FACTORS INFLUENCING INTERNATIONALIZATION OF METAL MANUFACTURING FIRMS IN KENYA, MOMBASA COUNTY

Transcription

1 FACTORS INFLUENCING INTERNATIONALIZATION OF METAL MANUFACTURING FIRMS IN KENYA, MOMBASA COUNTY Anthony Odhiambo Odoyo 1 Eric Mathuva 2 1 Department of Business Administration, School of Business, Kenya Methodist University, Kenya 2 Senior Lecturer, School of Business, Kenya Methodist University, Kenya ABSTRACT Internationalization is one of the key concepts of today's international business trade in recent years especially as most global firms seek to enter developing markets due to saturation in home markets. When going abroad firms usually try to implement their modern business culture to the developing countries. In this context, this research study sought to determine the factors influencing internationalization of metal manufacturing firms in Kenya, Mombasa County. The specific objectives were: To establish the influence of transaction cost on the internationalization of manufacturing firms in Kenya, Mombasa County, to analyze the influence of institutional environment on the internationalization of manufacturing firms in Kenya, Mombasa County and to examine the influence of resource availability on the internationalization of manufacturing firms in Kenya, Mombasa County. The study was firmly founded on three theories; Transaction Cost Analysis Theory, Resource-based Theory and institutional. The study adopted a survey research design, where the 15 manufacturing firms were targeted for the study. The study was carried out using both open and closed ended questionnaires which were given to (45) forty five managers. After collection of data, they were analyzed and conclusions drawn. Descriptive and inferential statistics were used whereby the information were presented into charts, tables and graphs. The study results indicated that Transaction cost, Institutional environment and Resource availability influence internationalization of manufacturing firms in Kenya, Mombasa County and therefore the study concluded that factors influencing internationalization of manufacturing firms in Kenya, Mombasa County include Transaction cost, Institutional environment and Resource availability. This study found transaction cost as one of the variables influencing internationalization and recommended that relevant transaction cost aspects such as Implementation cost, information less trade, market timing cost, opportunity cost and market impact should be reviewed time to time so as to enhance rapid expansion of companies, manufacturing being one of them. This will ensure faster growth of the economy. The study further established that internationalization of firms in Kenya relates to Institutional environment recommended greater improvement in institutional environment and more so on the aspects such as Market size, Number of export intermediaries, Direct/indirect trade barriers, County risk and Market growth. This will ensure faster market growth of manufacturing firms in Kenya, Mombasa County. 23

2 1. Introduction According to Andersen (1997), internationalization is a process in which specific attitudes or orientations are associated with successive stages in the evolution of international operations. There are a number of reasons for internationalization, on the global perspective for example, Indian firms are getting increasingly internationalized. The major drivers behind this trend are increase in liquidity in the economy given favorable macroeconomic policies, low-cost labor, efforts towards moving up the value chain, leveraging insights gained from servicing customers in the domestic economy, and strong economic growth during the years which improved balance sheets of the Indian firms making it possible for them to raise capital. Indian exports grew at 14.14% CAGR between the years to from US$ million to US $ million (See Figure 1). Top five export destinations being: United Arab Emirates, USA, Singapore, China and Hong Kong comprising around 37% of India s exports. The main export items are petroleum (crude & products), gems & jewelry, transport -equipment, machinery and instruments, drugs, pharmaceuticals & fine chemicals. Manufacturing firms are seeking for business opportunities in foreign markets owing to the increased competition in the domestic market (Hill, 2007). Internationalization has become a common approach especially with the emergence of trading blocs like East Africa community for example, currently, 15 out of the 19 member (Eastern and Southern Africa bloc) states are participating in the FTA (COMESA, 2015). They include Burundi, Comoros, Djibouti, Egypt, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia and Zimbabwe. Motives behind internationalization are many and vary from a firm to a firm. Lommelen and Matthyssens (2005) identified both reactive and proactive motives in the case of internationalization of operations by service firms. Pertinent factors that influence internationalization include trade liberalization, government policy, incentives, marketing, tariff framework, non tariff barriers and emergence of regional blocks. Manufacturing firms play an increasingly significant role in Kenyan economy, and is expected to grow fast given the growth prospects and the various industrialization policies of the government. Kenyan firms have been internationalizing at an increasing rate in the last 25 years. These have included both large and small firms for example Kobil, Bidco, Kenya Breweries and Kenindia Insurance. Some born globals include horticultural firms, which are established primarily for export of produce to other countries. Textile manufactures located in export processing zones also fall in this category. Small-scale businesses like basket makers and stone covers have also internationalised. 2. Research Gap Motivations for Internationalization include economies of scale, increasing market share, gaining knowledge enhancements leading to stronger capabilities and innovation, exploiting entrepreneurial opportunities, profit motives, costs minimization, market diversification, new opportunities and saturated domestic market among others. Rutashboya and Jaensen (2004) have argued that the internationalization of manufacturing firms especially from a developing country s perspective has received little attention in academic enquiry. In the past decades studies of internationalization of the firms had generally concluded that export marketing is the most typical type of internationalization among the firms of developing economies, because it is less 24

