Determinants of Foreign Equity Market Investment Decisions on Performance of Investment Banks in Kenya

DETERMINANTS OF FOREIGN EQUITY MARKET INVESTMENT DECISIONS ON PERFORMANCE OF INVESTMENT BANKS IN KENYA

HUMPHREY GATHUNGU

UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA

SPRING, 2020 DETERMINANTS OF FOREIGN EQUITY MARKET INVESTMENT DECISIONS ON PERFORMANCE OF INVESTMENT BANKS IN KENYA

HUMPHREY GATHUNGU

A Project Report Submitted to the School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA

SPRING, 2020

ii STUDENT’S DECLARATION

I, the undersigned, declare that this project report is my original work and has not been submitted to any other college, institution or university other than the United States International University -Africa in Nairobi for academic credit.

Signed: ______Date: ______

Humphrey Gathungu (ID 600748)

This project report has been presented for examination with my approval as the appointed supervisor.

Signed: ______Date: ______

Dr. E. Kalunda

Signed: ______Date: ______

Dean, Chandaria School of Business

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All rights reserved. No part of this proposal may be photocopied, recorded or otherwise reproduced, stored in a retrieval system or submitted in any electronic or mechanical means without prior permission of the copyright owner.

ACKNOWLEDGEMENT

I thank God for the grace that enabled me to complete this research project. I appreciate my supervisor for the encouragement and dedication that enabled me to clear this research project. I thank the management of the respective investment banks in Kenya for granting me an opportunity to collect data that helped in analysis of the findings to write this research project.

DEDICATION

I dedicate this research project to my family members.

TABLE OF CONTENTS

STUDENT’S DECLARATION ...... iii COPYRIGHT ...... iv ACKNOWLEDGEMENT ...... v DEDICATION...... vi LIST OF TABLES ...... ix LIST OF TABLES ...... xi ABBREVIATIONS AND ACRONYMS ...... xii ABSTRACT ...... xiii CHAPTER ONE ...... 1 1.0 INTRODUCTION...... 1 1.1 Background of the Study ...... 1 1.2 Statement of the Problem ...... 6 1.3 Purpose of the Study ...... 8 1.4 Research Questions ...... 8 1.5 Significance of the Study ...... 8 1.6 Scope of the Study ...... 9 1.7 Definition of Terms...... 10 1.8 Chapter Summary ...... 11 CHAPTER TWO ...... 12 2.0 LITERATURE REVIEW ...... 12 2.1 Introduction ...... 12 2.2 Trade Policies and Performance of Investment Banks ...... 12 2.3 Level of Investor’s Right Protection and Performance of Investment Banks ...... 17 2.4 Business Facilitation Measures in Foreign Markets and Performance of Investment Banks...... 25 2.5 Chapter Summary ...... 30 CHAPTER THREE ...... 31 3.0 RESEARCH METHODOLOGY ...... 31 3.1 Introduction ...... 31 3.2 Research Design...... 31 3.3 Population and Sampling Design ...... 31 3.4 Data Collection Methods ...... 33 3.5 Research Procedure ...... 34 3.6 Data Analysis Methods ...... 34 3.7 Chapter Summary ...... 35 CHAPTER FOUR ...... 36 4.0 RESULTS AND FINDINGS ...... 36 4.1 Introduction ...... 36 4.2 Response Rate and Background...... 36 4.3 Trade Policies and Performance of Investment Banks ...... 39 vii

4.4 Level of the Investor’s Right Protection and Performance of Investment Banks.... 43 4.5 Business Facilitation Measures in Foreign Market and Performance of Investment Banks...... 48 4.6 Overall Regression Results on the Determinants of Foreign Equity Market Investment Decisions and Performance ...... 52 4.7 Chapter Summary ...... 54 CHAPTER FIVE ...... 55 5.0 DISCUSSION, CONCLUSION AND RECOMMENDATIONS ...... 55 5.1 Introduction ...... 55 5.2 Summary ...... 55 5.3 Discussion ...... 60 5.4 Conclusion ...... 67 5.5 Recommendations ...... 69 REFERENCES ...... 71 APPENDICES ...... 82 Appendix I: Questionnaire ...... 82 Appendix II: List of Investment Banks ...... 88 Appendix III: Nacosti Research Permit ...... 89

viii LIST OF TABLES

Table 3.1: Target Population...... 32

Table 3.2: Reliability Results ...... 34

Table 4.1: Level of Education ...... 37

Table 4.2: Nontariff Barriers ...... 40

Table 4.3: The Tariff Regime ...... 41

Table 4.4: Export Subsidies ...... 41

Table 4.5: Model Summary for Trade Policies and Performance ...... 42

Table 4.6: Analysis of Variance for Trade Policies and Performance ...... 42

Table 4.7: Regression Beta Coefficients and Significance of Trade Policies and Performance ...... 43

