KENYATTA UNIVERSITY

SCHOOL OF ECONOMICS

UNIT TITLE: ECONOMICS OF GLOBAL BUSINESS

UNIT CODE: EAE 200

DATE : MARCH 2017

GROUP MEMBERS

NAME REGISTRATION NO. SIGNATURE

MARY NJUGUNA K24/1627/2015
PURITY WERU K24/1628/2015
EMMANUEL INNOCENT K24/1670/2015
PETER MUTHUI K24/1470/2015
REZZINE KEDOGO K24/1651/2015
CARMELIUS NORIEGA K24/5531/2015

CLEARLY DISTINGUISH BETWEEN THE IMPACT AND EFFECTS OF

GLOBALISATION SHOW THE RELEVANCE IN CONTEXT OF KENYA

(i)Impact of globalization on consumers

Consumers have cheaper goods and there is more choice this opportunity has improved the

welfare position of many consumers in Kenya. For example cheaper clothes which has enabled

many Kenyans to afford clothing (‘mitumba’).

Globalization increases information asymmetry to the disadvantage of many consumers. For

instance some goods or products in Kenya have little information on where they are produced,

how they are produced and the working conditions under which they are produced, a good

example the cosmetic products where the people using them have little information about them.

(ii)Impact of globalization on companies

It has led to the widening of markets thus more profiting for companies such as bidco which

supplies its products to different nations such as Uganda.

Globalization has facilitated mobility of capital and investments. This enables easier relocation

of companies in a more favorable investment environment. A good example is the recent

launching of a Volkswagen car assembly in Kenya.

Globalization has led to increased completion and hence unhealthy competition where there is

production of low quality and quantity products due to local companies competing with imported

products to attract consumers. For example in Kenya local sugar competes with cheap sugar

imported from Brazil and for local sugar companies to compete they lower their sugar prices

instead of production costs hence leading to a loss due to this unhealthy competition.

Impact of globalization on workers

Faces competition in its various strong sectors such as coffee and tea and hence to be competitive

it makes sure its products are of high quality.

Globalization promotes social ties a good example is the good ties Kenya has with china.

Globalization leads to easy movement of products across borders where trade, services,

investment, financial capital, technology and labor freely move. For example Peugeot starting its

car assembly in Kenya.

Globalization has led to loss of jobs, others job security. The lowly skilled have registered

deterioration in their earning and social hardships. A good example is in road construction,

tenders being given to foreign workers leaving local workers without jobs.

It has also encouraged violation of core labor standards such as fair remuneration, freedom of

association and rights to collective bargaining.

Due to globalization workers have borne the full brunt of globalization as first targets of cost

cutting and retrenchments.

Impact of globalization on government

It has led to governments in poor countries desperate for investments willing to allow child labor,

growth of informal sector and some creating export processing zones with weaker labor laws and

ignoring discrimination of workers such as women in order to attract investments.

Effects of globalization

Globalization has led to faster spread of technology, a good example is in Kenya where smart

phones are widespread yet we don’t produce them.

Globalization generates opportunities for trade. Local producers of tea, coffee and flowers in

Kenya export their products to UK and other nations, all of this made possible by globalization.

Globalization makes countries especially developing countries benefit from FDI (foreign direct

investment).Kenya’s top investors are drawn from US of America, United Kingdom, Mauritius,

Israel, Japan, Netherlands, Belgium, China and South Africa. Kenya has seen a rise in its number

of projects with one of its largest projects being the standard gauge railway.

Globalization promotes competition which reduces costs and encourages innovation. Kenya

METHODS IN WHICH ACHINESE COMPANY CAN USE TO PENETRATE AFRICAN

MARKET

1) DIRECT EXPORTING

This involves selling directly into the market the company has chosen ie the African market.

The Chinese firm is to establish a sales program and there has to be distributors to represent them

in that African market.

There is systematic reduction in production costs over the life of the product.Observations show

that a product’s production costs decline by some quality about each time cumulative output

doubles due to leaving effects and economies of scale

Advantages of Exporting
1 Exporting saves the firm a lot of cost incurred when other methods such as whole owned

subsidiary are used where the firm has to buy land and establish a new production firm in the

host country.

2 Direct exporting enables the firm to retain their intangible properties such as trademark and

patents.

3 Exporting leads to a firm experiencing economies of scale due to production of goods in bulk

to reduce the cost and hence have a competitive advantage.

4 Through direct exporting the firm is able to realize more sales because it reaches a larger

market to supplement the domestic market.

5 The firm is able to produce better goods to satisfy the tastes and preferences of the global

consumers.

Disadvantages of Exporting

1 It is very costly especially for the bulky goods and this makes a firm not realize any substantial

profits.

2 It takes a lot of time to learn about the foreign market and thus a lot of time that could be used

for expanding business is wasted.

3 Exporting may lead to loss of domestic market because the firm may major on the foreign

market and forget to cater for the needs of the domestic market.
 2) LICENSING

Licensing is where a firm transfers the rights to the use of a product or service to another firm.

There is a licensing agreement which is an arrangement where a license or grants the rights to the

intangible property such as invention, trademarks, formulas and copyright to another entity that

is the licensee for a specified period and in turn the licensor receives a royalty fee from the

licensee.

Advantages of Licensing

1 Through licensing the firm is able to possess other products that it couldn’t have otherwise

produced.

2 licensing makes a firm not to cater for developing costs and risks that comes along with having

a foreign market and this is particularly important for firms with no or little capital and would

like to start a business in a foreign market.

