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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 Wangombe 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
consumers 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 1990s,
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 1960s, 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.
Ngongola (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 NTBs 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 Kenyas
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 partners
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
1950s, 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. Todays 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 (RTAs) 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 RTAs 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 Kenyas 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 partners 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 worlds 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
managers
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 Shippers 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 firms
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 NTBs 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 points 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