C&G Mode of entry into Rwanda Special Economic Zone Essay Example

C&G Mode of entry into Rwanda Special Economic Zone

The C&H Garments Company has a fully owned subsidiary in the Rwandan Special Economic Zone. This means that the company has full control of the company’s affairs including operations. In 2014, C&H announced plans to invest $10 million to set up a textile plant in then Rwandan Special Economic Zones [ CITATION Nam14 l 1033 ]. According to the then Rwanda finance minister, Claver Gatete, the government set up the special economic zones to attract manufacturers with good access roads, reliable electricity, water and other services and tax concessions [ CITATION Rwa17 l 1033 ]. C&H founders, Cindy Ma and Helen Hai have significant experience in manufacturing garments for global markets. Their decision to open a new facility in Rwanda Special Economic Zone can be attributed to the existence of friendly investment policies, cheap labour and privileged access to African, American and European markets [ CITATION Man15 l 1033 ].

Opening a fully owned subsidiary in the Rwanda Special Economic Zone is a form of direct investment in a foreign market. According to Chang et al., (2013), direct investment entails transfer of resources, technology, capabilities and expertise to a foreign project. Typically, direct investment involves acquisition of an existing company or establishment of a new business (Athukorala and Tien, 2012). For the case of C&H Garments, the company decided to establish a Greenfield investment where it built everything from the scratch.

In 2015, as part of C&H direct investment entry mode, the company opened its newly equipped facility in Kigali Rwanda. The company installed a plant capable of employing 2000 workers within the first two years [ CITATION Man15 l 1033 ]. C&H started by recruiting 200 workers who underwent a 6-month training program to work at its plant. As of December 2016, the company had more than 800 trained workers at its plant [ CITATION Sol16 l 1033 ]. A key feature of a Greenfield direct investment is that a company has to install infrastructure, transfer technology and skills and train new workers (Qiu and Wang, 2011). Evidently, this is the same entry mode that C&H employed as it transferred resources, technology, expertise and skills to establish manufacturing operations in Rwanda.

Appropriateness of C&H entry into the Rwandan industry

C&H was motivated by several positive factors to enter the Rwanda Special Economic Zone. First, the Rwanda Special Economic Zones is part of the country’s government plans to attract foreign direct investment to boost domestic capacity and export earnings. The government offers several incentives including serviced land with good access to roads, markets and reliable supply of water and electricity. Some policy incentives include trade support, low tax obligations and removal of bureaucratic constraints [ CITATION Rwa17 l 1033 ]. The policies and practices that define the Rwanda Special Economic Zone are beneficial to a manufacturing business that may require a government that is actively involved in lowering operational costs and improving efficiency to minimise losses. The government expects that the labour-intensive apparel manufacturing industry will offer jobs and help grow the Rwandese economy [ CITATION Rwa17 l 1033 ]. This means that C&H may expect to maintain a favourable working relationship with the government as it helps it meets its political and economic objectives. Clearly, the business-friendly incentive package offered to manufacturers by the Rwanda government makes it appropriate for C&H to locate parts of its operations in the country.

In Rwanda, the average wage per worker is Rwf1000 or $1.20 per day. There are plans to review the minimum wage to $59 per month [ CITATION Nam14 l 1033 ]. This means that the C&H will produce garments at a significantly lower cost given than labour constitutes a major cost element in textile production. C&H owner observed that workers in Rwanda are highly disciplined and eager to acquire new skills in garment manufacturing [ CITATION Man15 l 1033 ]. As argued by Fosu (2011), foreign direct entry into Africa is partly influenced by the prospect of benefiting from the abundance of cheap labour. However, it important to acknowledge that firms must be willing to commit significant initial investment in training inexperienced workers to reap the benefit of cheap labour in Africa. Indeed, C&H conducts a six-months training program for workers before formally employing them [ CITATION Sol16 l 1033 ]. Given the low labour costs and expected higher productivity of Rwanda’s disciplined workers, it is justifiable to contend that C&H direct investment entry into the country’s Special Economic Zone is an appropriate strategy.

Rwanda is qualified to export apparel to the American market under the African Growth and Opportunity Act (AGOA) [ CITATION AGO17 l 1033 ]. This means that companies such as C&H can export to the U.S. without having to cope with the challenges of tariff barriers and duty charges. In addition, C&H can export products within the East Africa Community (EAC) and COMESA region where Rwanda enjoys duty-free access into a market that comprises about 492 million people [ CITATION Uni16 l 1033 ]. Africa’s population is rapidly increasing and will stand at 2.7 billion in 2050 from the current 1.4 billion. The continents economic growth rate is projected to grow at 2.9% in 2017. The future World Bank economic growth projections for Africa are generally positive due to the emergence of an educated and strong middle class and population increase [ CITATION Wor17 l 1033 ]. Such favourable access to global trade opportunities makes it appropriate for C&H to operate a garment manufacturing plant in Rwanda as it can target the domestic/regional market and international markets in America, Asia/Middle East and Europe.

C&H project in Rwanda’s Special Economic Zone is, however, exposed to some risks that may affect the success of the new venture. Rwanda’s economic policies are largely influenced by the ruling party led by president Kagame. Kagame recently led a constitutional change that allowed him to extend his tenure in power ([ CITATION McV15 l 1033 ]. In case of a regime change or political instability caused political strife, C&H operations may be affected by policy changes or a hostile political situation. Moreover, the company could be negatively affected by modifications to Rwanda’s trade agreements with EU and America under instruments such as AGOA and EAC preferential trade agreement (PTA) with EU. Clearly, it is important for the company as well as investors to consider the likelihood and expected impact of the occurrence of such risks as they may affect C&H operations and profitability in future.

References

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