations. Hence companies and individuals will find borrowing cheaper than before since state control of such aspects as interest rates will be discouraged. The wider implication is that doing business in China becomes cheaper and leads to an increase in profits for investors. Thus, deregulation would be a positive attribute that investors should consider. Regarding Kenya, the paper establishes that the country’s constitution protects private property. Hence, investors would find the aspect to be a positive element.
It is concluded that the two countries provide great investment opportunities. This is based on the countries’ environments which appear pro-investing. Despite the positive attributes, negative attributes are also present in each country. Thus, there is a danger that investments may not yield the expected return. For that reason, investors are advised to stay cautious when making their decisions about possible investments.
|Law in Book||Opinion Paper: Compare the views on animal agriculture and explain the aspects of meat eating|
- Opinion Paper: Compare the views on animal agriculture and explain the aspects of meat eating
- Law in Book
- Children and Parents