3 licensing is a good method of entry if the firm

Disadvantages of Licensing

1 The firm is not able to achieve the benefits that come with entering foreign market such as

location economies because it doesn’t have control over the manufacturing and marketing

strategies.

2 The firms giving out the license may lose control of the technology.

3. Using licensing a firm may not be able to help out its operations in another country due to the

limitations of the licensor and thus may lose a potential market.

 3) FRANCHISING

This is atypical North American way for rapid market expansion and works well for firms that

have a repeatable business model eg food outlets that can be easily transferred into other

markets.

Franchising is a specialized form of licensing in which the franchiser not only sells intangible

property to the franchisee but it also insists that the franchisee must agree to abide by the strict

rules as to how it does business.

Two qualifications are required when considering the franchise model;

i) The business should either be very unique or have a strong brand recognition that can

be utilized internationally.

ii) You may be creating your future competition in your francisee.

Franchising involve longer term commitments rather than licensing and often used by service

firms.

The franchisee must agree to abide by the strict rules as to how it does business.

Advantages of Franchising

1 The use of franchising allows for geographical expansion because the firm is able to seize a

market as the first and thus gives the firm a competitive advantage.

2 This method eliminates the probability of business failure in the new market by using the

cultural knowledge and the information of the local managers.

3 Through franchising the firm is able to maintain its standardization of goods which is the

production of similar products for all markets that enables the firm have a brand.

Disadvantages of Franchising

1 Franchisers may find it difficult to manage a large number of franchisees in a variety of foreign

markets.

2 Franchisees can experience a loss of organizational flexibility in franchising agreements.

4) JOINT VENTURES

These are a particular form of partnership that involves the creation of a third independently

managed company.

Two companies agree to work together in a particular market, either geographic or product, and

create a third company to undertake this.

Risks and profits are usually shared equally

Advantages of Joint Ventures

1 The foreign firm is able to achieve a competitive platform because of the knowledge of the

host in terms of its culture and business formations.

2 The firm is able to evade the risk of nationalization because of the host local partners may have

influence on the local government.

3 There cost and risk experienced in entering a new market is reduced because it’s shared with

the local partner.

Disadvantages of Joint Ventures

1 When one of the partners is a free rider there would be a substantial negativity on the

productivity of the newly formed firm.

2 The process of decision making is very slow and thus the firm may not be able to seize an

economic opportunity.

3 Poor decisions from one of the partners bring a negative impact on both parties.

5) TURNKEY PROJECTS

This is where the facility is built from the ground up and turned over to the client ready to go.

The contractor agrees to handle every detail of the project of a foreign client including the

training and operating personnel.

At completion of the contract the foreign client is handed the ‘key’ to a plant that is ready for full

operation hence the term turnkey

Turnkey projects are particular to companies that provide services e.g. engineering and

architecture.

The client is normally a government and often the project is financed by an international

financial agency e.g. World Bank so the risk of not being paid is eliminated.

Advantages of Turnkey projects

1 it is less risky compared to other conventional FDI because in politically unstable countries it

would experience some economics risks such as nationalization.

2 the firm will achieve greater economic returns from the asset received from the turnkey project.

3 the knowledge of running and assembling technological complex is a very valuable asset on its

own.

Disadvantages of Turnkey projects

1 the firm may lose a competitive advantage by selling their technology through turnkey to their

potential competitors.

2 by selling projects through turnkey the firm creates their own competitors because its sells all

the knowledge of producing the product.

3 the firm that enters into the turnkey projects do not have a long term interest in the foreign

market and this a disadvantage if the country becomes a major for the process sold.

6) WHOLLY OWNED SUBSIDIARY

This is whereby the firm’s own 100% of the stock.

To establish a wholly owned subsidiary in a foreign market there are two ways involved;

i) The firm can set up a new operation in that country often known as Greenfield

venture.

This is whereby you buy the land, build the facility and operate the business on an

ongoing basis in a foreign market.

 It is mostly costly and holds the highest risk but some markets may require you to

undertake the cost and risk due to government regulations, transportation costs and

the ability to access technology or skilled labor.

ii) It can acquire/buy an established firm in that host nation and use that firm to promote

its products.

This is the most appropriate entry strategy in some markets because the company has

substantial market share since the foreign firm has the status of a local company.

Advantages of wholly owned subsidiary

1The firm is able to receive all the profit shares gained in establishing a firm in the foreign

market.

2 The firm is able to establish tight controls of how business should run in different countries and

this provides the firm with strategies of effective competition.

3 the firm is able to achieve location and experience economies and this gives it a competitive

advantage.

4 it is the most preferred mode of entry for high-tech firms because it reduces the risk of losing

control over the technological competence.

Disadvantages of wholly owned subsidiary

1 It is very costly to establish and develop a new firm in a foreign market and sometimes the

problems are too many compared to the benefits.

7) PARTNERSHIP
This is whereby a firm is associated with another firm in the foreign market in a common fiekd

of offering services or product creation.

Partnering can take a variety if forms from a simple co-marketing arrangement to a sophisticated

strategic alliance for manufacturing.

Partnering is a useful strategy those markets where the culture, both business and social,is very

different from your own.

8) PIGGYBACKING

This is whereby if you have a particularly interesting and unique product or service that you sell

to large domestic firms that are currently involved in foreign market.

This method reduces risk and costs because one is essentially selling domestically and the larger

firm is marketing your product or service for you internationally.