INFLUENCE OF NON TARIFF BARRIERS ON THE

OPERATIONS OF SELECTED KENYAN FIRMS WITHIN

THE EAST AFRICAN COMMUNITY

BY

MUSAU JAMES WAMBUA

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT

OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE

OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF

BUSINESS, UNIVERSITY OF NAIROBI

OCTOBER, 2013

DECLARATION

This research project is my original work and has not been submitted for examination in

any other university

Signed……………..............................… Date ……………….............................

MUSAU JAMES WAMBUA

D61/60249/2011

This research project has been submitted for examination with my approval as the

university supervisor,

Signed……………..………................. Date ………………........................

DR. JOHN YABS

LECTURER

SCHOOL OF BUSINESS

UNIVERSITY OF NAIROBI

i

ACKNOWLEDGEMENTS

I wish to acknowledge all the individuals and respondents from the firms sampled for

their timely feedback. This went along in realizing the objectives of the study.

I am eternally grateful to dear my sister Scholastica for her prayers and moral support

during the course of my studies.

My sincere gratitude and appreciation to Dr. John Yabs for offering fatherly guidance and

support ever since I began the research project up to completion. Dr Yabs has stood out

strongly as my intellectual mentor. I also wish to acknowledge Mr. Eliud Mududa; my

moderator, and who advised on change of topic of study. Indeed, I am forever indebted to

the school of business lectures who taught me during the course of study.

Finally, I wish to appreciate my fellow colleagues in the work place at Kenya Investment

Authority; University of Nairobi non teaching staff, and finally my fellow students; in

particular Caro Gichana, Dominic Mulwa and Grace Kamau for all the encouragement

and support I received from them.

ii

DEDICATION

This scholarly work is dedicated to my dear family members, wife Patricia Nduku and

daughters Deborah Nzilani, Abigail Wang’ombe and Kate Mwelu.

iii

ABSTRACT

In the introductory chapter, the study explores the concept of international business and

the benefits associated with free trade; within the context of the East African Community

(EAC) regional economic grouping. The Study is however limited to identifying Non

Tariff Barriers (NTBS) as some of the main constraints affecting free trade. In terms of

scope, the study explores the influence of Non-Tariff Barriers (NTBs) on the operations

of selected Kenyan firms doing business in the East African region.

Chapter two discusses various theoretical perspectives on International business and free

trade. The chapter provides a conceptual overview on the theoretical foundations and

models available on genesis and evolution of free trade; and how free trade impacts on

global trading and regional integration.Modern theoretical models and new trade theorists

such as Krugman etal (1991) argue that there is no level playing field in international

trade and that free trade is isn't always benign. There are inherently different views for

instance on benefits brought about by regional integration and global trading.

Chapter three explored the methodology of study. Descriptive research was used to

describe the characteristics of the population studied. A Survey of 40 Kenyan firms doing

business within the East African Community region were chosen as the sample size. Data

was collected by use of questionnaires which were emailed to respondents, or dropped

and picked. The results were analysed statistically.

Chapter four entails data analysis, results and discussion. The chapter featured a detailed

analysis of the Non Tariff Barriers (NTBs) influencing the operations of selected Kenyan

firms doing business in the East African Community region. The sampled firms were

further categorized into manufacturing, transport and communications, Wholesale and

retail and agro-industry. The survey results were analysed and presented inform of

frequency tables, charts and graphs. Chapter five discusses the summary of the findings;

conclusions and policy recommendations thereof. The study results show that Non Tariff

Barriers are highly rampant within East Africa. The main investments affected are firms

in the manufacturing sector. Kenya firms are the big players in the region and therefore

do suffer business loss due to the resultant Non Tariff Barriers. To create a level playing

field in the region, and to advance further the tenets of free trade, the study recommends

harmonisation of national laws and policies in East Africa to streamline the business

environment.

iv

TABLE OF CONTENTS

DECLARATION .................................................................................................................... i

ACKNOWLEDGEMENTS...................................................................................................ii

DEDICATION.....................................................................................................................iii

ABSTRACT......................................................................................................................... iv

LIST OF TABLES..............................................................................................................viii

LIST OF FIGURES .............................................................................................................. ix

ACRONYMS & ABBREVIATIONS.................................................................................... x

CHAPTER ONE: INTRODUCTION................................................................................1

1.1 Background of the study .................................................................................................. 1

1.1.1 Concept of International Business.........................................................................2

1.1.2 Regional Economic Integration.............................................................................3

1.1.3 Tariff And Non Tariff Barriers (NTBs)................................................................. 4

1.1.4 The East African Community Integration Process ................................................ 5

1.1.5 Influence Of Non Tariff Barriers On Business Operations ................................... 7

1.2. Research Problem ........................................................................................................... 9

1.3 Research Objectives.......................................................................................................11

1.4 Value of the Study ......................................................................................................... 11

CHAPTER TWO: LITERATURE REVIEW................................................................ 13

2.1 Introduction...................................................................................................................13

2.2 Theoretical Foundation .................................................................................................. 13

2.3 Arguments For And Against Free Trade ....................................................................... 16

v

2.4 The WTO And Free Trade.............................................................................................19

CHAPTER THREE: RESEARCH METHODOLOGY ................................................ 20

3.1 Introduction...................................................................................................................20

3.2 Research Design............................................................................................................. 20

3.3 Population ...................................................................................................................... 21

3.4 Sample Design ............................................................................................................... 21

3.5 Data Collection .............................................................................................................. 21

3.6 Data Analysis ................................................................................................................. 22

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ................... 23

4.1 Introduction...................................................................................................................23

4.2 Response Rate................................................................................................................23

4.3 General Information.......................................................................................................24

4.3.1 Gender composition .............................................................................................. 24

4.3.2 Level of Education ................................................................................................ 25

4.3.3 Selected Firms ....................................................................................................... 28

4.3.4 Firm ownership and shareholding ......................................................................... 29

4.3.5 Length of period of business operation in Kenya.................................................. 31

4.3.6 Employment levels ................................................................................................ 33

4.4 Influence of Non Tariff Barriers on the Operations of Kenyan firms ........................... 34

4.4. 1 Understanding the EAC business environment. ........................................................ 34

4.4.2 Types of Non Tariff Barriers affectingbusiness operations.......................................37

vi

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS ..... 42

5.1 Introduction...................................................................................................................42

5.2 Summary of Findings..................................................................................................... 42

5.3 Conclusions.................................................................................................................... 45

5. 4 Recommendations and Policy Implications.................................................................. 46

5.5 Limitations of Study ...................................................................................................... 47

REFERENCES .................................................................................................................... 49

APPENDICES ..................................................................................................................... 53

Appendix I: Letter Of Introduction......................................................................................53

Appendix II: Research Questionnaire..................................................................................54

vii

LIST OF TABLES

Table 4. Summary of Response Rate............................................................................... 24

Table 4. summary of gender composition........................................................................ 25

Table 4. Levels of Education ........................................................................................... 26

Table 4. Position In Employment .................................................................................... 27

Table 4. : Selected Sectors/Subsectors.............................................................................. 28

Table 4. Type of Ownership ............................................................................................ 30

Table 4. Number of Years in Business Operation in Kenya............................................ 31

Table 4. Number of Employees ....................................................................................... 33

Table 4. Assessment of the Business Climate ................................................................. 35

Table 4. : State of play of Non Tariff Barriers in the EAC............................................. 38

viii

LIST OF FIGURES

Figure4. DistributionofFirmsbySector..........................................................................29

Figure4. ClassificationofFirmsbyOwnership................................................................31

Figure 4. Number of years of Operation in Kenya ............................................................ 32

Figure 4. Business Climate in the EAC ............................................................................. 37

Figure 4. Graphical Representation of Prevalence of Non Tariff Barriers ........................ 40

ix

ACRONYMS & ABBREVIATIONS

AGOA African Growth & Opportunity Act

ASEAN Association of South East Asian Nations

CU Customs Union

CM Common Market

COMESA Common Market for Eastern and Southern Africa

SADC South African Development Community

EU European Union

EAC East African Community

EAHC East African High Commission

EACSO East African Common Services Organisation

FTA Free Trade Area

GATT General Agreement on Trade and Tariffs

GDP Gross Domestic Product

KAM Kenya Association of Manufactures

KIFF Kenya Freight Forwarders Association

NTB Non Tariff Barriers

NTM Non Tariff Measures

RIA Regional Integration Arrangement

RTA Regional Trading Arrangements

ROOs Rules of Origin

EABC East African Business Council

SPSS Statistical Package for Social Science

SCEA Shippers Council for East Africa

WTO World Trade Organisation

x

CHAPTER ONE: INTRODUCTION

1.1 Background of the study

International trade can be said to be the buying and selling of goods and services across

national borders. International trade is the backbone of modern global economy; as it

affords producers from various nations to profit from an expanded market, rather than be

limited to selling within their own borders. Daniels and Sullivan (2007) argue that trading

across national borders increases sales, create jobs, balance seasonal fluctuations and

provides a variety of products and services. As the global economy continues to

strengthen, international trade continues to be in demand.

