Introduction
Recently, the International Monetary Fund (IMF) released a report detailing the gross domestic product (GDP) growths of countries across the world. Kenya and Rwanda were named among the fastest growing countries in Africa, in terms of economic and technological advancement. In the last decade, their GDPs have grown tremendously, attracting both domestic and international investors.
International organizations such as the World Bank, the IMF, and the United Nations have named them on several occasions as some of the African countries to watch out for in terms of economic growth, and as the future economic engines of the African continent. IMF forecasts reveal that the economies of Kenya and Rwanda will grow by approximately 6% and 7% respectively in 2022.
History, Population, and Governance
Kenya and Rwanda are both sovereign and democratic countries. Kenya gained independence from the British rulers in 1963 while Rwanda gained emancipation from the Belgian colonialists in 1962. The former has a population of approximately 44 million, while the latter has about 13 million people, the majority of whom are young and rural dwellers. Both nations are governed by a President who is elected by the people and guided by a constitution that is regarded as the Supreme law. Kenya is a republic, a unitary state, and a representative democracy that operates under a presidential system. Rwanda is also a republic and a unitary state, and has a semi-presidential system.
Cultural, Social, Political, and Environmental Factors
Rwanda has two major ethnic groups (Hutu and Tutsi) and one minor group (the Twa). The Hutus are the majority, and the cultural and social differences between the two major groups were the causes of the 1994 genocide that destroyed the country’s political, social, and economic fabrics (Cramer, Sender, & Oqubay, 2020).
In contrast, Kenya is multi-ethnic, and has 44 groups that have different cultural practices. In 2007, a disputed electoral process led to post-election violence, which resulted in thousands of deaths and displacements. Both countries have experienced political unrest in varying degrees.
Rwanda is still recovering from the genocide, while Kenya was able to resolve the conflicts and move on. Politically, Rwanda is very stable as laws to prevent a recurrence of the 1994 massacre were enacted by the legislative branch (Cramer, Sender, & Oqubay, 2020). Kenya is politically stable, though sometimes volatile, primarily because of its ethnic diversity. Official languages in Rwanda include English, French, Swahili, and Kinyarwanda. Kenya’s official languages are English and Swahili.
Legal Framework
Both countries are governed by constitutions that were implemented within the past three decades. Kenya’s current constitution was enacted into law in 2010 while Rwanda’s was adopted in 2003, and has undergone several amendments (Cramer, Sender, & Oqubay, 2020). Rwanda’s legal system is predominantly based on Belgian civil law system. Moreover, it consists of aspects of customary law.
The government is divided into three branches: the legislature, the executive, and the Judiciary. Legislative functions are performed by a bicameral parliament that comprises of two factions: the Senate and the Chamber of Deputies. Kenya’s legal framework is pluralistic, and incorporates several systems that govern different sectors. Like Rwanda, the government has executive, legislative, and judicial systems.
Risks of International Trade
The major risks of international trade in Rwanda include high cost of transportation, an underdeveloped power infrastructure, low purchasing power, limited access to finance, inconsistent taxation laws, and high cost of energy. The country is landlocked, thus the costs of transportation are very high compared to Kenya (African Development Bank Group, 2022b). Rwandan law provides equal treatment to domestic and foreign firms (The World Bank, 2021).
However, the applicable laws are executed inconsistently, and this has discouraged foreign investment (African Development Bank Group, 2022b). Other risks include trade disruptions due to political tensions, a resurgence of the COVID-19 pandemic, and a rising fiscal debt.
Risks to international trade in Kenya include corruption, low consumer spending, weak governance, and security issues. Kenya has been named among the most corrupt countries in the world: Transparency International ranked it at number 124 out of 180 (African Development Bank Group, 2022a). Its corruption perception index score falls below the average in Sub-Saharan Africa. The score is an indication of high levels of corruption in the public sector. The high rate of unemployment in the country, coupled with economic slowdown due to the COVID-19 pandemic has resulted in lower consumer spending (US Department of State, n.d.-a).
Moreover, its ballooning public debt has reduced public spending significantly. Terrorism has been a major security issue in Kenya, mainly because of their military presence in Somalia (African Development Bank Group, 2022a). Even though terror attacks are spasmodic, they pose a challenge to international businesses.
Economic Outlook
Kenya and Rwanda have positive economic outlooks, even though certain challenges pose risks for international business. For instance, between 2020 and 2021, Kenya’s public debt increased by 11% to 72% (African Development Bank Group, 2022a). Increased borrowing is aimed at sourcing funds for infrastructure development and COVID-19 management (US Department of State, n.d.-a).
The IMF has revealed that Kenya is on the verge of debt distress because of the high rate of borrowing, irregular repayment schedules, and the financial implications of the Coronavirus pandemic (African Development Bank Group, 2022a). The World Bank projects that the economy will grow by approximately 5.9% in 2022, despite the aforementioned challenges (African Development Bank Group, 2022a). The growth is projected to come from the full reopening of the economy, debt refinancing, concessional loans, and the successful implementation of the Economic Recovery Strategy (US Department of State, (n.d.-a).
In Rwanda, the fiscal deficit grew significantly due to health spending, the disruption of supply chains, a decrease in investments, low tax yields, and the financial implications of COVID-19 (African Development Bank Group, 2022b). Despite these challenges, the economy is expected to improve and grow by about 7% in 2022 due to the recovery of the tourism sector and infrastructure development (US Department of State, n.d.-b). This will improve the business environment for foreign investment.
