The Emergence of Multinational Corporations in Kenya. A Discussion of the Internalization Theory
Chandaria Enterprises and Kenya Commercial Bank
Essay 2011 12 Pages
TABLE OF CONTENTS
KENYA COMMERCIAL BANK
Many theories have been advanced in explaining the origin, development and motivation of multinational corporations’ investments globally. Multinational corporations (MNCs) are motivated by factors either internal to the investment or external to the location. The determinant of expansion of these firms may mean there is need to produce and sell goods and/or services in a number of countries. This is either through exports or through direct investment in these countries. But first of all, what is a multinational corporation? A multinational company or business has offices, shops or factories in several countries1. Multinational corporations are business corporations based in one particular country as the mother country with subsidiaries in other countries. They may also be defined in the context of the expertise and the origin of staff. They qualify as so if the extent of their staff establishment reflects a global representation both locally and internationally in their subsidiaries. This paper seeks to discuss the Internalization Theory in explaining the emergence of multinational corporations in a developing country-in our case, Kenya. Based on her experience, we shall discuss the import of the Internalization Theory in understanding the emergence of at least 2 multinational corporations.
The Internalization Theory is traceable by McManus, Buckley and Cusson to the Theory of the Firm which explains the growth of firms due to the attempt to economize and cut the cost of market transactions. The Firm assumes a market imperfection which generates costs and uncertainties which can be effectively avoided by internalizing transactions hence international production and consequently Multinational Corporations (MNCs). To do this, the Firm must maintain and keep results of innovation within itself while expanding the range of products and markets as well as production locations. The basic principle is reduction of production, distribution and transaction costs.
This theory views MNCs as surviving on secrecy of innovation, dynamism of products often times focusing on aspects leading to quick market response, for example, marketing and product presentation. According to John Dunning, MNCs often create an environment in which the need for their products is constantly rising, when it reaches limits; the product is recreated or exported into new markets. These exports inevitably create demand for production in these new markets.
Buckley and Cusson demonstrate that the MNC organizes bundles of activities internally such that it is able to develop and exploit firm-specific advantages in knowledge and other types of intermediate products. Internalization theory allows assessing the relative efficiency and effectiveness of alternative governance mechanisms to manage economic interdependencies2.
There is common presumption in the literature on international firms that such firms will have significantly different patterns of economic behavior from local firms. But as we shall see from our study of some multinational firms in Kenya, this is not always the case. Though international firms tend to expatriate a greater proportion of their profits, they have lower backward and forward linkages, more restricted diversification locally, a tendency to capital-intensive techniques and so on.
On capital intensive techniques, a recent study of Kenya found that subsidiaries on multinationals were in fact more labour intensive than national firms in the same sector. Multinationals also tended to be active in capital-intensive sectors3.
According to Chinitz, local firms tend to diversify more in the same area than would large firms with a wider geographical spread. This we shall see with emerging multinationals from Kenya. Chinitz argues,The surplus capital which accrues inside multiplant companies… is more mobile within the company than intra-regionally outside the company. A large corporation is more likely to respond to investment opportunities in its traditional activity at other locations than to new investment at home in unrelated industry4.
Before looking at the import of the internalization theory in the emergence on MNCs in Kenya as our developing country, it is important for us to highlight some characteristics of developing countries. First, most are ex-colonies. Colonialism has played a major role in the foundation of their political, economic and social systems. They continue to operate through highly centralized political systems purely for control and exploitation, poorly diversified economies and majorly on few cash-crops.
Moreover, developing countries rely heavily on agriculture as a major source of revenue. 70% -75% of the population eke their living from agriculture. In addition, they have low levels on industrialization basically because colonialism greatly neglected manufacturing. They were to produce raw materials for industries in Europe.
Developing countries also depend on large volumes of imports ranging from consumables, entertainment to machinery. The notion of these imports is such that they distort the economies of many developing countries given their mass production. Moreover, these countries continue to have very high population growth levels far surpassing their economic growth. Therefore, scarce resources are diverted to expand services to take care of the increase in population.
Countries that constitute the developing countries are quite diverse, tend to appear similar but are not strictly identical, although they face challenges in the process of development. Here is where MNCs come in. in this paper; we shall focus on the emergence of the Chandaria Group of industries and the Kenya Commercial Bank as Kenyan MNCs.
The Chandaria Group is a family firm of Kenyan Asians who expanded their business first in Kenya and then abroad. P.P. Chandaria, the grandfather, moved to Kenya from India in 1914 and started business as a hawker. Between 1917 and 1940 business developed from hawking to retailing then to wholesaling in the 1930s. In the late 1920s, the family invested in elementary processing in tanning and wattle in Thika and in a small aluminium factory in Mombasa called Kenya Aluminium in 1929. Between 1940 and 1948, the Chandarias independently started a dhow passenger service between Jamnagar in India and Mombasa5. So far, we can see the Chandaria business had not diversified internationally in trade and distribution.
