Time to re-evaluate our trade regulation regime

Entrepreneurs and business executives quickly become logistical acrobats early in their careers. Businesses in East Africa must jump through many regulatory hoops. Attend a BNI meeting, an MBA class, or a business professionals’ prayer group, and an observer will invariably hear endless frustration over regulations and the stifling effect on businesses.

One of our students in the Incubation and Innovation Center at USIU-A recently started a food production and distribution business. In his startup process, he needs regulatory approval from multiple government entities from the National Environment Management Authority (Nema) on the packaging approval to the Kenya Bureau of Standards (Kebs) for the standards, the Health Ministry for the public health certificate, a medical certificate for each employee from the Nairobi City County and occupational health and safety, as well as trademark protection from the Kenya Industrial Property Institute (Kipi), among others including business and name registration.

Then there are also taxes for many actions not present in most other countries, including paying the Nairobi City County to stamp each client brochure before distribution in public spaces. The particular entrepreneur struggles to chart an ethical path to jump through all the regulatory hurdles without falling victim to corruption.

Now compare us to Hong Kong where business registration famously takes only one day and then regulation per industry is thorough but quick including aspects of self-regulation. If an investor or entrepreneur desired to launch a new innovative product line, where would they choose to base the home operations?

Interestingly, when teaching graduate-level students about the causes and effects of innovation, a common refrain heard often in Kenya revolves around student ideas for more regulation to spur innovation instead of creating more innovation through less regulation. Clearly, a nation must strike a balance between wild unchecked companies verses stifling regulation that kills global competitiveness and innovation.

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Which methods of regulations work? In terms of environmental regulations, Klaus Rennings and Christian Rammer found that over-regulation forces firms to innovate to get around the hurdles. The forced innovation causes lower profits due to costs. But positively in a non-bribing setting, clear consistent regulations lower uncertainty due to expected standards and allows companies to more properly plan. But in a bribing environment, then regulation can logically cause little to no need for innovative solutions to the set standards, so the sector gets higher costs but without the innovative or uncertainty avoidance benefits.

Researchers Neil Gunningham and Joseph Rees found industry self-regulation can become an effective and efficient means of social control. In Kenya, would we trust industry associations to deliver more effective self-regulation as well as improved innovation trends? Or would we prefer the largely national and county regulation environment currently in place?

Social scientists Andrew King and Michael Lenox make the argument that industry self-regulation needs two conditions to succeed. First, powerful industry apex bodies such as manufacturing associations, etc. Second, the threat of strong government sanctions if the apex body does not deliver on minimising deviant industry behavior.