Infrastructure and Education System
Infrastructure development is one of the pillars of economic prosperity in developing African countries. Kenya has an established infrastructure system that comprises international airports, a seaport, a large energy sector, an extensive road and railway system and a developed digital telecommunication network (US Department of State, n.d.-a). Kenya has a strong education system that comprises three levels: 8 years of primary education, 4 years of secondary education, and between two and four years of tertiary education. Its universities rank highly in Africa, and they are known for excellent research and innovation.
Rwanda dedicates about 10% of its annual budget to the development of infrastructure. The main goals is to create a competitive private sector through the construction of roads, water, and rail transport infrastructure. Rwanda is not as developed as Kenya as there is a need for increased public investment and the maintenance of fiscal sustainability in order to lower the risk for investment in the country (US Department of State, n.d.-b). The education system is not as developed in Kenya as it has suffered over the years due to political conflicts. Enrollment is low due to the limited availability of resources. The system is comprised of 4 levels: 6 years of primary school, 3 years of junior secondary, 3 years of senior secondary, and 4 years of university education.
Pros and Cons of International Business
The pros of international business in Kenya include a large pool of well-educated labor, favorable investment policies, a strong mobile market, a vibrant private sector, a diversified economy, and a strategic geographical location (African Development Bank Group, 2022a). The cons include high unemployment rate, weak consumer spending, poor governance, corruption, and security concerns (US Department of State, n.d.-a).
The pros of international business in Rwanda include political stability, a favorable business environment (bilateral investment treaties, transparency of the regulatory system and beneficial investment incentives), a transparent financial system, and responsible business conduct (African Development Bank Group, 2022b). The cons include a shortage of skilled labor and a weak financial system (US Department of State, n.d.-b). For example, the Rwanda Stock Exchange has only 11 listed companies.
Conclusion and Recommendations
The aforementioned discussion evaluates the suitability of Kenya and Rwanda for international business, as two of the most promising developing countries in Africa. They have similar governance and legal systems, and invest significantly in infrastructure. However, differences in political systems, social and cultural factors, and quality of governance affect their suitability for international business. Kenya is a better choice for investment when compared to Rwanda because it has a large pool of skilled labor, has a stronger economy, enjoys political stability, and it has a strong legal system.
In addition, government policies regarding international business are favorable and readily attract foreign investors. Risks such as corruption and poor governance can be mitigated by ensuring strict adherence to laws that govern international business. Rwanda’s labor force is limited, its financial system is not well established, and its infrastructure is not as developed as Kenya’s.
Annotated Bibliography
African Development Bank Group. (2022). Kenyan economic outlook.
This resource discusses the economic outlook of Kenya: macroeconomic and financial developments, changes in economic growth, risks of investment, and projected growth. It also includes the economic outlook and risks that would be encountered by investors. Statistics regarding Kenya’s GDP growth, inflation, GDP per capita growth, and fiscal debt are discussed. This resource is appropriate because it has been authored by the African Development Bank, a reputable financial institution and is based on research.
African Development Bank Group. (2022). Rwanda economic outlook.
This resource discusses the economic outlook of Rwanda from the perspectives of financial developments, risks for investment, and financing issues as well as options. The author also discusses the impact of the COVID-19 pandemic on the country’s economy, and the projected growth in coming years. The author offers recommendations on the various measures that can be put in place to revive the economy. The resource is appropriate because it offers information that can be used to determine the suitability of Rwanda for international business, and how it compares to Kenya along similar parameters.
Cramer, C., Sender, J., & Oqubay, A. (2020). African economic development: Evidence, theory, and policy. Oxford University Press.
This book discusses the issue of economic performance in African countries, and focuses on variations observed among countries. The authors outline the variations and differences between countries, mainly caused by factors that include gender, social class, and ethnicity. Improvements in economic performance have reduced inequality greatly and emancipated many nations from their colonial pasts. The authors utilize the findings of decades of research to support their arguments. Moreover, they incorporate statistical evidence from different countries across Africa.
US Department of State. 2020 investment climate Statements: Kenya.
This resource evaluates the economy of Kenya amidst the ravaging effects of the COVID-19 pandemic. It explores Kenya’s strengths as the largest economy in East Africa and one of the strongest financial and technology hubs in Africa. It outlines the measures that Kenya has taken in the past to create an environment that is suitable for international business. The information contained in the publication can be sued to evaluate the country’s suitability for foreign investment in comparison with Rwanda. Issues such as policies governing Foreign Direct Investment, taxation treaties, the legal system, and industrial systems are discussed in detail.
US Department of State. 2020 investment climate statements: Rwanda.
This resource was authored by the United States Department of State as a guide for investors looking to invest in Rwanda. It explores Rwanda’s economic situation before COVOD-19, and how the various sectors have been affected. The author discusses several factors that could affect international investment in Rwanda. These include Openness to foreign investment, bilateral investment and taxation treaties, the legal regime, industrial policies, protection of property rights, state of the financial sector, and political and security environment. This information can be used to evaluate the suitability of Rwanda for foreign investments.
The World Bank. (2021). Infrastructure development in Rwanda: Leveraging private sector to close the gap.
This publication by the World Bank evaluates Rwanda’s infrastructure development and the role played by the private sector. It recommends the active participation of the private sector in enabling Rwanda to achieve its development goals and lower fiscal debt. The report offers recommendations on how the country can improve the contribution of the private sector in order to mitigate its infrastructural shortcomings. It is evident that even though Rwanda has invested extensively in infrastructure, the developments are not sufficient to successfully support international investments. This resource is appropriate for the completion of this case study because the information it contains is based on scientific research conducted by a reputable organization.