Table 4.8: Diversification ...... 44

Table 4.9: Put Options ...... 45

Table 4.10: Dividends ...... 46

Table 4.11: Principal-Protected Notes ...... 46

Table 4.12: Model Summary for Level of the Investor’s Right Protection and Performance ...... 47

Table 4.13: ANOVA for Level of the Investor’s Right Protection and Performance ...... 47

Table 4.14: Beta Coefficients for Level of the Investor’s Right Protection ...... 48

Table 4.15: Ease of Doing Business ...... 49

Table 4.16: Cost of Doing Business ...... 50

Table 4.17: Incentives ...... 51

Table 4.18: Model Summary for Business Facilitation Measures in Foreign Market and Performance of Investment Banks ...... 51

Table 4.19: ANOVA for Business Facilitation Measures in Foreign Market ...... 52

Table 4.20: Beta coefficients for Business Facilitation Measures in Foreign Market .... 52

Table 4.21: Model Summary ...... 53

Table 4.22: Overall ANOVA Results ...... 53

Table 4.23: Overall Coefficients and Significance ...... 54

LIST OF TABLES

Figure 4.1: Response Rate ...... 36 Figure 4.2: Gender of the Respondents...... 37 Figure 4.3: Years of Experience ...... 38 Figure 4.4: Years of Organizational Existence ...... 39

ABBREVIATIONS AND ACRONYMS

ANOVA Analysis of Variance

ASEAN Association of Southeast Asian Nations

EFTs Exchange-Traded Funds

EPZ Export Processing Zones

EU European Union

FDI Foreign Direct Investment

IFRS International Financial Reporting Standards

MENA Middle East and North Africa

NACOSTI National Commission for Science, Technology and Innovation

RQ Research Question

SACCOs Savings and Credit Cooperatives

SPSS Statistical Package for Social Sciences

SSA Sub Saharan Africa

UK United Kingdom

WTO World Trade Organization

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ABSTRACT

The study sought to establish the determinants of foreign equity market investment decisions on performance of investment banks in Kenya. The study was guided by the following research questions: How do trade policies affect the performance of investment banks in Kenya? How does the level of the investor’s right protection affect the performance of investment banks in Kenya? What are the effects of business facilitation measures in foreign market on performance of investment banks in Kenya?

The study adopted descriptive research design where 44 finance officer and chief operation officers from 22 investment banks in Kenya were targeted. Census was used and thus all the 44 respondents were covered. Primary data was collected using questionnaires. The analysis of the collected data was conducted using descriptive statistics like means and standard deviations and inferential statistic which was regression analysis. The findings were presented using tables and figures.

On the first research question, the study established that non-tariff barriers had p-value of 0.001, tariff regime had 0.041 and export subsidies had 0.017. The results of the second research question indicated diversification (p<0.05), put option (p <0.05) and dividends (p <0.05) all were found to have significant effect on performance of investment banks in Kenya. In view of the third research question, the study established that the cost of doing business (p<0.05) and the ease of doing business (p<0.05) all were significant. Based on the purpose of the study, it was shown that significant proportionate change in performance of investment banks in Kenya is jointly explained by business facilitation measures in foreign market, level of investor’s right protection and trade policies as the determinants of foreign equity market investment decisions. The study noted that the level of investor’s right protection (p<0.05), trade policies (p<0.05) and business facilitation measures in foreign market (p<0.05) all have significant effect on performance of investment banks.

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The study concludes that non-tariff barriers had the largest effect on performance of investment banks followed by tariff regime and lastly export subsidies. Jointly, the study established that trade policies had the second largest significant effect on performance of investment banks in Kenya. Diversification as a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Jointly, the study established that the level of the investor’s right protection had the largest significant effect on performance of investment banks. The ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. Jointly, the study noted that business facilitation measures in foreign markets had the least but significant effect on performance of investment banks in Kenya.

The study recommends that finance managers of the investment banks should rely on the trade policies when making foreign equity market investment decision so as to enhance on their performance. The finance managers of the investment banks in Kenya should divert most resources and attention on the investor’s right protection when making foreign equity market investment decisions so as to enhance on their performance. When jointly making the foreign equity market investment decisions, the finance managers of the investment banks in Kenya should pay least emphasis on business facilitation measures in the foreign market since they have the least contribution towards performance of the organization. The study recommends further studies to be conducted using relatively larger sample sizes that would allow wider generalization of the findings of the study.

