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The rise of East African multinationals

Friday October 14 2016
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Companies seeking to expand regionally have to confront several issues on foreign terrain in order to establish a strong presence and profitable subsidiaries. FOTOSEARCH

Bank M is the first Tanzanian bank to enter the Kenyan market, after it acquired a controlling stake in Oriental Commercial Bank.

“We have a strategy to penetrate the Kenyan market in line with our regional expansion strategy. The stereotype that Kenya is capitalist and Tanzania socialist will not stand in our way,” chief executive of Tanzania’s M Holdings Group Sanjeev Kumar said at the launch in June.

Companies seeking to expand regionally have to confront several issues on foreign terrain in order to establish a strong presence and profitable subsidiaries.

Since the revival of the East Africa Community in 1999, there has been an emergence of homegrown multinationals — in financial services, manufacturing, retail, transport and ICT — that have expanded beyond their countries of operation.

“The pressure to sustain growth is prompting companies to diversify into the region in search of a bigger market,” said Kwame Owino, CEO of the Institute of Economic Affairs.

He said the decision to start cross-border operations followed the revival of the EAC and the resultant significant transformation of the region across the political and socio-economic sphere.

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Some notable East African multinationals are KCB, Equity Bank, CRDB Bank Plc, Bidco Oil Refineries, Brookside Dairy, Athi River Mining, Nakumatt Holdings, Nation Media Group and Britam Holdings.

Such companies sometimes struggle to sustain operations of the new subsidiaries. For example, Equity Bank’s subsidiary in Rwanda posted losses for three consecutive years before starting to return profits in the fourth year.

Gladys Makumi, a partner at Deloitte East Africa, said that over the years, the EAC has opened up for business owing to its positive economic growth, formation of a Common Market, peace and security, Internet connectivity and a competent labour market.

“Increased integration has seen laws governing regional expansion become conducive and encouraging for businesses aiming to expand regionally,” she said.

East Africa is one of the world’s fastest growing regions, with a GDP growth of 5.4 per cent last year against a global growth rate of 2.5 per cent, according to the World Bank.

With a population of 140 million, which would rise significantly when South Sudan officially joins the bloc and Ethiopia is connected through the proposed Lamu port corridor, the region offers vast opportunities for expansion.

“The EAC is an addressable market. When you add Ethiopia and the Democratic Republic of Congo you get a meaningful market. Companies operating at a regional level are seeking to position themselves to address this market and carve out an early position,” said Aly-Khan Satchu, the CEO of investment advisory firm Rich Management Ltd.

In addition to the Common Market and Customs Union, other reforms have been implemented to create a conducive business environment. These include the establishment of the real time gross settlement system (RTGSS) that has increased the flow of capital, electronic cargo tracking systems, completion of one-stop border posts, and the single visa. Efforts are also underway to ensure that the region adopts a single currency by 2024.  

While the improved business environment has given homegrown multinationals reasons to invest in cross-border operations, there have been some challenges.

According to Ms Makumi, in order to initiate a worthwhile venture in each new country, a company must consider the cost and time to establish the foreign subsidiary, compliance risk for the payroll, taxation and immigration rules, establishing secure office premises, employee residences and bank accounts, and evaluating the growth potential against the required investment.

To encourage more companies to set up operations regionally, there is a need to strengthen the regional trade integration, governance and the political environment, specifically in the enforcement of contracts, property rights, tax administration and business ethics.

“Streamlining tax administration across the region will be a big plus for foreign companies,” she said.

Issues relating to fiscal reforms remain a major challenge because it usually takes a long to obtain tax refunds.

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