However, Non Tariff Barriers are a contributory factor to the high cost of business

transactions globally. This is because these barriers reduce the gains from trade by

restricting domestic market access to regional exporters, in addition to denying

consumer’s welfare enhancing opportunities and access to reasonably priced regional

imports. In modern global trading system, countries are moving towards free trade

arrangements which contribute to the promotion of free flow of goods and services across

national borders. Regional economic groupings are the newest forms of promoting free

trade within defined geographical settings. However, the World Trade Organization

(WTO) is the primary international body responsible for promoting free trade; and does

this by drawing up the rules of international trade.

In recent years, regional free trade agreements have proliferated. The East African

Community (EAC) is one of such regional economic groupings; and which informs the

subject of study. Other groupings in Sub Sahara Africa are Common Market for Eastern

1

& Southern Africa (COMESA) and the South African Development Community

(SADC). The EU (European Union) and the ASEAN (Association of South East Asian

Nation (ASEAN) are such other forms of regional integration bodies.

Efforts by the EAC to eliminate Non Tariff Barriers (NTBs) have been wanting;

therefore limiting free trade in the region The progress towards trade liberalization has

had its challenges; and this has impacted on development of trade among the Partners

States. Non Tariff Barriers have are rampant and have the potential to derail free trade.

The study examines the influence of NTBs on the operations of selected Kenyan firms

within the East African region.

1.1.1 Concept of International Business

International business has been going on across the borders of countries since time

immemorial. Significant growth of international business began in the middle decades of

the 19th century and accelerated post World War 11, which so the expansion of national

companies into international or multinational companies. Since the 1990’s, international

business has grown enormously, more so necessitated by internalization factors.

According to Nzuve and Ogot (2007), the pertinent factors influencing

internationalization include trade liberalization, government policy, incentives,

marketing, tariff framework, non-tariff barriers, and emergence of regional trading blocs.

Porter (1990) further argues that differentiation either by product or price will assist a

company to overcome the barriers to penetrating unfamiliar markets.

Both the rate of growth and structure of international business have undergone dramatic

changes over time. In particular, different sectors have dominated at different stages. First

2

the primary sector gave way to manufacturing, but currently global business growth is led

by the service sector, which has seen the most dynamic growth in foreign direct

investment in recent times.

The 1990s and the new millennium clearly indicate rapid internationalization and

globalization. The entire globe is passing at a dramatic pace through the transition period.

Conducting and managing international business operations is a crucial venture due to

variations in political, social, cultural and economic factors, from one country to another

country.

1.1.2 Regional Economic Integration

Regional integration is a process in which states or countries; usually within a given

geographical area enter into a regional agreement, mainly aimed at enhancing economic,

political and social interests or cooperation. The terms of association are defined by a

treaty or other arrangements such as protocols and other bilateral arrangements.

Lombaerde and Langenhove(2007), define regional integration as a worldwide

phenomenon of territorial systems that increases the interactions between their

components and creates new forms of organization, co-existing with traditional forms of

state-led organization at the national level. Ginkel (2001), defines regional integration as

the process by which states within a particular region increase their level of interaction

with regard to economic, security, political, social and cultural issues. Past trends on

regional integration initiatives show that the main focus has been on removal of barriers

to trade among participating countries. Regional integration has been influenced more by

3

the growing phenomenon on global trade liberalization; and which in turn has contributed

to the growing economic interdependence among countries.

1.1.3 Tariff and Non Tariff Barriers (NTBs)

Trade barriers amount to government induced restrictions on international trade and

between nations. In the current global trading arena, trade barriers are often most felt by

developing countries since they have weaker economies and also limited bargaining

power on global trade affairs. The developed countries usually set the agenda on most of

the global policies on international trade. Mbithi (2010) observes that NTBs have been

identified as the second largest constraint to trading in the EAC by the private sector after

infrastructure.

Tariffs are said to be taxes imposed on imports of commodities into a country or region,

and are among the oldest forms of government intervention in any economic activity.

Governments world over implement them for two main reasons; that is to provide

revenue for the government and secondly to safeguard against flooding of the local

market with imports. According to Kirk (2010), the steady decline of tariff rates as a

result of GATT rounds of multilateral trade negotiations raised the relative importance of

NTBs as both protection and regulatory trade instruments. As levels fell in tariff s, non-

tariff barriers increasingly took centre-stage in market access concerns. Available

evidence indicates that NTBs are often applied as alternative trade policy instruments,

since the multilateral trade agreements impose limits on the use of traditional trade policy

instruments such as tariffs.

4

Non tariff barriers represent the great variety of mechanisms that countries use in order to

restrict imports from other countries. Mansfield (1995) defines Non-Tariff Barriers

(NTBs) as trade barriers that restrict imports but are not in the usual form of tariffs.

Empirical evidence suggest that the reduction of tariff barriers among regional trading

blocs make the use of non-tariff barriers more pervasive as countries seek to protect their

markets from external competition. Roorbach (1993) observes that NTBs are a form of

evasion of free trade. Some forms of NTBs may manifest in administrative and regulatory

requirements which slow down business flow across borders

An emerging new requirement under the WTO trading system are new concepts being

referred to as procedural obstacles or Non Tariff measures which refers to issues related

to the process of application, approvals and related licenses and permits.

1.1.4 The East African Community Integration Process

The EAC is the regional intergovernmental organisation of the Republics of Kenya,

Uganda, the United Republic of Tanzania, Rwanda and Burundi with its Secretariat

headquartered in Arusha, Tanzania. The East African Community (EAC) overarching

agenda is the attainment of economic, social and political integration.

The history of the East African Community integration process dates back to pre-colonial

times. The scramble for Africa and subsequent partition in the Berlin conference of 1884

ushered in a period of unprecedented exploitation of African resources by the whites. In

1922, The British who by then occupied both territories, Tanganyika and Kenya formed

the first East African Customs Union (EACU). The EACU progressed into the East

5

African High Commission (EAHC) in 1948 and the East African Common Services

organisation (EACSO) in 1961.

These developments culminated into the formation of the erstwhile East African

Cooperation (EAC) in 1967; composed of three member States of Kenya, Uganda and

Tanzania. According to Mwapachu (2010), the three states had earlier on gained

independence from the British in the early 1960’s, and the dictates of the colonial system

quickly influenced their coming together for common good in terms of political and

economic interests. In 1977, the community collapsed due to economic and political

differences. However, the community continued to be tied together by a past of shared

political, economic, cultural and social interests. In November 1993, a tripartite

agreement was signed and which led to the establishment of the Permanent Tripartite

Commission for East Africa 1996. Subsequent cooperation meetings led to the signing of

the Treaty establishing the East African Community in November, 1999 in Arusha,

Tanzania and which entered into force in July 2000.

In November, 2004 the EAC Partners States composed of Kenya, Uganda and Tanzania

signed the Customs Union (CU). The protocol was ratified in December of 2005 and

became effective in January, 2006; and which effectively marked the first phase of the

regional integration process. The Customs Union protocol provides for the elimination of

customs duties and other charges of equivalent effect on imports; the removal of NTBs to

trade; and the establishment of a Common External Tariff (CET). In the year 2007, the

Republics of Rwanda and Burundi were admitted into the East African Community

(EAC), effectively increasing the number of cooperating States to five Partner States.

6

Implementation of the EAC Customs Union (CU) has been progressive from the onset.

Ng’ong’ola (2000) observes that with the different levels of development, the approach

taken was progressive and asymmetric, with immediate duty-free elimination or a gradual

reduction of tariffs. Kenya is considered as the economic power house in the region and

therefore opened up earlier than the rest of the Partners States.

The second phase of the EAC integration process was marked by the signing of the

Common Market (CM) protocol in November, 2009. The CM protocol became effective

in July, 2010; and which basically provides for four freedoms; namely the free movement

of goods, labour, services, and capital. The realization of deeper trade and investments in

the region is depended on implementation of the CM protocol. The CM Protocol is also

marks a significant step towards the achievement of the next milestones in the integration

processes; namely the Monetary Union and the EAC Political Federation by 2015.