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CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Investment banks are financial intermediaries that perform a variety of services. Most of the investment banks play part in specializing in very large and complex financial transactions. Some of the investment banks also have retail operations that serve small, individual customers. According to Cekrezi (2015), some of the key factors that determine financial performance of investment banks include; the size of the firm, the position of the liquidity, leverage level and its operating efficiency.

Individuals and corporates make investments with the aim of earning a return (Capizzi, 2015). The process of investment is however, surrounded by a lot of uncertainty in relation to the returns to be earned over a given period of time. Equity markets offer access to capital for companies and the opportunity for investors to own a stake in those companies with the potential to realize gains based on their future performance (Nassr & Wehinger, 2016). Capital gains / losses and dividends are the manner in which stock market returns are counted. Markets are volatile by nature. For markets, there is a risk- reward dimension that relates to the investment horizon and the volatility of investing for different asset classes. In fact, stock markets are not always logical, and sometimes over- react or under-react with respect to the likely change in these underlying business fundamentals (Basu & Nair, 2015).

Overall market performance can be affected by a number of factors: some of these would be at a micro-level and could be unique to a company or industry; while other factors would affect the economy as a whole (Frijters, Johnston, Shields & Sinha, 2015). Usually market indices are used in measuring market performance. Typically, indices consist of selected listed securities, bonds among others. Indices are sampled to be indicative proxy of the different sectors and the general price transition. The valuation of a selected stock is assumed to be accurate based on the information available (Gerrits & Verweij, 2015).

The performance of a firm's stock market transmits knowledge about its continued output to the market (Chen, Parsley & Yang, 2015). Ideally, investors need to base their investment decisions on the ability of a company to maintain its long-term success. It is incumbent on investors and/or their advisors to understand the dynamics at stake before committing to a stock position.

Fundamental analysis is used to gauge the key drivers of share prices (Wafi, Hassan & Mabrouk, 2015). In the short run, the technical analysis can be used to predict the movement of share prices and relies on models based on price and volume transformations and Chartism. Collection of information about the market conditions, policies, rules and regulations of operating on international markets come into play when the investors want to make decisions (Altonji, Kahn & Speer, 2016). Coming up with sound decisions improves the performance in terms of returns to the investors, minimizes instances of loss and maximizes earnings. Improved performance also refers to widened investment portfolios in different industries, regions and levels of investing (Hervé, Manthé, Sannajust & Schwienbacher, 2019).

Khan, Afrin and Rahman (2015) shared that using the media and other social communication tools makes many people across the globe to be knowledgeable about investment opportunities available to them and in their locality. However, what these people lack is ability to manage the investment portfolios effectively and be able to improve their performance. Investment opportunities have been seen to increase in each and every day including the financial assets and instruments like the securities market. There are new instruments and securities options for different investors who can take a variety of risks and be able to invest productively.

According to White (2016) on the step-by-step guide of investing in stocks, sharing that having assets that are idle is unproductive and wasteful. As such many investment institutions seek customers who have assets and encourage and help them to make investment decisions that will increase their incomes and returns. Any investor aims to minimize the risks involved in any venture, while at the same time increase their returns,

which can majorly be done through gaining information about the venture including the cost of operation, their policies and regulations, business measures at home, such that they can make sound investment decisions.

Foreign equity market is simply trading in stocks, shares and bonds in another country through publicly traded companies (Wardhani, 2015). It is also one of the easiest ways and avenues for globally financing different ventures. The only way to directly participate in the foreign equity markets is either through directly buying foreign stocks by the investors themselves which would involve opening a global account in your country with brokers who trade in the global markets (Joshi & Bayra, 2017). The broker must have authority and credentials to be able to buy, sell or trade with you shares. The other alternative is to open an account with a local broker in the country where you wish to conduct the trading. For either option, the investor must make sound decisions by gaining information about the rules and regulations that bind the trading activities and understand the policies so as to improve on their outcomes and returns. That investors going to foreign markets must be updated on the time on market factors by being financially literate. Some of market factors cover aspects including the stock price earnings, earnings per share, currency shifts, market conditions, trade policies and industry matters (Yang, Mueller & Croes, 2016).

