Challenges Of Foreign Direct Investment Faced By Firms In The Apparel Manufacturing Industry In

66 Pages·2016·2.42 MB·English

CHALLENGES OF FOREIGN DIRECT INVESTMENT FACED
BY FIRMS IN THE APPAREL MANUFACTURING INDUSTRY
IN THE KENYAN EXPORT PROCESSING ZONES
By
Maru Hiten M.
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, 2012
Declaration
This research project is my own original work and has never been presented in any
other University
Signature !)an-
Maru Hiten M.
D61/76221/2009
This project has been submitted for examination with my approval as the University
Supervisor
Si^amr
Prof.Martin Ogutu
Professor, Department of Business Administration
School of Business
University of Nairobi
u
Acknowledgment
I acknowledge the following persons for their priceless contributions which enabled
this work see the light of the day. First, my parents, my dear wife and daughter for
the material and emotional support during the most trying times.
Secondly, I am grateful to my supervisor for the timely guidance and support as I
worked on the document. My colleagues at work for all their support and
understanding and MBA colleagues for their supportive contributions and
encouragement. Lastly, I remain indebted to John for his effort in shifting through
the data.
iii
Dedication
I dedicate this project to my parents for supporting my ambitions in life.
IV
Abstract
Foreign Direct Investment (FDI) is a complex foreign market entry mode which
involves the ownership and control of assets in a foreign market or direct ownership
of facilities in the target country. Foreign Direct Investment contributes to the
growth of domestic firms through complementarities in production and productivity
spillovers. With the ever-changing environment, entry mode decisions and how to
cope with such changes are very challenging to International Business Managers as
wrong decisions could be irreversible and costly on the long run. Kenya has been
involved in Global trade for many years, but mainly in the agricultural sector and
with the US Congress passing the African Growth and Opportunity Act (AGOA) in
2000, and enhanced by the formation of the Export Processing Zones ( EPZ) in
Kenya, there is renewed interest in the once declining apparel manufacturing
industry with the inflow of Foreign Direct Investments into the apparel sector
mainly within the Export zones in order to reap the incentives offered by the EPZ
Scheme. With the window of opportunity presented by AGOA which provided the
major market expected to close in September 2015 and compounded by other
challenges like the deterioration of the Kenyan infrastructure, port congestion, poor
supply and cost of electricity, and high cost of labor, this study attempted to
investigate the challenges of Foreign Direct Investment faced by firms in the
apparel manufacturing industry in the Kenyan export processing zones and the
measures adopted by the firms in dealing with the challenges. Data for the study
was collected from fourteen out of the fifteen FDI firms in the apparel
manufacturing industry in the Kenya export processing zone using drop and pick
method. Analysis of the data concluded that fiscal policy, state and cost of
infrastructure, customs regulations and market and product are the major sources of
challenges. The study highlighted that political, legal and social variables, human
resource variables are not major challenges with land related challenges not a
challenge.EPZ Authority generated measures were the most effective measure in
dealing with the challenges faced by the FDI. Flowever, others such as corporate
social responsibility measures, in-house generated measures, parent company
generated and globally outsourced measures equally play a pivotal role in helping
deal with the effects of the challenges. Trade organization /affiliates, Non­
governmental /lobby groups and other Kenya Government ministry /agency were
providing the least assistance to overcome the challenges. A study on the factors
that promote effective growth of foreign direct investment in apparel manufacturing
industry in Kenya, a comparative study on challenges that affect locally owned and
foreign direct investment in apparel manufacturing industry in Kenya and a study
on the service levels, the strengths and effectiveness of the Export processing zones
authority is recommended. The Government by strengthening the EPZ Authority,
ministries and affiliates should facilitate more interaction with the foreign direct
investors to overcome the challenges. The investors on their part should form lobby
group to enable them to market their product more easily.