1.1.5 Influence of Non Tariff Barriers on business operations

The EAC is focused on the removal of non-tariff barriers in an attempt to avoid policy

reversals since the Partner States have already committed themselves to remove tariffs on

intra-regional trade. The up scaling of free movement of goods and services is high up on

the regional integration agenda. However, Non tariff barriers (NTBs) are a big hindrance

to doing business not only in Kenya but the region. Some of the common NTBS

influencing the operations of firms within the East Africa region are regulatory and

administrative requirements, standards and technical requirements, trade facilitation

measures, delays on transit cargo, issuance of permits and existence of several

weighbridges. Elimination of these barriers is a priority towards realization of the broader

7

EAC developmental goals; and the subsequent enhancement of cross border trade and

investment in the region.

In spite of the fact that the Partner States have been able to eliminate a significant number

of tariffs on intra-EAC trade and also implemented a common external tariff (CET), there

has been limited progress in addressing trade restrictive measures and which are also

referred to as non tariff measures (NTMs). Non tariff measures in the context of EAC are

referred to as Non-tariff barriers (NTBs). The EAC Customs Union Protocol makes

specific reference to the need to eliminate NTBs and to refrain from imposing new ones.

The five partner states have established national reporting and monitoring mechanisms

for NTBs The countries have also established National Monitoring Committees (NMC)

on NTBs, which include stakeholders from government and the private sector. The

community has a time bound program on the elimination of identified NTBs. The focus

on elimination NTB’s by Partner States is intended to further augment the gains made in

the regional integration process, and create a level playing field for business to thrive.

However, the EAC does not have a strong enforcement mechanism to help remove

NTBs. In the absence of a credible mechanism to eliminate them, the EAC Partner States,

particularly those which are land-locked, are conducting bilateral discussions for their

removal. The absence of a clearly defined monitoring mechanism with time limits for

action means each Partner State is responsible for voluntarily removing NTBs without

being subjected to possible economic sanctions or penalties if they fail to do so. For this

8

reason, NTBs influence the operations of business entities involved in cross border trade

in the region.

The NTBs slow down liberalization of intra-regional trade in goods, movement of capital,

production capacities and foreign investment flows. Monica Hangi (2008) notes that the

slow pace or reluctance among partner States to eliminate NTBs is essentially trade

restrictive; and a hindrance to doing business in the entire region. Kenya is regarded as

the biggest trading partner in the region; exporting over 50 % in traded goods in the

region. Firms doing business in Kenya and whose business interests transcend the EAC

region are particularly challenged by recurrent trade restrictive measures. More so, Kenya

happens to be the regional hub of business in the region, by virtue of her strategic

location. The country is a major transport corridor, with her roads interconnecting the

region, the sea Port of Mombasa and Jomo Kenyatta international Airport (JKIA) being

major conduits for export and import business.

1.2. Research Problem

The East African Community regional integration process is one among regional

economic communities in the world today that has grown within a very short time. Since,

the treaty of establishment came into force in 1999, the region has witnessed

unprecedented speed in which other protocols implementing the treaty have been

negotiated, signed and ratified. The integration milestones are too close. For instance, the

EAC Customs Union and the Common Market protocols were negotiated and became

operational in 2006 and 2010 respectively. The EAC integration roadmap also assumes a

9

political federation by 2015. The short period in which Partner States have completed

integration milestones poses various implementation obstacles.

For instance, Kenyan firms doing business in the EAC have been affected by

proliferation of NTBs. The proliferation of NTBs in the region is exacerbated by inherent

policy gaps in the implementation of laws and policies affecting business. The study

undertakes to establish the state of play of trade restrictive barriers, policies and laws

which inhibit the smooth operations of business entities in the region.

Although mechanisms have been put in place to eliminate non tariff barriers in EAC, the

process has been slow than anticipated. Other new forms of NTBs continue to come up.

The study explores the reasons behind the current situation, challenges faced and possible

remedial measures. As per the EAC trade report 2012, the region has a combined

population of more than 135.4 million people, land area of 1.82 million sq kilometres and

a combined Gross Domestic Product (GDP) of $84.7 billion. The region bears great

strategic and geopolitical significance and prospects to the business community. To make

Kenya more competitive in the region therefore, this study becomes necessary to unravel

the business constraints arising from the influence of NTBs.

Studies have however been done on various challenges facing the EAC integration

process. Nzomo (2009) did a study on The Impact of EAC Integration on Kenya’s

Economic Development. Hangi (2010) did a study on Non Tariff Barriers in Trading

within the EAC. Irungu (2009) did a study on Policy Prospects and Challenges for

Regional Economic Integration in Africa; Case of the East African Community. Mbithi

(2011) did a study on Regional Economic Integration: the challenges ahead; case for

10

Kenya. Kirk (2010) did a study on Non-Tariff Measures on Goods Trade in the East

African Community: Designing and Implementing an Effective Monitoring Mechanism.

The studies expose various challenges facing the regional integration. However a gap

exists since the researcher is not aware of any study that has been done to determine the

influence of Non Tariff Barriers on the operations of business firms in the region. This

therefore leads to the following research question: -What are the Influence of Non Tariff

barriers on the Operations of Selected Kenyan Firms within the East African

Community?

1.3 Research Objectives

The objectives of the study were:

(i)

To identify the types of Non Tariff barriers influencing operations of selected

firms in Kenya

(ii)

To identify policy gaps and measures aimed at eliminating NTBs to improve

the business environment in the region.

1.4 Value of the Study

The study will assist Kenyan firms or business entities doing business in the East African

region to make requisite recommendations towards improving the business environment

in order to deepen trade and investment.

The study will also be useful in enriching existing literature and other scholarly works on

international business. In particular, the study will assist researchers; academia and

11

students of international business to understand deeper issues on regional integration

processes; and some of the challenges thereof that contribute to trade creation and or

trade diversion. It is hoped that the findings will be valuable in stimulating interest and

further research in topical areas pertaining to regional integration in the EAC; and more

specifically the impact of Non Tariff barriers to doing business in the region.

Finally, the study will contribute towards enriching knowledge gaps among policy

makers in government and private sector. The study will further contribute towards

promoting better policies to improve the level playing field in the EAC integration

process. This study will also be useful to those business firms setting up operations in

Kenya, and which target the EAC market. It will provide requisite information and

knowledge to investors on influence of Non Tariff Barriers in the overall doing business

environment in Kenya.

12

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter provides a conceptual overview on the theoretical and empirical literature

available on international business and regional integration. Selected materials on

international trade have been used. The main area of interest is the contribution of those

theories and studies to development of regional integration. The East African Community

regional economic grouping has witnessed a proliferation of Non Tariff Barriers (NTBs)

in spite of progress made to move the region towards a single market. The influence of

NTBs on the operations of Kenyan firms doing business in the EAC region becomes a

relevant subject of study.

2.2 Theoretical Foundation

The removal of the trade barriers in most regional economic groupings has had multiple

impacts, in some cases increasing gross domestic product (GDP) among trading partners.

Regional integration agreements (RIAs), have led to major developments in international

relations between and among many countries. Modern models to regional integration

argue strongly that the solutions to global crises must involve regional solutions.

According to the law of comparative advantage, free trade allows trading partner’s

mutual gains from trade of goods as long as they have different relative efficiencies.

Allyn and Bacon (1999) however observe that by the end the 2nd World War, and early

1950’s, it was assumed that a customs union would be welfare improving since tariffs,

which are regarded as welfare reducing would fall. Various factors such as political,

13

economic, social and technological changes throughout the last few decades have

enhanced globalisation efforts. Today’s globalized world is as a result of such processes.

However, conventional theory, by Viner (1950) showed that a customs union is not

necessarily welfare improving unless the tariff reduction results to trade creation. Tariff

reduction is also harmful to welfare if it results to trade diversion. Trade creation happens

if industry (productive sectors), begin to enjoy more efficient and low cost production

technologies within an expanded economic space, necessitated by a regional integration

agreement. Available literature on economic integration indicates that there are potential

gains resulting from tariff liberalization within the context of regional trade agreements

(Viner, 1950).

Krugman et al (1991) argues that regional trade blocs can yield dynamic growth benefits

to members through providing domestic firms with access to a larger market and hence

making it possible to exploit economies of scale and overcome limitations imposed by

the small size of national economies. Better access to a large market through regional

trade arrangements can also boost growth by reducing risk and uncertainty for firms and

spurring entrepreneurship. This can influence the decisions firms take on location and

also enhance their growth, thereby having a positive impact on employment, investment

and growth in the economy.

Bhagwati and Panagariya (1996) argue that regional trade agreements (RTA’s) will likely

reduce welfare in member countries and impede multilateral trade liberalization.

However, they continue to argue that by giving preferential treatment to member

countries within a trading bloc, they divert trade from non-members. They point out that

14

this trade diversion is likely to dominate trade creation, so the RTA’s will reduce welfare

in member countries. Empirical models show that aggregate trade creation dominates

trade diversion. The models also indicate that welfare for all members both current and

potential increases when RTAs expand. There are even bigger welfare gains when

models incorporate aspects of ‘new trade theory’ such as increasing returns, imperfect

competition, and technology transfers. The theoretical models suggest that the net impact

of an RTA on trade creation and trade diversion is ambiguous. It depends on the export

capacity of the partner country and whether the partner country faces constant cost.