Entering and operating in foreign markets and even investing in one can pose challenges such as language barriers, complications in currency conversions, trade policies and market regulations (Batten & Vo, 2015). Guenther, Johan, and Schweizer (2018) state that successful investing requires the understanding of the risks of investing in these types of markets, and how to buy stocks in the foreign markets, One of the challenges faced by investors and which plays a key role in the investment decisions by foreign investors include first, the lack of transparency since the foreign markets do not have standardized financial reporting standards, for instance while some require all listed companies in the stock exchange to report their earnings on a quarterly basis like the US stock exchange market, in some countries this does not apply (Talal, Ahmad & Amjad,

2016). This in the process affects the accuracy of the decisions made by foreign equity market investors.

Secondly, volatility as the foreign markets move up and down due to insider trading, market manipulation by players that may lead to inflation and depressions which would negatively affect foreign investment and must be taken into consideration when making investment decisions (Jebran & Iqbal, 2016). Investors in international markets need to focus both on the short-term market factors and long-term factors and if these markets become volatile, the day-to-day operations should not deter the activities of investors and their willingness to put their funds into an investment venture (Wardhani, 2015). Thirdly, currency risks such that the currency of a specific country can appreciate when compared to the dollar meaning that the value of the investment will be much higher and the earnings are high for the investor, but when the currency depreciates against the US dollar, then the value of the investment is lower which negatively affects the returns of the investor. Khaldoun (2011) classified factors affecting investment decisions as market, political and enterprise. Gill, Khurshid, Mahmood and Ali (2018) note that the benefits derived from foreign markets vary from accessibility to high liquidity, opportunity to diversification of risks through building a portfolio that promises optimal returns.

In Asia, Chen (2018) focused on foreign direct investment noting that any financial advisor would always encourage investors to hold some foreign stocks which can easily be done through exchange-traded funds (EFTs) which is a bundle of international stocks and bonds held by one investor. Exchange-traded funds (EFTs) also referred to as mutual funds includes holding shares and bonds from several industries, sectors of the economies, countries or region which the investor can easily handle in one transaction (Wardhani, 2015). A mutual fund can be an international fund spread across several countries whereas a regional fund is one in which investments are done in a specific region like Asia. Country fund or sector fund is one where investment is done in one or more industries like energy or agricultural products. In India, Lee and Shin (2018) noting the challenges and investment decisions emphasizes that investors make decisions with long-term investment options as one of the strategies used in maximizing the growth 4

prospects. Investors who are risk takers would look into information asymmetry so as to provide them with sufficient knowledge when making foreign investment decisions that would yield high advantages like reduce loses and increase returns. Another study by Luthfianto, Priyarsono and Barreto (2016) on trade facilitation and performance of Indonesian manufacturing export revealed that trade facilitation geared towards customs environment of Indonesian and its trading partners positively impacts the Indonesian manufacturing export performance.

In Nigeria, Ogunlusi and Obademi (2019) concentrated on the Nigerian investment banks and the impact of behavioral financial and their decision making capacity, noting that the two variables were positively linked. Some of the factors that influenced the decision of investors to invest their money in any specific portfolio included the attractiveness of the industry based on the market conditions, the expected returns, the financial indicators and behavior of the sector players, chances of capital gain and ability to cut losses. In addition, when looking at both local and foreign investment, the investors based their investment decisions on ease of conducting business, returns and currency fluctuations and volatility of the market and the industry.

Kazarwa (2015) focused on the Rwanda stock exchange and the challenges faced in the stock markets in Africa, noting that any investment incurs some form of risk and with the foreign and international markets the returns are higher but it is also accompanied by higher risks. Balancing the portfolio when operating accounts in a foreign equity markets can be a challenging aspect since the investors must have knowledge on the current happenings in the foreign markets, the policies and regulations that cover different sectors and industries and the growth rates so as to prospect on the amounts of earnings to be expected.

In Libya, Farj (2016) noted that investment managers consider a number of factors when making decisions to invest in equity markets outside the jurisdictions of their country of origin. Among these factors are prevailing trade policies, Rules and regulations related to entry and operations in the foreign market, general efficiency levels in the local equity

market, business facilitation measures in foreign markets in terms of Incentives, ease of doing business, cost of doing business among others, level of restrictions related to repatriation of earnings or profits, tax policies on capital gains and the level of investor's right protection. The general liquidity in the foreign markets also plays a critical role in influencing the foreign direct investment flow. Stability of exchange rates makes it possible for investors to predict with certainty the monies they are likely to expatriate home from the investments.