3 risky and it requires less resource commitment. However, there is not enough evidence that justifies this assumption and more studies need to be done in order to develop theory by identifying factors that influence internationalization decisions specifically in firms from a developing country context. Like any other firms, Kenyan firms have been internationalizing at an increasing rate in the last 20 years, (Waudo, 2005). These have included both large and small firms for example Kenol/Kobil, Bidco, Kenya Breweries and Kenindia Insurance. Some born globals include horticultural firms, which are established primarily for export of produce to other countries. Textile manufactures located in export processing zones also fall in this category. Small-scale businesses like basket makers and stone covers have also internationalized. Despite many firms going international little is known about the Kenyan metal manufacturing firm s internationalization and even less on the factors that influence their internationalization. 2.1: General Objective of the study This research study was set to determine the factors influencing internationalization of metal manufacturing firms in Kenya, Mombasa County : Specific Objectives of the study 1. To establish the influence of transaction cost on the internationalization of metal manufacturing firms in Kenya, Mombasa County; 2. To analyze the influence of institutional environment on the internationalization of metal manufacturing firms in Kenya, Mombasa County; 3. To examine the influence of resource availability on the internationalization of metal manufacturing firms in Kenya, Mombasa County. 3. Methodology A survey research design was adopted so as examine the factors influencing internationalization of manufacturing firms in Kenya, Mombasa County. The information was gathered on a target population. The target population targeted all the fifteen (15) metal manufacturing firms in Mombasa County. The respondents were three (3) the general manager, the strategic manager and operation manager from each firm. A total of 45 managers of these firms formed the respondents of the study. A technique of census was adopted where all the 45 respondents were picked for the study. This was because the respondents number was small and manageable within the constraints of the study. Data were collected through the use of questionnaires. The open and closed-ended questions were used to limit the respondents answers on the subject matter. The questionnaires were self-administered to the selected managers. On receipt of all the data, they were edited. Coding of the data and classification was done so as to reduce raw data into suitable groups and to get meaningful relationships. Descriptive and inferential statistics were used to present findings into frequencies and percentages. Charts, tables and graphs were used to make the analysis more meaningful. 25

4 4. Study Results 4.1: Response rate The study targeted 45 Metal manufacturing companies Managers operating in Mombasa County with regard to the influence. According to Mugenda and Mugenda (2003) a 60% response rate is good and viable for generalization of the findings on the whole population. From the study, 38 out of 45 sampled respondents filled in and returned the questionnaire making a response rate of 84.44%. This response rate was made a reality through the tactful approach and personality displayed by the researcher while collecting data from the said managers. Table 1: Response rate of the respondents Items Frequency Percentage (%) Responded Did not respond Total % 15.56% Source: Researcher, (2017) 4.2: Reliability Test A pilot study was carried out to determine reliability of the questionnaires. The pilot study involved 6 respondents from the target population. Reliability analysis was subsequently done using Cronbach s Alpha which measures the internal consistency by establishing if certain items within a scale measure the same construct. Table 2: Reliability Analysis Statements Cronbach's Alpha Number of Items Transaction cost Institutional environment Resources Source: Research data, (2017) Cronbach Alpha was established for every variable which formed a scale. Table 2 shows that Transaction cost had the reliability (α=0.882), Institutional environment (α=0.791) while Resources had a value (α=0.729). The reliability of the instrument was established through pre-testing of questionnaires at four (6) Metal manufacturing firms outside Mombasa County. Internal consistency method was used. The most popular internal consistency reliability estimate should be given by Cranach s alpha reliability coefficient of 0.70 or higher was considered acceptable in most social science research situations. 26