Panagariya et al (1993) notes that an RTA can be net trade-creating in one sector and net

trade diverting in another sector.

De Melo et al. (1998) notes that the case of pure trade diversion emphasized in

Panagariya et al (1993) is welfare reducing, and is too extreme a model to characterize

actual RTAs. He further argues that Panangariya et al( 1993) presents a more balanced

view of the welfare effects of an RTA in an analytical model in which integration both

creates and diverts trade. In this case, the country which lowers its barriers against a trade

partner faces a new domestic price which is lower than the tariff inclusive mark-up over

the constant cost supplier, but higher than the free trade price. The welfare effects on the

tariff reducing country are ambiguous. It loses because it has diverted all imports from

the lowest cost supplier, but it benefits because total imports have increased.

According to Krugman (1991), the move towards regional trading blocs is wrong in

theory because free trade areas may lead to trade diversion rather than trade creation. He

however observes that prospective trading blocs consist mostly of countries that already

15

engage in sizeable trading volumes with one another. He points out that due to the

disappointments of the Doha rounds, countries might take comfort in the continuing

integration of markets at the regional level.

Krugman has made substantial contribution on new trade theory. New trade theory tries

to explain empirical elements of trade that comparative advantage based models have

difficulty with. New trade theories are often based on assumptions such as monopolistic

competition and increasing return to scale. Krugman (2001) on home market effect

observes that an industry tends to cluster in one location because of returns to scale and if

that industry faces high transportation costs, the industry will be located in the country

with most of its demand in order to minimize cost. Shiozawa( 2007) observed that traded

volume increases for intermediate goods when the transport cost decreases.

2.3 Arguments For and Against Free Trade

Modern theoretical models stipulate that there is no level playing field in international

trade and that free trade is producing, within and among countries, winners and losers.

Baumol et al (2001) did a study on Global Trade and Conflicting National Interests; and

argue that free trade can produce multiple outcomes, including those where the overall

welfare of one country can be at the expense of another. Free trade isn't always and

automatically benign and there are both inherent conflicts as well as mutual gains for

those engaged in global trade.

According Nzomo (2009), the impact of EAC integration on Kenya’s economic

development has been wanting. The countries are at different levels of economic

development and have not achieved macro-economic convergence. Besides, Kenya is

16

classified as developing country, while the rest of the four partner’s states are least

developed countries. The full implementation of the customs union protocol therefore

becomes a challenge, given that the countries have not opened fully to free movement of

goods. Eric Irungu J, (2009) did a study on policy prospects and challenges for regional

economic integration in Africa; case of the East African Community. In her expositions,

she observes that lack of a harmonised trading and investment regimes in East Africa

slows down the regional integration process.

In today's global economy, there is no single best outcome arrived at by international

trade. However, some outcomes may be good for one country as opposed to the other. In

a modern free-trade environment, a country's welfare is critically dependent on success of

its industries in international trade. However, the biggest advantage of international trade

relates to the advantages accruing from territorial division of labour and specialization in

production processes and value chains. However, Ricardo, D (1817) argued that there is

mutual benefit from trade or exchange even if one party is more productive in every

possible area than its trading counterpart as long as each concentrates on the activities

where it has a relative productivity advantage. Even if one country is more efficient in the

production of all goods or has absolute advantage in all goods than the other, both

countries will still gain by trading with each other.

Ricardo's theory of comparative advantage was further developed by Heckscher and

Ohlin (1933), who argued that countries have different factor endowments of labour, land

and capital inputs. Countries will specialise in and export those products which use

intensively the factors of production which they are most endowed. International trade

17

enables a country to specialize in the production of those commodities in which it enjoys

special advantages. If each country specializes in those goods and services where they

have an advantage, then total output and economic welfare can be increased. However,

the gains arising from international trade shall be available to the participating countries

only if trade is free and unfettered.

Critiques of globalization argue that the fast paced growth of free trade has done far less

to raise the incomes of the world’s poor. The growing number of small free trade deals

could limit opportunities with countries outside an RTA. Such deals might be beneficial

to the countries involved, and therefore reduce the potential for trade to prosper with

countries outside the arrangement. A multinational for example would benefit from

having its entire supply chain covered by a free trade pact in its particular sector, say

chemicals.

Modern theoretical models show that firms internationalize for various reasons. Brooks

and Rosson (1982) observe that firms search for growth in new markets. The pertinent

factors influencing internationalization include trade liberalization, government policy,

incentives, tariff framework, non-tariff barriers, emergence of regional trading blocs and

markets.

Porter (1990) further advances that a company will not be able to overcome the barriers

to penetrating unfamiliar markets unless it brings a meaningful advantage in either cost of

differentiation to the table. Success in international competition demands that firms

translate domestic positions into international positions.

18

2.4 The WTO and Free Trade

Since the formation of WTO in 1995, the world has witnessed substantial reduction in

tariff barriers, but an upward trend in Non tariff barriers. The WTO defines trade

liberalization as entailing substantial reduction of trade barriers. Other than trade in

goods, the scope of the WTO is wider and includes services, agriculture issues,

intellectual property and other trade related issues. The WTO embodies key principles

such as non discrimination, reciprocity, transparency, special and differential treatment.

The Doha Development agenda of 2001 aimed at achieving major reforms of the

international trading system through the introduction of lower trade barriers and revised

trade rules. It also sought to increase the number of developing countries in the WTO,

and the role which trade and liberalization have to play in their development processes.

Since the Doha round to date, countries and mostly the developed world continue to

invoke protectionist policies to safeguard their markets from foreign products and

investment.

However, protectionist policies may be invoked as a consequence of economic down

turns such as the global economic crisis of 2008. During such times, developed countries

employ protectionist policies such as bailouts, capital injection into the markets, austerity

measures to safeguard domestic industry. These measures are not consistent with the

tenets for free trade and therefore result to increased unemployment, slow GDP growth,

and depressed market conditions. Imports also face restrictions in order for countries to

protect their balance of payments position.

19

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

The methodology of study entailed research design, population of study, data collection

and data analysis. The researcher aimed at outlining the processes and procedures of data

collection to elicit relevant, reliable and detailed information related to the subject of

study.

3.2 Research Design

The researcher adopted descriptive survey research. Descriptive research was used to

describe characteristics of the population or phenomenon of study. Mugenda and

Mugenda (2003) observes that descriptive survey research seeks to obtain information or

data that describes existing phenomena or answers questions regarding the subject of

study. According to Kothari (2004), descriptive research studies concern with describing

the characteristics of a particular individual or group. It addresses the “what” question.

For instance, what business constraints do firms experience in accessing the East Africa

Community regional market?

Descriptive research survey was considered appropriate in this study and assisted the

researcher to generate detailed information from respondents on the attitudes, perceptions

and opinions in relation to the influence of Non Tariff Barriers on business operations of

selected Kenyan firms doing business in the East Africa region.

20

3.3 Population

According to Mugenda and Mugenda (2003), a population is defined as an entire group

of individuals, events or objects having a common observable characteristic. In other

words, a population is the aggregate of all that conforms to a given specification.

The target population of study was business firms located in Kenya; and which do

business in the East African region. The population of study was obtained from the

membership list of firms registered with the East African Business Council (EABC)

private sector lobby group. The membership list obtained from the EABC website

totalled 190 firms, as at March, 2013.

3.4 Sample Design

A sample size of thirty five (40) firms was selected from the target population. Mugenda

and Mugenda (2003) define a sample as a smaller group obtained from the accessible

population. The firms were purposively selected; based on assessment of their relevance

to the subject of study. Mugenda and Mugenda(2003) notes that cases of subjects are

handpicked because they are informative or they possess the required characteristics.

3.5 Data Collection

Primary data was collected by use of questionnaires. Questionnaires were emailed or

dropped and picked from respondents. The method was considered appropriate as

respondents would easily give independent feedback on issues raised. A sample

questionnaire is attached as Appendix 1

21

The researcher narrowed the scope of data collection to firms whose business operations

are in transport and communications, manufacturing, wholesale and retail, and agroindustry.

3.6 Data Analysis

In the final analysis data collected entailed checking for the completeness and

consistency. In order to ensure consistency in data profiling and entry, the input was done

by the researcher.

Data collected was analyzed using descriptive statistics (frequency tables, charts and

graphs). Descriptive statistics involved the process of transforming a mass of raw data

into tables, charts, frequency distribution and percentages which were a vital part of

making the data have sense to the researcher. The data was classified, tabulated and

summarized using descriptive measures, percentages and frequency distribution tables;

while tables and graphs was used for presentation of findings. The Statistical Package for

Social Sciences (SPSS) software was used to analyse data.