In Kenya, Jagongo and Mutswenje (2014) noted that the liberalization of markets has widened investment opportunities for firms. They further noted that globalization has reduced the world into a global village where firms can invest outside the jurisdictions of the country of origin provided the prevailing risks are analyzed thoroughly. Through fundamental, technical and judgmental analysis, investors together with investment managers analyze the investment opportunities to establish the ones that are in line with their objectives in trading risk against returns. While Kisaka (2015) study on stock investment decision making, demonstrated that the participants in the stock market had sufficient information from both media and magazines on quantitative financial analysis and news on financial performance on different investment portfolios. The wide range of information sources including the internet, financial news media, economic indicators and trends and suggestions from well experience financial advisors, all came in handy when making investment decisions. The investment decisions made are a factor of the market features, risk profiles and information on the different investment ventures. Ngahu (2017) on the factors influencing the investment decisions among retail investors of equity stock and some of the things that influenced their decisions included the price of stocks and their affordability, the opinion of third parties to the retailers, herding behavior and available information on the investment ventures.

1.2 Statement of the Problem

As the world markets go global, it is important to understand the factors that drive the investment decisions among variety of investors. Trade policies like average weighted

tariff rate and the real effective rate of exchange impacts the performance of the economy both directly and indirectly. Given the increasing importance of international trade today, it is widely believed that countries with less restrictive trade policies are experiencing higher economic growth compared with those that rely on trade protectionism. Investors typically get certain rights or powers that are generally protected by enforcing laws and regulations when they finance firms, however when an outside investor finance companies, they face a risk, and sometimes near certainty, that their investment returns will never materialize because they are expropriated by the controlling shareholders or managers. Business facilitation measures like removal of trade barriers have greatly contributed towards the expansion of global trade. Business producers can now offer a wide range of goods and services to more customers. Effective business facilitation measures have become the key factors towards the creation of highly improved and conducive trading environment but in effective measures are considered to be a big threat in improving the performance of businesses and trade.

A number of studies have examined investment decisions and firm performance, Santoso (2019) examined the impact of investment decision and funding on financial performance and firm value. The concertation was on asset structure and financial performance and firm value as opposed to foreign equity market investment decisions and performance. In another study, Ariemba, Evusa and Muli (2016) studied investment decisions and financial performance from the perspective of SACCOs. This was a local investment context which does not present a similar platform as the international equity market. Mweresa and Muturi (2018) studied investment decisions and financial performance of sugar firms in Kenya. These studies focused on investments in the local market without consideration for foreign markets. None of them looked at the effects of trade policies on performance, level of investor’s right protection and effects of business facilitation measures hence creating the gap which the current study sought to fill. The study sought to generate new information related to investments in foreign equity markets and firm performance using the context of investment banks in Kenya.

1.3 Purpose of the Study

The purpose of this study was to investigate the determinants of foreign equity market investment decisions on performance of investment banks in Kenya.

1.4 Research Questions

The study was guided by the following research questions:

1.4.1 How do trade policies as determinants of foreign equity market investment decisions affect the performance of investment banks in Kenya?

1.4.2 How does the level of the investor’s right protection as a determinant of foreign equity market investment decisions affect the performance of investment banks in Kenya?

1.4.3 What are the effects of business facilitation measures in foreign market as a determinant of foreign equity market investment decisions on performance of investment banks in Kenya?

1.5 Significance of the Study

The study sought to assess the impact that foreign equity market investment decisions have on the performance of asset managers and investment banks in Kenya. The findings may be of importance to the asset managers and investment banks, regulatory bodies and the academic body, as discussed below:

1.5.1 Investment Banks

Investment is a risky factor as such the asset managers and investment banks need to gather sufficient information on the market before making the decision to invest there, this study may make available important information and make suggestions that they can follow when making foreign equity market investment decisions so as to increase their

performance. The management team in the investment banks may be guided by the findings from this study so as to ensure increased performance of their portfolios.

1.5.2 Regulatory Bodies

The bodies charged with streamlining the investment sector in the country such as Kenya Bankers Association, individual and licensed asset managers, unit trust managers, securities dealers and investment managers; these units can gain insight on how best to make decisions that will increase their performance. The study findings and suggestions may guide the regulatory bodies when developing policies, acts and regulations that direct their activities when making foreign market investment decisions so as to improve their performance. The findings are also important to the government and the Ministry of Finance when enacting laws and policies that may guide the activities of asset managers and investment banks.

1.5.4 Researchers and Scholars

This study may contribute to the body of knowledge on foreign equity markets, the investment decisions and performance of these organizations. The study may also show the gaps in context, concepts and methodology and suggest areas where future researchers can conduct their study in. Furthermore, the study may be useful to the future academicians as they form part of their literature review and reference material.

