Why Kenya needs more multinational enterprises

In Summary

• For Kenya, part of the reasons that the economy remains small, erratic and moderate and insufficiently diversified is because of the absence of critical number of firms with transnational operations.
• Objective assessment of the record of trans-national enterprises shows that they often offer far better terms of service to their employees as compared to local enterprises that are protected from competition because of political links that allow for manipulation of policy.
• Entry of competitors would open up the business services and expand the range of services while contributing to greater specialisation across the industry.

ENTERPRISES

By Kwame Owino

A few days back, I heard someone proudly count the number of Multinational Enterprises that have either expressed interest in or actively established business operations in Kenya.

In my view, this is a far more accurate predictor of Kenya’s development compared to immediate assessments based a year’s growth.

For Kenya, part of the reasons that the economy remains small, erratic, moderate and insufficiently diversified is because of the absence of critical number of firms with transnational operations.

Government policies such as the private Sector Development Strategy (2006-2010) also explicitly expressed preference for developing indigenous enterprises ostensibly to ensure local ownership and participation in the economy.

INTENSIFY COMPETITION

Yet Kenya needs multinational enterprises not only because they would add to the stock of investments in the economy but mainly because they would intensify competition between firms based in Kenya.

The degree of economic competition in Kenya’s main industries starting with telecommunications, airline transportation, banking, retail trade, and even utilities provision is appallingly low.

Competition is without doubt good for consumers because it would exert pressure on the dominant firms in these areas and facilitate more competitive prices for goods and services.

One indicator of the absence of competition in the leading sectors is an avalanche of profits for all firms against the most pathetic service and poor quality of some goods. It is not possible than many indigenous firms could add market pressure against Kenya’s leading firms with the exception of multinational enterprises.

Occasionally, multinational enterprises face prejudice on account of their foreign origins. Given the vast resources that they have and their success in working across various countries, their absence in any country is itself a manifestation of a poor business and regulatory environment.

BETTER SERVICES

Objective assessment of the record of trans-national enterprises shows that they often offer far better terms of service to their employees as compared to local enterprises that are protected from competition because of political links that allow for manipulation of policy.

In this respect, the attraction of multinational enterprises is advantageous because they provide good employment to a sizeable number of people.

Looking at Kenya’s vast population of unemployed people, these firms are a far better prospect than either informal sector employment or small-scale businesses that die in large numbers. Thus attraction of these firms is a good part of the broader employment policy.

A known feature of multinational enterprises is that they are particularly adept at introducing new technology and management systems. Added to these is that these firms are also most likely to pay for proper research to support new products or services.

Private sector research activities are desperately required in Kenya and the new multinational enterprises would add to related research activities. Growth in total investments in research and design activities is a public good and even if undertaken entirely within a firm, that knowledge will soon be engendered in its products to the benefit of many more people.

FORMAL AND INFORMAL SECTORS

One of the paradoxes of Kenya’s economic structure is the existence of a large service sector comprised of both informal and formal sector activities with low total productivity of labour. Compared to most of the region, the cluster of professional services firms in Kenya is large but also comprise oligopolies and dense informal and undiversified networks.

Entry of competitors would open up the business services and expand the range of services while contributing to greater specialisation across the industry.

This would open up the professional services industry by creating diversity of firms and allow for the emergence of new firms and services. In the process, it is possible that some firms that subsist on public sector contracts may have to expand their range of services or be wiped out altogether.

REDUCE DIFFERENCES

Finally, the infusion of multinational enterprises in Kenya would accelerate the reduction of the deep nexus between Kenya’s largest firms and politics.

Looking at the composition of the management and boards of most of Kenya’s largest firms reveals the preference for individuals with backward linkage to the public sector or outright connection to politics through family affiliation.

This is a problem because these connections probably undermine transparency in the policy processes and determine outcomes that favour not the entire industry but specific firms.

Since the government should not dictate to private firms about inclusion, it is just possible that multinational enterprises would show greater inclination to more diversity within their firms.

The composition of the major firms in Kenya and the degree of interlocking directorships represents a very stable equilibrium that incumbent firms are unwilling to depart from.

An unintended consequence of market driven multinational enterprises firms could accomplish diversity and transformation without direct intervention by the public