22

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1 Introduction

This chapter discusses the influence of Non Tariff barriers on the operations of selected Kenyan

firms doing business in the East African Community region. The data collected is collated and

analysed to give an informed report of the actual findings from the survey conducted. The scope

of study was limited to the identification of Non Tariff Barriers (NTBs) influencing business

operations; and policy gaps or measures recommended to eliminating the NTBs in order to

improve the business environment.

4.2 Response Rate

The study targeted 40 firms, based in Kenya but with business interest across the East African

region. Out of the 40 firms purposively selected, a total of 30 filled and returned the

questionnaire. This translates to a response rate of seventy five (75) percent; and which was good

enough given the challenges encountered in the research terrain, such as challenges to do with

limited knowledge or information levels among line managers, logistics, delays and transport

costs to and back from the selected firms.

Mugenda and Mugenda (1999) notes that , a response rate of 50 percent is adequate for analysis

and reporting; while 60 percent is good enough and over 70 percent is excellent.

Table below shows analysed results of the response of questionnaires returned.

23

Table 4.1 Summary of response rate

Respondents Frequency Percentage(%)

No. of questionnaires returned 30 75%

No. of questionnaires not returned 10 25%

Total 40 100%

4.3 General Information.

This section focuses on the sample population general characteristics such gender, age,

education level and position in employment. This part of analysis enables the researcher

to deduce findings that have direct influence in the conduct of business by firms;

investing and exporting to the EAC market.

4.3.1 Gender composition

Out of the 30 respondents who gave feedback, 20 of them were men; translating a total of

66.7% percent of male respondents. The remaining 10 respondents were women,

amounting to 33.3% of female respondents. The results are indicative of the fact that

more of the male gender happen to hold managerial positions in those firms doing

business in the EAC were. The pointers to this could be the nature of duties and

responsibilities; which range from supervisory to manual.

24

Table 4.2 Summary of gender composition

Gender Frequency Percentage

Male 20 66.7%

Female 10 33.3%

Total 30 100%

4.3.2 Level of Education

The need to establish the level of education was found necessary in the study. This is

because it shows the variance in terms of education level; and which is a precondition for

good managerial practises. The theory of the firm purports that firms exist for profit

making and as an alternative system to the market price mechanism when it is more

efficient to produce in a non-market environment. Baumol etal (1959) suggest that

managers would seek to maximise their own utility and consider the implications of this

for firm behaviour in contrast to the profit-maximising case. He suggested that manager’s

interests are best served by maximising sales after achieving a minimum level of profit

which satisfies shareholders interests.

One of the key drivers of highly performing, profits making firms is the calibre and level

of education of staff. This is reflected in managerial competences’ employed in key

functional areas such as sales and production.

25

Table 4.3 Level of Education

Education level Frequency Percentage

Masters or first Degree 22 73.3%

Diploma 6 20%

Certificate 2 6.7%

Total 30 100%

The results show that, a majority of the respondents (73.3%) are well educated and either

posses a masters degree or a first degree. Out of the 30 respondents who gave their

feedback, 20% posses middle level training; that is up to diploma level. An insignificant

number of 6.7% posses’ certificates.

The results point to the fact that, the Kenyan firms doing business in the East African

region employ qualified staff at managerial level. This makes it easier for management of

key functional areas such production, supply and logistics management, sales and

marketing. The nature of doing business requires firms to maximise on human resource

capacity, so as to reap the gains associated with free trade. Regional trade affords many

opportunities and challenges at the same time. Companies have to employ competitive

strategies in order to break even; and move towards profit maximisation.

According to Porter (1980) firms are able to apply their core competencies and business

networks to achieve profits above the industry average. Profitable markets that yield high

returns will attract new firms. This explains why the EAC is a very important market for

Kenyan firms. However, the existence of barriers to trade ( NTBs) in the region makes it

difficult for firms to move their goods across border. This undermines market entry

26

conditions in a free market. The easing of free trade in the EAC supported by the

Customs Union and Common Market protocols implies that countries in the region apply

business practises that slow down regional trading. In this study, those measures are

being regarded as Non Tariff Barriers.

Table 4.4 Position in Employment

Position Frequency (Fr) %

Managing director 1 3.3%

Chief operating officer 2 6.7%

Line managers(e.g. production, sales& marketing, logistics) 21 70%

Technical staff( e.g. clerks, accountants) 6 20%

Total 30 100%

Source: Field data (2013)

The survey established that a majority of the respondents (70%) were line managers

responsible for key functional departments such as manufacturing, sales and marketing,

production, procurement and logistics. From the response gotten from the line managers,

indications are that they are more informed on international trade affairs. They also deal

with day today issues pertaining to conduct of business in the firms. This shows that the

information provided has a higher certainty of being reliable and valid.

27

4.3.3 Selected Firms

The table below shows the number of firms contributing to trading activities in the East

African region. The firms are grouped by sector or subsector. This made it easier for

generalisation of results and findings.

Table 4.5: Selected Sectors/Subsectors

Sector/ Subsector Frequency Percentage (%)

Manufacturing 17 56.7%

Wholesale and retail 3 10%

Transport & communications 6 20%

Agro-industry 4 13.3%

Total 30 100%

Source: Field data 2013

The results show that out of the total number firms sampled, manufacturing sector is the

leading sector in terms of penetration on trading activities in the EAC region. The sector

contributed 56.7 % being the total trade share by Kenyan firms exporting to the East

African region. Some of the manufactured (industrial products) exported to the region

are mainly pharmaceuticals, industrial chemicals, soaps and detergents, tyres, cooking

fat, oils and cement, steel & steel products, industrial feeds ,and processed food. The

transport and communications subsector contributed 20%. The actual business of

transportation of goods across border and the logistics involved was the central focus.

The main players in transport logistics are the Shipper’s Council of Eastern Africa

(SCEA) and the Kenya Freight Forwarders Association (KIFFA). This level of

28

penetration of the transport and communications subsector is made possible by recent

developments of the main transport corridors in East Africa and Kenya in particular.

The rest of the sampled firms were 13.3 % in Agro-industry and 10% in whole sale and

retail. The EAC Trade report (2012) shows that Kenya exports to the EAC Partner States

declined slightly from 25.6 % in 2011 to 24.3% in 2012. This explains the slow

penetration of exportable product by firms in the agro-industry, wholesale and retail

subsectors.

Figure 4.1 Distribution of firms by sector

Source: Field Data

4.3.4 Firm ownership and shareholding

The survey results show that the firms shareholding and ownership level has a lot more

foreign presence than local (domestic). The table below shows the type of ownership of

the firms selected and sampled in the survey.

29

Table 4.6 Type of ownership

Type of ownership Frequency Percentage (%)

Foreign owned ( 100% Foreign) 10 33.3%

Domestic ( 100% Kenyan) 4 13.3%

Foreign majority owned (over 50%

foreign shares)

14 46.7%

Domestic majority owned ( over 50%

domestic shares)

2 6.7 %

Total 30 100%

Field data 2013

The analyzed results show that a majority of the firms trading in the EAC region are

foreign majority shareholding companies( 46.7%), followed by wholly owned foreign

companies( 33.3%). Firms wholly owned by Kenyans control a shareholding of 13.3%;

while firms with majority domestic shareholding comprise 6.7%. The results indicate that

locally (domestic) firms are far off from being the dominant trading partners in East

Africa. This could be attributed to domestic policies on investment; whereby foreign

firms are allowed by law to open a branch office or register a new company without the

requirement for local equity participation. This could explain why Kenyan based firms

exporting to the EAC region face a Myriad of Non Tariff Barriers (NTBs).

The study also reveals that, in terms of market competitiveness, foreign owned firms

have a greater presence in Kenya. Wood and Robertson (2004) observe that the current

age of globalization has both facilitated and necessitated businesses to move towards the

internationalization of organizations of all sizes. The figure below shows classification of

firms by ownership.

30

Figure 4.2 Classification of firms by ownership

4.3.5 Length of period of business operation in Kenya.

This section discusses the number of years in which the firm(s) has maintained presence

of business operations in Kenya. The feedback back is necessary to establish firm level

competitiveness and capacity to trade in the EAC, due to economies of scale. Other than

branch or affiliate companies of Multinationals, local firms usually establish as small in

terms of equity participation.

Table 4.7 Number of years in business operation in Kenya

Number of years Frequency Percentage (%)

0-5 years 1 3.3%

5-10 years 3 10%

10-15 years 11 36.7%

15-20 years 12 40%

Over 20 years 3 10%

TOTAL 30 100%

Field data 2013

31

The study finding show that more firms have operated in the country for between 10-15

years and 15-20 years are more; reflecting concentration levels in the country of 36.7%

and 40% respectively. Year 0-5 has one company from feedback gotten amounting to

3.3%; while firms with 5-10 years and those over 20 years report the same frequency

levels; amounting to 10% respectively.