1.6 Scope of the Study

This study sought to assess the determinants of foreign equity market investment decisions on performance of investment banks in Kenya. It specifically sought to establish the trade policies, the rules and regulations that govern entry and operations at the foreign equity markets. It also looked into business facilitation measures and how these aspects determine the performance of investment banks in Kenya when they enter the foreign equity markets. The study covered all the 22 investments banks that were licensed and operating in Kenya, the respondents were drawn from the senior and top

management in the banks. The study was carried out in the month of April and May 2020 using questionnaires as the primary data collecting instrument.

1.7 Definition of Terms

1.7.1 Foreign Equity Market

This refers to trading in stocks, shares and bonds in another country through publicly traded companies (Min & Bowman, 2015).

1.7.2 Performance

Refers to the actual output or results of an organization as measured against its intended outputs (Singh, Darwish & Potočnik, 2016)

1.7.3 Investment Banks

Financial services company or corporate division that engages on behalf of individuals, corporations and governments in advisory-based financial transactions (Mazzucato & Penna, 2016).

1.7.4 Trade policies

These are the rules, standards and regulations that pertain to trade relations between counties (Choi, Lee & Lim, 2016).

1.7.5 Investor’s Right Protection

The means of safeguarding and enforcing the obligations and claims of an investor (Meshel, 2015)

1.7.6 Business Facilitation Measures

Measures designed to establish a transparent, consistent and predictable environment for business related transactions (Ellis, 2016).

1.7.7 Investment Decisions

These are considerations of expanding the size of the firm by entering into new markets and coming up with more viable projects that maximizes the value of shareholders (Bai, Dhavale & Sarkis, 2016).

1.8 Chapter Summary

The first chapter covers the introduction part of the study, which has the background information on the study topic of foreign equity market investment decisions and performance, the statement of the problem and the main purpose of the study and the research questions that it aims in answering. It also covers the significance, scope of the study and definitions of the key terms as they are used in the context of this study and the chapter concludes by discussing the chapter summary.

The second chapter covers the literature by other researchers as based on the research questions. It is planned as per the studies previously done by others, their findings and conclusions drawn that expand on our current study. The chapter three looks at the methodologies that were used while collecting data in response to the research questions. It has sections on the research design, the population and sampling technique that were used to get the respondent list, the instrument, method and procedure that were used in analysis of the data.

The analysis, presentation and interpretation of the findings from the data that was collected in the study is indicated in chapter four. The findings in chapter four are organized along the research questions that guided the study. Chapter five summarizes the analyzed findings with discussions, conclusions and recommendations.

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter presents a review of literature on the impact of foreign equity market investment decisions on performance of insurance companies in Kenya. The review is centered on the factors promoting foreign equity market investment decisions, the benefits derived from foreign equity market investment decisions and the challenges encountered by asset managers and investment banks in Kenya in foreign equity markets.

2.2 Trade Policies and Performance of Investment Banks

The performance outcomes recorded by an organization is a function of its policies and guidelines which set boundaries within which investment decisions are to be made. The policies and guidelines determine areas where an organization can invest their resources and those which are restricted. Trade policies are aimed at making sure that there are smooth trade transactions between different countries hence improving performance of banks. Given the increasing importance of international trade today, it is widely believed that countries with less restrictive trade policies are experiencing higher economic growth compared with those that rely on trade protectionism. Curran (2015) researched on how trade policy affects the performance of global networks using the case study of solar panel. The study adopted the use of trade data and interviews together with press reports and position reports. The findings revealed that there needs to be incorporation of intuitional factors like trade policy, more effectively into Global Production Networks (GPN) analysis.

Asfaw (2015) researched on trade policy and the performance of the Sub-Saharan economy in Africa. The study revealed that openness to international trade acts as a stimulator to both economic growth and investment. Trade policies like average weighted tariff rate and the real effective rate of exchange impacts the performance of the economy both directly and indirectly. Trade policies between countries allow the flow of goods for 12

mutual benefit from one country to another, as different products are available to the importing country, which otherwise would not be available to consumers (Seck, 2017). The imported goods may also be easily affordable and cheaper in terms of quality than the locally produced goods hence offering the buyer a preference to choose from (Santhi & Setyari, 2019). With regard to this, cheaper goods that imported leads to stiff competition to the locally manufactured goods resulting in huge losses in unsold stocks. This leads to low production level which in the end contributes to lower performance.