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TABLE OF CONTENTS
Declaration........................................................................................................................ ii
Acknowledgement................................................................................................................. iii
Dedication.............................................................................................................................. iv
Abstract ......................................................................................................................... v
List of Tables.......................................................................... .......................................... ix
List of Figures..................................................................................................................... x
Abbreviations and acronyms................................................................................................ xi
CHAPTER ONE: INTRODUCTION.............................................................................. 1
1.1 Background of the study................................................................................................. 1
1.1.1 Foreign Direct Investment..................................................................................... 2
1.1.2 Export Processing Zones ......................................................................................... 4
1.1.3 Export Processing Zones in Kenya ............................................................................... 5
1.2 Apparel Industry in Kenya........................................................................................... 6
1.3 Research problem .................................................................................................. 7
1.4 Research of Objectives.............................................................................................. 9
1.5 Value of the study....................................................................................................... 9
CHAPTER TWO: LITERATURE REVIEW................................................................... 11
2.1 Introduction ............................................................................................................ 11
2.2 Foreign Direct Investment ......................................................................................... 11
2.3 Foreign Direct Investment Strategies ......................................................................... 12
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2.4 The Challenges of Foreign Direct Investment 14
2.5 Dealing with the Challenges of Foreign Direct Investment............................................ 15
CHAPTER THREE: RESEARCH METHODOLOGY................................................. 18
3.1 Introduction................................................................................................................ 18
3.2 Research Design.......................................................................................................... 18
3.3 Population of the Study ..................................................................................... 18
3.4 Data collection.......................................................................................................... 19
3.5 Data analysis and Reporting ....................................................................................... 20
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSIONS .............. 21
4.1 Introduction................................................................................................................ 21
4.2 Demographic Characteristics of the Respondents ..................................................... 21
4.2.1 Respondent Firms....................................................................................................... 21
4.2.2 Year of registration ............................................................................................... 21
4.2.3 Firm ownership...................................................................................................... 22
4.2.4 Firm's country of origin...........................................................:................................. 23
4.2.5 Firm's investments................................................................................................... 24
4.2.6 Respondent officers.................................................................................................. 26
4.3 Challenges of FDI faced by Firms in the apparel Manufacturing industry in the
Kenya Export processing zones................................................................................ 27
4.3.1 Fiscal Challenges.................................................................................................... 28
4.3.2 State and cost of infrastructure challenges .............................................................. 29
4.3.3 Custom regulation challenges.................................................................................. 30
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4.3.4 Market and product challenges ............................................................................. 31
4.3.5 Political, legal and social challenges.......................................................................... 32
4.3.6 Human resource challenges .................................................................................... 33
4.3.7 Land related challenges ................................................................................... 35
4.4 Measures adopted in dealing with the challenges......................................................... 35
4.5 Discussions of the findings............................................................................................ 37
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RE MM END ATI ON S.......... 39
5.1 Introduction ........................................................................................................... 39
5.2 Summary of findings.................................................................................................. 39
5.3 Conclusions of the study............................................................................................ 41
5.4 Limitations of the study......................................................................................... 42
5.5 Recommendations for further research.................................................................... 42
5.6 Recommendation for policy and practice ................................................................ 43
REFERENCE ................................................................................................................ 44
APPENDICES................................................................................................................... 50
Appendix I: Questionnaire.................................................................................................. 50
Appendix II: List of apparel manufacturing firms in the EPZ in Kenya................................. 54
Appendix III: list of respondent firms................................................................................... 55
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LIST OF TABLES
Table 4.1: Year of registration..................................................................................... 21
Table 4.2 : Firm ownership............................................................................................. 22
Table 4.3 : Finn's country of origin.................................................................................. 23
Table 4.4: Number of employees.................................................................................. 24
Table 4.5: Capital investment......................................................................................... 24
Table 4.6: Estimated annual turnover.............................................................................. 25
Table 4.7: Length of service.......................................................................................... 27
Table 4.8: Fiscal policy challenges................................................................................. 28
Table 4.9 : State and cost of infrastructure challenges....................................................... 29
Table 4.10: Customs regulation challenges......................................................................... 30
Table 4.11: Market and product challenges........................................................................... 31
Table 4.12: Political,legal and social challenges.................................................................... 32
Table 4.13 : Human resource related challenges................................................................... 34
Table 4.14: Land related challenges..................................................................................... 35
Table 4.15: Measures adopted.............................................................................................. 35
Table 4.16: Challenges......................................................................................................... 37
IX
LIST OF FIGURES
Figure 1 : Ownership.................................................................................................. 22
Figure 2 : Country of origin.............................................................................................. 23
Figure 3 : Total capital by December,2011.......................................................... 25
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