However, this was to change in the 1948-1958 decade when the Chandarias made an explicit decision to move their financial and managerial resources in Kenya into manufacturing. In 1948, they set up Pure Food Products to make pasta for the Italian prisoners-of-war following the 2nd World War. The family soon after sold Pure Food Products in order to concentrate on Kenya Aluminium through which a whole range of aluminium products from household utensils, wire products to hurricane lamps were made6.
Between 1958 and 1970 is when the family diversified and expanded in Africa. This was after the take-over of East Africa Match Co. in which an integrated steel plant did all operations from furnaces to rolling and finishing and into the production of matches. This business shows diversification in production.
Between 1959 and 1961, the Chandarias set up a modern aluminium rolling mill in Tanzania and also set up, an integrated process for galvanized roofing in Tanzania. Together with M.K. Shah, whose Kenyan firm East Africa Stationery, which was supported by the Chandarias, the family established Paper Products Ltd. In Tanzania in 1962 to produce exercise books for the post-independence educational market7.
In 1966, the Chandarias diversified into Europe. Operations in Africa were expanding through their own earnings ensuring a surplus left over. From 1967, fifteen manufacturing plants were established, eight ion Britain, two in France, others in Belgium, Holland, Italy, Spain and Switzerland. Usually, existing firms were taken over, and the range of goods manufactured was in the area the Chandarias were familiar-metals, building products and later plastics.
Between 1974 and 1975, eight plants were established in different Asian countries in the group’s traditional lines of manufacturing. The Chandarias have plants in at least 22 countries with Africa accounting for 50% of total assets. About 200 engineers work in African plants and a further 10 to 12 new projects were planned for Africa between 1975 and 19788.
Using the Internalization Theory, we can argue and say that the family integrated backwards from hawking to retailing to semi-wholesaling and finally wholesaling, with profits accumulated locally. The shift in 1948 into manufacturing shows a pattern of reinvestment of profits. Though technology was imported, together with foreign technicians for the initial period, family members were trained so that they could successfully apply this technology.
Expanding abroad, the Chandarias relied on technical knowledge they had developed largely in Kenya during the 1950s giving them material advantage which made them less vulnerable to contingencies that had marked the Indian venture9.
The Chandarias are similar to other multinationals in their financing and organizational structure as they expanded. Their concern in Kenya and elsewhere was travelling light so that they can leave with minimum losses when an expatriation order arrives. They also expanded through acquisition of ailing firms, offering creditors a return from the restructured company and contributing their managerial and technical abilities in return for equity. They have also funded fixed assets out of loans and current liabilities.
The general minimization of risk capital by joint ventures, takeover of devalued firms, and operation with funds borrowed from local market, form suppliers or accounts abroad –are all features of the financial behavior of multinational manufacturing companies in under-developed countries of which Kenya is our case study.
The Chandarias have continued to diversify in Kenya whenever the economic climate was suitable. In spite of their local knowledge of Kenya, and its conditions, their capital, like that of the multinationals, has tended to flow out. The Chandarias have not had to yield their high local profits to foreign technology suppliers, but have instead used them for their own chosen path of diversification, restricting themselves primarily to metals and construction materials10.
KENYA COMMERCIAL BANK
The Kenya Commercial Bank (KCB) qualifies as an emerging MNC offering banking services in different East African countries. As we shall see, KCB began operations in Kenya before expanding beyond Kenya’s borders. It is important for us to first of all trace its historical origins up to its operations to date.
The history of KCB dates back to 1896 when the National Bank of India opened an outlet in Mombasa11. It was a British bank based in London and operating in India with the aim of financing external trade. The National Bank of India was established to serve the interests of the colonial government and finance its firms and agricultural industry for the export of primary goods and the import of her finished products12.
In 1904, the bank extended operations to Nairobi which had become the headquarters of the expanding railway line in Uganda. In 1958, Grindlays Bank merged with the National Bank of India to form the National and Grindlays Bank13. This was the first step towards increasing internal capacity that would later be used for cross-border expansion.
As the local economy developed, the bank started to widen its functions from not only financing the external trade but also the more general functions of deposits banking. The bank started to collect deposits locally in excess of what could be used in Kenya. Form this; capital was exported from Kenya to Britain. This went on until Kenya gained her independence in 196314.
Upon independence, the Government of Kenya acquired 60% shareholding in National and Grindlays Bank in an effort to bring banking closer to majority of Kenyans. In 1970, the Government went further and acquired 100% of shares to take full control of the largest commercial bank in Kenya. The National and Grindlays Bank was later renamed the Kenya Commercial Bank (KCB).
From its internal resources, KCB began product diversification. In 1972 foe example, KCB acquired Savings and Loan (K) Ltd. This acquisition specialized in mortgage finance15. This coincided with the favorable climate for investment being fostered by the Kenya government in the 1960s and early 1970s. The bank continued to expand its operations locally until the 1990s when expansion across borders began.