Beverelli, Fiorini and Hoekman (2017) conducted a study on the role of institutions on services trade policy and manufacturing performance. The findings revealed that the conditioning effect of institutions operates through services trade that entails the establishment of foreign investment as compared to cross-border arms-length trade in services. Trade policies are believed to promote faster economic performance and higher income per capita. Trade policies are aimed at maintaining and expanding an international customer base hence most businesses usually strive towards delivering quality products at fair prices (Royer, Stehr & Sydnor, 2015). Trade policies lay out the foundation of setting rules that relate to the global exchange of goods including tariffs, quotas, and import and export regulations which are aimed at improving performance (Panga, 2016).

2.2.1 Non-Tariff Barriers

Non-Tariff Barriers (NTBs) refers to the restrictions that comes as a result of prohibitions, conditions or specific market requirements that make product importation or exportation to be difficult or costly (Egger, Francois, Manchin & Nelson, 2015). They include systems such as import quotas, licenses and monopoly rights. Nontariff barriers are believed to encourage competing interests to lobby for import licenses. Due to their lack of transparency, they may allow protection to escape scrutiny (Panga, 2016). The political economy of protection suggests that import and export controls are usually put in place for purpose of benefiting powerful interest groups other than the poor ones (Okute, 2017).

Based on the banking sector, NTBs are perceived as any measures other than a tariff that leads to the distortion of the banking charges which exists where the price of a product or service at the border diverges from the domestic price and can result from regulations procedures which are imposed specifically for serving specific objectives like ensuring that the there is a banking safety of another country (Beghin, Maertens, & Swinnen, 2015). In most cases, the regulatory policies, procedures and administrative requirements are implemented in a way that effectively discriminates against imports services relative to domestic products meant to be exported to other countries, constraining businesses.

A study among European Union member countries by Navaretti, Felice, Forlani and Garella (2018) to determine the role of non-tariff measures on the performance of competitive advantage established that non tariffs have an influence on competitive advantage and performance of the firm. This was an empirical review that combined data from 15 countries which were member states of EU. The study covered a time frame from 2001 all through 2012. It was. Panga (2016) did a study on non-tariff measures and their effect on performance with evidence from food processing industry in Ukraine. The study covered a total of 9,983 firms and it considered a time frame from 2004 all through to 2009. The study defined non-tariff measures as efforts in trade relation that suggest non quantity and non-prices barriers. Non-tariff measures were operationalized into non- tariff barriers on outputs and inputs. The study noted that in most cases, non-tariff measures are negatively related with performance at the firm level.

Ferraz, Ribeiro and Monasterio (2017) noted that non-tariff measures have a negative relationship with export of the country. Another study was conducted in Ireland by Byrne and Rice (2018) to establish the effect of non-tariff barriers on the performance of trade in goods in United Kingdom and Ireland. This study emerged following the decision of UK to exit European Union hence Brexit. The methodology used in this study was difference gravity specification. It was shown that 9.6% reduction in flow of trade performance between Ireland and UK is due to increase in border waiting time.

Okute (2017) studied non-tariff barriers to performance of trade in the context of the East Africa Community with key focus on Kenyan exports. The variables of the study included non-tariff barriers, technical barriers to trade and mitigating factors to non-tariff barriers. Explanatory research design was adopted and a total of 9,585 exporters in Kenya were targeted. The findings indicated that involvement of various agencies in verification of exports and documentation procedures all affect the flow and performance of goods across east Africa region.

2.2.2 Tariff Regime

Most developing low-income countries have separate tariff systems with significant tariff escalation (Nassr & Wehinger, 2016). The underlying motivations include fiscal targets, substitution of imports and the political weight of vested interests. Since tariff escalation provides high "efficient" security to end-producer products, intermediate industries are discouraged in their growth. According to Zhang, Andrews-Speed and Perera (2015), uniform tariff conveys a number of benefits, the most important of which is that the industry lobbying gains and performances are much smaller (and potentially negative).

A uniform tariff greatly simplifies customs activities and direct administrative costs, reducing incentives for evasion and, ultimately, corruption which may have beneficial spillover effects on other government activity dimensions (Gómez-Mera, 2015). Customs and other officials in low-income countries have tended to argue that standardized tariffs can't be enforced in practice. Uniformity doesn't mean that socially important goods, such as basic medicine, cannot be removed (Jebran & Iqbal, 2016). However, care should be taken that such exceptions target only products that are critical to attain social and public health objectives.