From the foregoing, it is clear that a lot more firms have tended to establish in Kenya in

the last 10-20 years. This could be attributed to advancement in technology; a better

business environment supported by strong socio-economic and political environment. It

is also within the same period that EAC was re-established; and therefore affording

investors from Kenya a deeper market access in the EAC region. The figure below

presents a graphic scenario of the number of years of business operation in Kenya.

Figure 4.3 Number of years of operation in Kenya

32

4.3.6 Employment levels

This section enumerates the employment levels in the firms selected. For ease of

sampling and to ensure consistency and accuracy in reporting; the firms were grouped

depending on number of employees. The need to identify the number of employees is

imperative in this study as Non Tariff Barriers have impact on employment levels

Table 4.8 Number of Employees

Number of Employees Frequency Percentage (%)

50-100 4 13.3%

100-150 9 30%

150-200 12 40%

Over 200 5 16.7%

Total 30 100

Field data 2013

The finding show that most firms’ employment numbers range within 100-200 people.

Out of the sampled firms, 30% reported employment levels of between 100-150 people;

while 40 % reported employment levels of between 150-200 people Companies

employing between 50-100 people and those employing over 200 people reported less

percentages of 13.3% and 16.7% respectively.

From the above analysis, it can be deduced that most firms in Kenya employ in the range

of 100-200 employees. There are a number of factors determining the firm’s employment

levels. These include the firm size, profitability, market penetration, competitiveness, and

resource base and product range. Firms employing between 50-100 employees tended to

be small and medium size; and ownership oscillate between local and foreign

33

shareholding. Firms employing over 200 employees tended to be Multinationals, with

majority shareholding by foreign firms.

The results however reveal that companies have tended to be resilient enough in spite of

the impact of Non Tariff barriers on doing business. The results do not reveal direct

correlation between employment levels and the influence of Non Tariff barriers on the

operations of the firms.

4.4 Influence of Non Tariff Barriers on the Operations of Kenyan firms

This section mainly focuses on the research question; and which is to unravel the

influence of Non Tariff Barriers on the operations of Kenyan firms doing business in the

East African Community(EAC) region. A detailed analysis is guided by the research

objectives.

4.4. 1 Understanding the EAC business environment

Respondents were required to rate the questions in scale of 1-5; about their level of

understanding of the EAC business environment and how this influences the prospects

for Kenyan firms doing business in the region. The responses were rated as follows:-1Strongly

disagree, 2-Disagree, 3-Neither agree nor disagree, 4-Agree , 5-Strongly

agree.

34

Table 4.9 Assessment of the Business climate

1 2 3 4 5

Fr % Fr % Fr % Fr % Fr %

The EAC is composed of five partners

States, i.e Kenya, Uganda, Tanzania,

Rwanda and Burundi. The Partners are

united against trade barriers in the region.

28 93.3 2 6.7 0 0 0 0 0 0

Kenya stands to gain by being a member of

the East African Community

0 0 2 6.7 3 10 20 66.7 5 16.7

The EAC main objective is to achieve

greater economic, political and social

cultural integration.

0 0 0 0 0 0 28 93.3 2 6.7

Are you certain that Kenya is the biggest

player in the EAC with trade and investment

statistics in her favor?

4 13.3 3 10 22 73.3 1 3.3

Your firm has business interests in East

Africa. This is shown by the trade volumes

in terms of exportable products

0 0 0 0 0 0 28 93.3 2 6.7

Unfriendly business practice in the EAC

result to delays in movement of cargo,

goods and other services across border

0 0 0 0 0 0 2 6.7 28 93.3

There are several police roadblocks and

checks on the Kenyan Northern corridor

route

0 0 0 0 0 0 4 13.3 26 86.7

The EAC certification, testing quality

assessment and standards are not fully

harmonized.

0 0 0 0 0 0 23 76.7 7 23.3

Business constraint in Kenya and the EAC

affect business performance e.g

infrastructure, energy, power supply e.t.c

19 63.3 7 23.3 0 4 13.3 0 0

There are numerous delays at border and

ports of entry limit the free movement of

goods, services and persons

0 0 0 0 0 0 10 3 27 90

The EAC secretariat, the body responsible

for coordinating the affairs of the

community also champions the interests of

the business community as well

0 0 22 73.3 5 16.7 3 10 0 0

Is your firm a member of a private sector

organization or lobby group supporting

business interests in the EAC?

0 0 0 0 0 0 0 0 30 100

The study established that 93.3 % of the respondents strongly agree that unfriendly

business practises in the EAC result to delays in movement of cargo, goods and other

services across border. Another 86.7% and 90 % strongly agreed that the several police

roadblocks; and the numerous delays at border points and ports of entry limit the free

35

movement of goods, services and persons respectively. All firms studied are members of

at least one private sector association or lobby groups. 66.7 % of the respondents agree

that Kenya stands to gain by being a member of the East African Community. 93.3 % of

the respondents report that their firms have business interests in East Africa. This is

reflected in the trade volumes, and the range of exportable products. 73.3% of the

respondents agree that Kenya is the biggest player in the EAC; a fact emphasized in the

EAC trade report (2012).

On further analysis, 63.3% of the respondents disagreed strongly that Kenya and the EAC

in general provide good environment for doing business. There are a myriad of business

constraints limiting performance of business. 90% of the respondents strongly disagreed

with the position that East African Community partners are united against trade barriers

in the region; and that the EAC Secretariat is working hard enough to champion the

interests of the business community. 16.7% of the respondents were ambivalent on the

state of affairs of doing business in the EAC. They neither agreed nor disagreed with

most of the issues raised.

Figure 4.4 is a graphical presentation of some of the identified business climate indicators

that affect business negatively. The level of prevalence is shown by percentages.

36

Figure 4.4 Business climate in the EAC

From the findings, the prevalence is high, ranging between 60% and 90%.

4.4.2 Types of Non Tariff Barriers affecting business operations.

The up scaling of free movement of goods and services is high up on the EAC regional

integration agenda. However, Non tariff barriers (NTBs) are a big hindrance to doing

business not only in Kenya but the region. Some of the NTBs relate to regulatory and

administrative requirements, bureaucratic red-tape, standards and technical requirements,

trade facilitation measures, delays on transit cargo, issuance of permits, existence of

several weighbridges and poor roads and railways infrastructure.

The study sought to gauge the level of understanding by respondents on the types of

NTBS that are more prevalent in EAC. In a scale of 1-5, the responses were rated to the

extent in which they influence the operations of Kenyan firms doing business in the EAC

region. That is 1-strongly disagree, 2-disagree, 3-Neither agree nor agree, 4-Agree, 5Agree

strongly.

37

Table 4.10: State of Play of Non Tariff Barriers in the EAC

Delays in transit bonds cancellation by the

revenue authorities

0 0 0 0 0 0 7 23.3 23 76.7

The region has numerous institutions

involved in testing of goods.

0 0 3 10 0 0 8 26.7 19 63.3

One stop border posts in Ports of entry /

border points are not fully operationalized.

0 0 0 0 5 16.7 9 30 16 53.3

Existence of several weighbridge stations

in the Central and Northern corridors;

0 0 0 0 0 0 4 13.3 26 86.7

Several Police road blocks along Northern

and Central Corridors

0 0 0 0 0 0 3 10 27 90

Lengthy procedures for issuing of work

permits

0 0 2 6.7 3 10 7 23.3 17 56.7

Lack of harmonized port clearance and

procedures manual causing delays in

clearance of goods

0 0 0 0 0 0 5 16.7 25 83.3

Border management institutions’ working

hours are not harmonized.

0 0 2 6.7 4 13.3 7 23.3 17 56.7

In efficient cargo tracking system 0 0 0 0 0 0 4 13.3 26 86.7

Food and Drugs Authority requires

companies exporting to register products

being exported

0 0 3 10 6 20 10 3.3 12 70

EAC Standards Bureaus have varying

procedures for issuance of certification

marks, inspection and testing.

4 13.3 5 16.7 21 70

Lack of harmonization of internal taxes

leads to increase cost of doing business;

6 20 2 6.7 22 73.3

Lack of interface within the customs’

systems in the Revenue Authorities in

Partner States.