In 1997, Kenya Commercial Bank (Tanzania) Limited was incorporated in Dar-es-Salaam, Tanzania to provide banking services and promote cross-border trading. Since then, the subsidiary has 11 branches16. Notice the fact that the bank did not change its name. It remained KCB-Tanzania Limited. This marks the development of KCB as a brand name. Its expansion in Tanzania is as a result of internalization and pooling of resources for subsequent expansion.
In May 2006, KCB went further and expanded its operations to Southern Sudan to provide conventional banking services. This subsidiary has 11 branches. It is important for us to note that the launching of operations in South Sudan in 2006 followed the signing of the Comprehensive Peace Agreement between the Sudanese Government and the Sudan People’s Liberation Army (SPLA) rebels of the south. This ushered in an era of relative peace conducive for business in a virgin market.
In November 2007, KCB Bank Uganda was opened. The subsidiary has 13 branches today. In December 2008, KCB Rwanda began operations. There are now 9 branches spread out in Rwanda17. This expansion in East Africa followed the bank’s rights issue offer in 2008 which raised capital locally for the expansion in addition to reducing government shareholding in the bank. The bank did another rights issue offer in 2010 to raise Kshs. 15 Billion for expansion of banking services. The end result of this was reduced government shareholding to 17.5% today.
In 2010, Savings and Loan Ltd. (S & L) was merged with KCB in order to provide access to mortgage finance through the bank’s wide branch network. This is a case of internalization in which the bank seeks to keep results of its innovations within itself while expanding the range of products and markets as well as increase production location through its branch network.
Indeed, KCB’s vision is: To be the preferred financial solutions provider in Africa with a global reach by 2013. It is not lost on us that financial solutions are beyond conventional banking. Its desire to spread operations in Africa also demonstrates multinational tendencies.
The internalization theory allows assessing of the relative efficiency and effectiveness of alternative governance mechanisms to manage economic interdependencies. Buckley and Cusson demonstrate that the MNC organizes bundles of activities internally such that it is able to develop and exploit firm-specific advantages (FSAs) in knowledge and other types of intermediate products.
We have seen this to be the case with both the Chandarias and KCB. Both have organized their activities to what they do best coupled with diversification into other products. The Chandarias focus on manufacturing building materials and KCBs provision of banking services across borders is an example of internalization.
In fact, the main reason why the largest industrial groups in Kenya owned by Asians such as the Chandarias have expanded through concentration, not the formation of new enterprises18. KCB on the other hand, has raised capital internally to finance its regional expansion.
However, it seems the state sometimes helps structure the economy in favour of subsidiaries and against local enterprise; but the state sometimes helps local enterprise against foreign MNCs. The modern Kenyan state has sophisticated economic instruments such as differential taxes, widespread shareholding etc., the MNCs both local and foreign seem to rely, to a degree, on manipulation of these for their surplus appropriation within Kenya19. The Chandarias, for example have registered businesses in Jersey which is considered a tax haven.
The secrecy of innovation, dynamism of products, and focus on quick market response by both the Chandaria Group and KCB explain their expansion beyond Kenya. This as we have seen, shows the direct import of the internalization theory in explaining these emergent multinationals in Kenya, a developing country.
Kaplinsky, Raphael (ed); Readings on the Multinational Corporation in Kenya, Oxford University Press, Nairobi, Kenya, 1978.
Kenya Literature Bureau, History and Government, Book 3, Kenya Institute of Education, 1994.
Langdon, Steven, Review of African Political Economy, Vol. 8, 1977.
Macmillan, Macmillan English Dictionary for Advanced Learners, 2nd edition, Macmillan Publishers.
Rugman, M. Alan, Verbeke Alain; Internalization Theory and its Impact on the Field of International Business, 2007.
Swainson, Nicola ; The Development of Corporate Capitalism in Kenya, 1918-1977, Heinemann Educational Books Ltd., Nairobi, 1980.
1 Macmillan English Dictionary for Advanced Learners, 2nd Edition.
2 Alain M.Rugman and Alain Verbeke; Internalization Theory and Its Impact on the Field of International Business, 2007 , pp.1-5.
3 Robin Murray in Readings on the Multinational Corporation in Kenya edited by Raphael Kaplinsky, 1978, p. 285.
4 Ibid., p. 286
5 Ibid, p. 288.
6 Ibid., p. 291
7 Ibid., p. 293
8 Ibid., p.296
9 Ibid., p.298
10 Ibid., p. 304
12 Kenya Literature Bureau, History and Government , Book 3, 1994, p. 101
13 Op. Cit,
14 Kenya Literature Bureau, History and Government , Book 3, 1994, p. 101
18 Nicola Swainson; The Development of Corporate Capitalism in Kenya , 1918-1977, 1980, p. 202.
19 Steven Langdon, Debate in Review of African Political Economy , vol.8, 1977, p. 95.
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