5 4.3: Factors influencing internationalization 4.3.1: Transaction cost Table 3: Transaction cost and Internationalization Transaction cost Observation Mean Std. Deviation Implementation cost Informationless trade Market timing cost Opportunity cost 38 Market impact Source: Researcher (2017) The study inquired on the level of agreement and disagreement as to whether aspects of transaction cost including implementation cost, informationless trade, market timing cost, opportunity cost and Market impact influence the internationalization of manufacturing firms in Kenya, Mombasa County. And according to the results shown in table 3, these aspects had mean scores and standard deviations of (mean 4.08,std. Dev.1.213), (mean 3.87, std. Dev ), ( mean 4.12, std. Dev ), ( mean 3.71, std. Dev ) and ( mean 3.67, std dev.1.106) respectively as shown in table 4.2, implying that management should enhance controls on transaction cost by making cost/benefit analysis as was noted by Anderson & Gatignon, (1986). Anderson & Gatignon (1986) was the first who made proposition regarding entry mode of a foreign market. They also put forward that entry modes differ greatly in their advantages and drawbacks and that these are poorly understood. Several researches have been made on how firms really make their entry mode decision and it shows that few companies make a cost/benefit analysis. This result shows that all aspects above are above mean though Market timing cost is considered the most important aspect in determining the factors influencing internationalization of metal manufacturing firms in Kenya. 27

6 4.3.2: Institutional environment Table 4 institutional environment and Internationalization Institutional environment Observation Mean Std. Deviation Market size Number of export intermediaries Direct/indirect trade barriers County risk Market growth Source: Researcher (2017) The study inquired on the level of agreement and disagreement as to whether aspects of Institutional environment such as Market size, Number of export intermediaries, Direct/indirect trade barriers, County risk and Market growth influences the internationalization of manufacturing firms in Kenya, Mombasa County. From the findings, the respondents felt that aspects of Institutional environment such as Market size, Number of export intermediaries, Direct/indirect trade barriers, County risk and Market growth enables firms to narrow the gap between local market and international market. According to Hitt, Ahlstrom, Dacin, Levitas and Svobodina (2004) institutional factors have great power in shaping economic activity and the strategic choices of firms. One such institutional factor, economic freedom is a widely utilized construct that reflects the freedom and protection that individuals have in acquiring property and engaging in voluntary transactions (Gwartney, Lawson, and Block, 1996). According to the results, the above aspects had mean scores of 3.83, 4.08, 3.58, 3.67, 3.67 and standard deviation of 1.090, 1.060, 1.316, and respectively as shown in table 4. Thus all the aspects influence the internationalization of manufacturing firms in Kenya, Mombasa County. 28

7 4.3.3: Resource availability Table 5: Resource availability and Internationalization Resource availability Observation Mean Std. Deviation Company size International experiences Product complexity and differentiation. 38 Technological resources 38 Financial resources Source: Researcher, (2017) The study inquired on the level of agreement and disagreement as to whether aspects of Resource availability influence the internationalization of manufacturing firms in Kenya, Mombasa County. From the findings, the respondents felt that the aspects of Resource availability including Company size, International experiences, Product complexity and differentiation, and Financial resources influences the internationalization of manufacturing firms in Kenya, Mombasa County.. The above aspects had mean scores of 4.09, 4.46, 4.42, 4.00, 4.01 and standard deviation of 1.063, 0.932, 0.830, and respectively as shown in table 5. This result shows that the aspect of International experiences is considered the best resource availability indicator in so far influence of the internationalization of manufacturing firms having scored the highest mean in the resource availability category : Internationalization of metal manufacturing firms Table 6: Internationalization and Internationalization Resource availability Observation Mean Std. Deviation Increased involvement in international operations Franchising agreements Mergers and acquisitions Licensing contracts Industrialization policies Source: Researcher, (2017) The study inquired on the level of agreement and disagreement on those aspects influencing the internationalization of manufacturing firms in Kenya, Mombasa County. From the findings, the respondents 29

8 indicated that the aspects of Increased involvement in international operations, Franchising agreements, Mergers and acquisitions, Licensing contracts and Industrialization policies aspects influencing the internationalization of manufacturing firms in Kenya, Mombasa County. The results shows the above aspects had mean scores of 4.79, 4.42, 4.06, 4.00, 4.39 and standard deviation of 0.703, 0.881, 1.101, and respectively as shown in table 6. This further shows that the aspect of increased involvement in international operations is the most important part of the internationalization process through which a firm enters and begins operating within a foreign country market as was emphasized by Asika, (2006). It is a process in which specific attitudes or orientations are associated with successive stages in the evolution of international operations, (Andersen (1997). 4.4 Regression Analysis for Overall Model The influence of the factors investigated which were Transaction cost, Institutional environment and Resource availability on Variable: internationalization of metal manufacturing firms in Kenya, Mombasa County was evaluated. In addition, the study established the combined influence of these factors on internationalization of metal manufacturing firms in Kenya, Mombasa County. The results are presented in model summary Table 5. Table 7: Regression Weights for Overall Model Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate.931 a a. Predictors: (Constant), Transaction cost, Institutional environment and Resource availability The study noted that the factors under study which were Transaction cost, Institutional environment and Resource availability had a positive and strong relationship (R = 0.931) with internationalization of metal manufacturing firms in Kenya, Mombasa County. Moreover, the factors studied were found to explain 86.6% of internationalization of metal manufacturing firms in Kenya, Mombasa County (R² = 0.866). As such 13.4% of internationalization of manufacturing firms in Kenya, Mombasa County was as a result of other factors such as stakeholder involvement, top level managers commitment among others not investigated in the study. 30