1 3.3 6 20 23 76.7

Arbitrary administration of the EAC Rules

of Origin

4 13.3 6 20 5 16.7 15 50

Transit fee( road toll and freight charges) 0 0 4 13.3 0 7 23.3 19 63.3

Inefficient road and rail transport 0 0 0 0 0 0 6 20 24 80

Corruption& governance 0 0 0 0 0 0 3 10 27 90

38

From the study findings, 76.7% of the respondents strongly agreed that delay in transit

bonds cancellation by the revenue authorities’ impact negatively on business. 63.3 %

reported that the region has numerous institutions involved in testing of goods; while

53.3%, were of the view that one stop border posts in the EAC ports of entry / border

points are not fully operationalized nor harmonised; and therefore slow down smooth

exist and entry of transit goods. 86.7% of the respondents strongly agreed that there exist

several weighbridge stations in the Central and Northern transport corridors; while 90 %

say that several police road blocks exist along the transport corridors.

On issuing of work permits, 56.7% of the respondents reported that the procedures are

lengthy and cumbersome. 83.3 percent of the respondents strongly agree that lack of

harmonized port clearance procedure manuals cause delays in clearance of goods. The

EAC countries are slow in adopting efficient cargo tracking systems. 86.7 % of the

respondents felt strongly that the current systems of monitoring transit cargo are very

inefficient. This scenario contributes to loss of transit cargo; through theft and diversion

of transit products to the domestic market.

In all the five partners States, plant and animal health inspections and registration are

mandatory practises. However, the challenge is that the procedures take unnecessarily

long. A good response rate of 70% of the respondents strongly agreed that food and drugs

authorities companies require firms to register their products. 70% of the respondents

strongly agreed that EAC Standards Bureaus have varying procedures for issuance of

certification marks, inspection and testing; while 73.3 % of the respondents reported that

EAC has not fully harmonized internal taxes; while 76.7% strongly agreed that there is

lack of interface within the customs’ management systems of the Revenue Authorities in

39

Partner States. This leads to increased cost of doing business. The EAC Rules of Origin (

RoO) also influence the operations of firms. 50% of the respondents felt that the rules are

arbitrarily applied and therefore are a hindrance to doing business.

An analysis of corruption and governance as a factor slowing down business operations,

90% of the respondents strongly agreed that corruption is indeed a big problem. Another

80% of respondents reported that the road and rail transport systems are grossly

inefficient; while 63.3% are of the opinion that transit fees and freight charges are high.

The graph below presents in a summarized form the most prevalent of Non Tariff barriers

influencing the operations of firms in Kenya.

Figure 4.5 Graphical Representation of Prevalence of Non Tariff Barriers

From the graphical presentation in Figure 4.5 above, it can be deduced that all

respondents felt strongly that the NTB’s prevalence rate ranges between 50% and 90%.

40

According to Bernhardt (2012), there exist some mechanisms to eliminate NTBs in the

EAC region. These are commonly referred to as National Monitoring Committees on

NTBs; charged with reporting and following up to eliminate new NTBSs. This study

however established that NTBS have instead proliferated; consequently influencing

business operations in Kenya.

41

CHAPTER FIVE: SUMMARY, CONCLUSION AND

RECOMMENDATIONS

5.1 Introduction

This chapter provides the summary of the findings; conclusions and policy

recommendations arrived at.

5.2 Summary of findings

The results show that out of the total number firms sampled, manufacturing sector is the

leading sector in terms of penetration on trading activities in the EAC region. The sector

contributed 56.7 % being the total trade share by Kenyan firms exporting to the East

African region. This follows that if NTBs are rampant or go unchecked, this would

negatively affect business operations. The going concern for most businesses is profit

making. A high prevalence of NTBs, coupled with unfavourable business environment

impacts negatively on the operations of manufacturing firms. Other sectors such as

wholesale and retail, transport and communications are equally affected.

Over 60% of the firms are affected by high prevalence of unfriendly business practises.

Again, most of the Kenyan firms doing business in the East African region were

established in the last 10-20 years. This indicates that overtime, the firms have acquired

economies of scale and therefore able to leverage against business competition and the

prevalent NTBS in the region.

From the study findings, 76.7% of the respondents strongly agreed that delay in transit

bonds cancellation by the revenue authorities’ impact negatively on business. 63.3 %

42

reported that the region has numerous institutions involved in testing of goods; while

53.3%, were of the view that one stop border posts in the EAC ports of entry / border

points are not fully operationalized nor harmonised; and therefore slow down smooth

exist and entry of transit goods. 86.7% of the respondents strongly agreed that there exist

several weighbridge stations in the Central and Northern transport corridors; while 90 %

say that several police road blocks exist along the transport corridors.

Delays in issuance of work permits affects the lead time between making an investment

decision and business start up; as reported by 56.7% of the respondents. Foreign owned

businesses as well as those with majority foreign shareholding, the number of foreign

directors are restricted. While this is intended to safeguard local jobs; the delays in

issuance or renewal of work permits affects some line functions such as marketing and

sales; whereby the managers are foreigners. It is also important to acknowledge in this

study that most of the firms sampled, 46.7% have foreign majority shareholding; while

33.3% are foreign owned.

There is lack of interface within the customs’ management systems of the Revenue

Authorities in Partner States. This leads to increased cost of doing business. Regarding

Ports and border point’s management, 83.3 percent of the respondents strongly agree that

lack of harmonized procedures cause delays in clearance of goods. This leads to delays in

movement of transit cargo.

The EAC countries are slow in adopting efficient electronic cargo tracking systems. 86.7

% of the respondents felt strongly that the current manual systems of monitoring transit

43

cargo are very inefficient. This scenario contributes to loss of transit cargo; through theft,

dumping and diversion of transit products to the domestic market.

On standards, 70% of the respondents strongly agreed that EAC Standards Bureaus have

varying procedures for issuance of certification marks, inspection and testing. This

follows that, more goods are denied entry in the EAC markets.

In all the five partners States, plant and animal health inspections and registration are

mandatory practises. However, the challenge is that the procedures take unnecessarily

long. A good response rate of 70% of the respondents strongly agreed that food and drugs

authorities companies require firms to register their products. While this is important to

safeguard on health requirements, in certain cases; goods are denied entry even with valid

inspection documentation.

From the foregoing, it is clear that a lot more firms have tended to establish in Kenya in

the last 10-20 years. This could be attributed to advancement in technology; a better

business environment supported by strong socio-economic and political environment. It

is also within the same period that EAC was re-established; and therefore affording

investors from Kenya a deeper market access in the EAC region

Some of the common NTBs reported in the study include delays in movement of transit

goods, standards and technical requirements, police road blocks, delays in port clearance

procedures, lengthy processes for securing work permits, several weighbridges,

corruption, inefficient cargo tracking systems, lack of harmonisation of internal tariffs,

Rules of origin conferring criteria, high transit fees and corruption.

44

The results show that most of the NTBS are highly rampant; and therefore influence the

smooth operation of businesses entities. Because of the impact NTBSs have on business

operations, some firms result to unethical business practises to counter the effect.

Consequently, there are reported cases of dumping and diversion of transit goods into the

Kenyan market. Such unethical business practises affect the level playing field. The

lengthy procedures related to issuing of permits, port clearance and documentation

procedures; and lack of one stop border posts in major ports of entry affect the time taken

to move goods across border. This influences the lead times on delivery of goods; and

consequently affect returns.

5.3 Conclusions

The study sought to establish the influence of NTBs on the operations of selected Kenya

firms doing business in the EAC region. Kenyan firms command a huge presence in the

EAC region; and therefore the more reason why government needs to step up elimination

of NTBs.

Since the coming into force of the EAC Treaty of establishment in 1999, the integration

process has been progressive. The EAC has achieved deeper integration by having in

place a Customs Union and a Common Market protocol, within the last ten years.

However, implementation of the various protocols has been wanting. There has not been

sheer commitment by Partner States to eliminate Non Tariff Barriers.

Other shortcomings continue to be encountered in that the Community has not

harmonized various laws and policies affecting business. This scenario slow down

integration efforts; and indeed affect the operations of business establishments in Kenya.

45

Non-recognition of EAC Rules of Origin and the certificates issued by competent

authorities adds to the cost of doing business. Lack of interface within the customs’

systems in the Revenue Authorities in Partner States also delays clearance of goods under

customs control. This too increases cost of doing business and contributes to loss of

market for manufactured products. The arbitrary application of the Common External

Tariff (CET) by other Partner States also causes injury to investments; especially the

manufacturing and the agro-industry sectors in Kenya.

5. 4 Recommendations and policy implications

In order to address the challenges identified as a result of Non Tariff Barriers; and to

significantly improve the policy scope; the following recommendations have been

identified in the study.

The EAC Partner States need to come up with legally binding mechanisms to address the

elimination of Non Tariff Barriers. The suggested areas are harmonisation of domestic

policies and laws on pertaining to conduct of business or investment. The institutional

and regulatory frameworks further need to be strengthened to enable quick approval,

inspection and clearance procedures.

The government of Kenya needs to improve the business environment by streamlining

the road transport sector, eliminate numerous checkpoints (weighbridges, customs and

police checks) along the transport corridor; and decongest major cities and urban centres.

There is need for significant improvement in the port clearance and handling procedures

to improve corridor efficiency and movement of transit cargo and goods across border.

The regional borders and ports of entry/exit need to operate on 24 hour basis to ease free

46

flow of goods. Such measures include security and availability of services such as

banking and insurance services.

The study recommends that the documentation and clearance procedures be digitized to

facilitate provision of services. Information technology systems are some of the steps

recommended for improving efficiency of border crossing and for lowering the cost of

trade logistics.

The EAC Partner States should fast track the process of starting one stop border posts to

ease movement of goods and services across border. It is also recommended that the

Partner States upgrade regional road and rail infrastructure and eliminate Non Tariff

Barriers. The study recommends the provision of easy access to documentation

requirements and tariff schedules; which will significantly reduce transaction costs for

importing and exporting within the region. Simple and efficient trade procedures are

necessary to promote trade, support economic growth, create jobs and attract private

investment in Kenya.

It is also recommended that the government implements an affordable and easily

available electronic cargo tracking system that will eliminate the need for stopping trucks

for physical customs checks along the transport corridor.

5.5 Limitations of study

The study faced limitations in collection of data. Follow up was needed to elicit feedback

from the respondents. This was through visits to the firms to collect questionnaires earlier

on dropped or emailed. In some instances, the researcher interviewed the respondents;

47

during the walk in; just to elicit further comments. Many respondents seemed apathetic

and wondered if the study would be beneficial to them in any way. The time needed to

roll out the questionnaires and get feedback was not adequate enough to enable timely

feedback; and thorough scrutiny.

The researcher also faced time and financial limitations needed to cast the net further and

involve a larger population sample. The duration that the study was conducted was

limited hence exhaustive and extremely comprehensive research could not be carried out.

5.6 Recommendations for further study

The researcher recommends that further studies be conducted on the effect of business

constraints facing manufacturing firms in Kenya. Many Kenyan firms in the

manufacturing sector have business interests spread across East Africa. The just

concluded study also found out that they are more heavily affected by Non Tariff Barriers

and their products are in big demand in the region. This is an indication that there is a lot

more potential in investment in the manufacturing sector in East Africa.

To ensure more validity and generalisation of results, the studies in manufacturing sector

should also be segmented further; by product for instance. This would assist scholars and

policy makers understand the most beneficial investment segments in the country.

More research can be conducted to assess the impact of one stop border points;

improving port clearance procedures and on assessment of the impact of improved

infrastructure along the northern transport corridor in Kenya.

48

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52

APPENDICES

Appendix I: Letter of Introduction

53

Appendix II: Research Questionnaire

The purpose of this survey is to identify and understand the influence of Non Tariff

Barriers (NTBs) on the operations of Kenyan firms within the East African Community.

One of the biggest challenges to the EAC integration process is the proliferation of

NTBs. They happen to be a hindrance to business flow in the region. Answers generated

will be treated confidentially and are for the purposes of informing this survey. I thank

you in advance for choosing to fill in this questionnaire.

PART A: Respondent Personal Details.

Name of organization/ company………………………………………..

1.

Name of the Respondent ……………………………………….………

Address…………………………

Telephone………………………..

Email…………………………..

2.

Position held in organisation/company

3.

Gender: Male [ ] Female [ ]

4.

What is your highest level of education?

Masters or first degree [ ]

Diploma/ middle level colleges [ ] Certificate (High school)

5.

What cadre of staff do you fall under?

a) Managing director ( )

b) Chief operating officer ( ) c) Line manager ( ) Technical staff( clerks,

accountants)

6.

Type of business entity/ company( e.g manufacturing, financial services etc

Sector/ subsector

manufacturing

Agro-industry

Transport & communications

Wholesale and retail

54

PART B: Influence of Non Tariff Barriers on The Operations of Selected Kenyan

firms within the East African Community

1 The business community faces business challenges in the EAC. In your assessment

indicate how you assess the situation in EAC. To what extend do you agree with certain

circumstances.

In a scale of 1-5, state your assessment of the business climate (.i.e 1-strongly agree, 2diagree,

3-neither agree nor disagree, 4-agree , 5 strongly agree)

1 2 3 4 5

The EAC is composed of five

partners States, i.e Kenya, Uganda,

Tanzania, Rwanda and Burundi.

The Partners are united against

trade barriers in the region.

Kenya stands to gain by being a

member of the East African

Community

The EAC main objective is to

achieve greater economic, political

and social cultural integration.

Are you certain that Kenya is the

biggest player in the EAC with

trade and investment statistics in

her favor?

Your firm has business interests in

East Africa. This is shown by the

trade volumes in terms of

exportable products

Unfriendly business practice in the

EAC result to delays in movement

of cargo, goods and other services

across border

There are several police roadblocks

and checks on the Kenyan

Northern corridor route

The EAC certification, testing

quality assessment and standards

are not fully harmonized.

Business constraint in Kenya and

the EAC affect business

performance e.g infrastructure,

55

energy, power supply e.t.c

There are numerous delays at

border and ports of entry limit the

free movement of goods, services

and persons

The EAC secretariat, the body

responsible for coordinating the

affairs of the community also

champions the interests of the

business community as well

Is your firm a member of a private

sector organization or lobby group

supporting business interests in the

EAC?

b) Does Kenya stand to gain or lose out in EAC?

c). Any form of business competition from the other EAC Partner States? Explain.

.....................................................................................................................................

..........

…………………………………………………………………………………………

4. The EAC is already into a Customs Union since 2006 and which one of the objectives

is to open the EAC market further by allowing free movement of goods, services across

border. Do you think this has been the case to-date? Explain giving examples

………………………………………………………………………………………………

………………………………………………………………………………………………

5. What are some of the main restrictions or challenges facing free movement of goods

across border? List and give examples where necessary.

………………………………………………………………………………………………

………………………………………………………………………………………………

6. What are some of the solutions or proposals do you suggest to improve the movement

of goods across border? e.g. Through Namanga, Busia or Malaba borders?

…………………………………………………………………………………………

…………………………………………………………………………………………

(a)Transit goods from the Ports of entry such as Mombasa face numerous delays

associated with inspection, clearance e.t.c what effect does these procedures have to

business? Explain giving examples

…………………………………………………………………………………………

…………………………………………………………………………………………

(b) What suggestions or recommendations do you have to improve on the current

situation?.

…………………………………………………………………………………………..

56

…………………………………………………………………………………………

………………………………………………………………………..

…………………………………………………………………………………………

…………………………………………………………………………………………

7.

a) Non tariff barriers are any forms of trade deterring practices or impediments that

restrict the smooth, quicker or easier flow of goods outside national borders. In a

scale of 1-5, indicate your assessment on the State of Play of Non Tariff Barriers in

the EAC (.i.e 1-strongly agree, 2-diagree, 3-neither agree nor disagree, 4-agree , 5

strongly agree

1 2 3 4 5

Delays in transit bonds cancellation by the

revenue authorities

The region has numerous institutions

involved in testing of goods.

One stop border posts in Ports of entry /

border points are not fully operationalized.

Existence of several weighbridge stations

in the Central and Northern corridors;

Several Police road blocks along Northern

and Central Corridors

Lengthy procedures for issuing of work

permits

Lack of harmonized port clearance and

procedures manual causing delays in

clearance of goods

Border management institutions’ working

hours are not harmonized.

In efficient cargo tracking system

Food and Drugs Authority requires

companies exporting to register products

being exported

EAC Standards Bureaus have varying

procedures for issuance of certification

marks, inspection and testing.

Lack of harmonization of internal taxes

57

leads to increase cost of doing business;

Lack of interface within the customs’

systems in the Revenue Authorities in

Partner States.

Arbitrary administration of the EAC Rules

of Origin

Transit fee( road toll and freight charges)

Inefficient road and rail transport

Corruption& governance

c) What remedial measures or policies do you recommend to government to improve on

the doing business environment in Kenya to support free flow of goods and services

across border?

.....................................................................................................................................

.

.....................................................................................................................................

..

e) In particular, what policies or measures does the government need to put in place to

eliminate restrictions arising from NTBs to so as to support free flow of goods and

services across the EAC?

.....................................................................................................................................

.

f). Are the interests of the business community fully represented at the EAC?

g) If yes, what are the main business concerns for your firm in accessing the East African

market?

8. How long has your business been in operation?

0-5 year; ( ) 5-10 year ( ) 10-15 ( ) 15-20 years ( )

More than 5 years

Q4: How many people does your firm employ?

a)50-100; (b)100-150 (c) 150-200

58