9 Table 8: Significant Test Results for Overall Model Coefficients a Model Unstandardized Coefficients B Std. Error Standardize d Coefficients Beta t Sig. (Constant) Transaction cost Institutional environment Resource availability a. Dependent Variable: Internationalization of Metal manufacturing firms The findings indicated in Table 8 are interpreted as follows: Y= X X X3 The regression coefficient results revealed that a change by 1 unit in internationalization of metal manufacturing firms in Kenya, Mombasa County was because of changes by unit in Transaction cost, unit in Institutional environment and unit in Resource availability while holding (0.940) constant. It was revealed that Transaction cost (t = 4.179; p < 0.05), Institutional environment (t = 3.837; p < 0.05), and Resource availability (t = 3.009; p < 0.05) significantly influenced internationalization of metal manufacturing firms in Kenya, Mombasa County. In combination, the three factors were found to significantly influence internationalization of metal manufacturing firms in Kenya, Mombasa County (t = 3.726; p < 0.05). 5 Conclusions and recommendations From the findings, the study concluded that the aspects of transaction cost that influence the internationalization of metal manufacturing firms in Kenya, Mombasa County included Implementation cost, Information less trade, Market timing cost, Opportunity cost and Market impact. It was also clear from the findings that the respondents felt that the aspects of Institutional environment such as Market size, Number of export intermediaries, Direct/indirect trade barriers, County risk and Market growth influences the internationalization of metal manufacturing firms in Kenya, Mombasa County. Further, the study inquired on the level of agreement and disagreement of the influence of the aspects of Resource availability on the internationalization of metal manufacturing firms in Kenya, Mombasa County. From the findings, the respondents felt that the aspects of Resource availability including Company size, International experiences, Product complexity and differentiation, and financial resources influences the internationalization of metal manufacturing firms in Kenya, Mombasa County. 31

10 From the study findings, it concluded that Transaction cost, Institutional environment and Resource availability influence internationalization of metal manufacturing firms in Kenya, Mombasa County This study found transaction cost as one of the variables influencing internationalization and recommended that relevant transaction cost aspects such as Implementation cost, information less trade, market timing cost, opportunity cost and market impact should be reviewed time to time so as to enhance rapid expansion of companies, manufacturing being one of them. This will ensure faster growth of the economy. The study further established that internationalization of firms in Kenya relates to Institutional environment recommended greater improvement in institutional environment and more so on the aspects such as Market size, Number of export intermediaries, Direct/indirect trade barriers, County risk and Market growth. This will ensure faster market growth of manufacturing firms in Kenya, Mombasa County. REFERENCES Andersen RA. (1987), The Role of the Inferior Parietal Lobule in Spatial Perception and Visual-Motor Integration. Bethesda, MD:Am. Physiol. Soc., pp Asika, N. (2006). Research methodology in the behavioural sciences. Ikeja: Longman Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: a transaction cost analysis and propositions. Journal of International Business Studies,17(3), Hill S, Lupton M, Moody G and Regan S (2007), A stake worth having? The potential for equity stakes in social housing, London: Chartered Institute of Housing and IPPR. Lommelen, T. and Matthyssens, P. (2005) The internationalization process of service providers: a literature review. Advances in International Marketing 15: Eaton, J., Jensen, J. B., and Kortum, S. (2004), Plants and Productivity in International Trade, American Economic Review, 93(4), Mugenda and Mugenda A (2003) Research Methods. Qualitative and Quantitative Approaches Nairobi Act Press Hitt, M.A., Ahlstrom, D., Dacin, M.T., Levitas, E. and Svobodina, L. (2004). The institutional effects on strategic alliance partner selection in transition economies: China vs. Russia. Organization Science, 15, Gwartney, J., Lawson, R. and Block, W. (1996). Economic Freedom of the World, Vancouver, BC: The Fraser Institute. Journal Waudo J. (2005), Research and Evaluation for Educational Development learning from the PRISM experience in Kenya 32