Bigsten, Gebreeyesus and Söderbom (2016) studied tariffs and firm performance in Ethiopia. The study used data from the manufacturing sector in Ethiopia. The essence of the study was to determine the interaction between liberalization of trade and the ability of the firm to perform. The study failed to established evidence that reduction in output

tariffs resulted into improvement in productivity. It was concluded that policy measures designed to facilitate access to inputs produced abroad may lead to performance gains

Bussolo and Vargas-Da-Cruz (2015) sought to establish whether reduction of input tariff had an impact on the performance value of export of the firm. This study was conducted in Morocco. It was shown that firms with high exposure on input tariffs perform better in sectors with a large amount of input tariff, accessibility to markets and greater opportunities for profitability. Curran, Nadvi and Campling (2019) conducted a study to determine the interaction between tariff regimes and performance of the global networks. The study was conducted among EU member states. From the findings, existence of high tariffs directly impacts on sourcing in the EU market.

2.2.3 Export Subsidies

Export subsidies may be necessary to mitigate market failures; including, for example, knowledge problems that individual companies seeking to enter new markets may face (Defever, & Riaño, 2017). In practice, countries have often made indiscriminate use of such subsidies, in part to counteract the anti-export bias produced by other policies. These policies should be horizontal in nature, not sector-specific, so as to be efficient and not distort incentives (Hua, 2015). While subsidies can stimulate exports, this could cost the budget enormously. When subsidies accrue to wealthy exporters, the effect will be regressive.

It is unfair to use subsidies to offset the negative impact of other policies on exports (such as security): in such situations, reducing import protection and implementing instruments such as drawback or EPZs would be a better approach. Countries that are WTO members have become more restricted in the use of export subsidies, although less developed countries with per capita incomes of less than US$ 1,000 are exempted (Asmelash, 2015). The main problem with the export subsidies is their use for agricultural commodities by high-income countries. This has a destabilizing impact on world markets and is extremely harmful to producers in developing countries.

Brown and Troutt (2018) did a study on welfare and trade effects of export subsidies on performance. The paper sought to conduct an analysis of welfare and market effects linked with export subsidies. The study used an assumption of imports being restricted and prohibited by exporting nations. According to the study, this assumption contradicts the ceteris paribus assumption that is largely embraced in most economic analysis, it does not hold in a world characterized by free trade. Starting from the very basis level, the study presented an analysis of export subsidies for policy implications.

Defever, Reyes, Riaño and Varela (2017) did a study on the performance effectiveness of export subsidies in the context of Nepal. The analysis of the findings was done at the firm level. The study obtained custom level data covering a period from 2011 all through to 2014. On overall, the study noted that subsidies have not significantly impacted on values of exports, quantities, prices and growth rates at the firm level. At the same time, the study noted existence of a small positive effect on exported eligible products to countries apart from India. The interpretation of these results was that subsidies were primarily granted to relatively larger exporters already shipping eligible products to countries away from India.

2.3 Level of Investor’s Right Protection and Performance of Investment Banks

According to Choi, Lee and Shoham (2016), effective investor protection acts as an incentive to a country's business environment, contributing to development and performance of the financial market and enhancing the economic competitiveness as a whole. Cavusoglu, Cavusoglu, Son and Benbasat (2015) ascertain that investment security and greater capital inflows into the national economy depend largely on the performance effectiveness of corporate regulation and the quality of the institutional environment. Self-regulation and voluntary adoption of good corporate governance practices are a relevant factor in attracting investors by corporately responsible companies.

All outside investors be it big or small, shareholders or creditors, need to protect their rights. Gao, Zhong and Mei (2015) suggests that security of investment and the performance inflow of capital into the national economy depend largely on the quality of the institutional environment which consists of all the institutions that create standards, rules and social, political and economic policies. However with regard to the organizations and the regulatory bodies, institutions are also in charge of defining the formal and informal rules that govern the human relations.

Wardhani (2015) researched on the role of investor protection in the performance of corporate governance and accounting harmonization. The study revealed that investor protection impacts positively on the performance of corporate governance’s implementation and degree of convergence of local standard to IFRS. Investor Protection is a legal system encompassing rules, regulations, and enforcement aimed at protecting the minority investor’s rights (Klöhn, Hornuf & Schilling, 2016). Investors typically get certain rights or powers that are generally protected by enforcing laws and regulations when they finance firms. Disclosure and accounting rules are some of these rights which are aimed at providing the required information to the investors so that they can effectively exercise their rights (Gupta & Dubey, 2018).

Kohler and Stähler (2019) researched on the performance of investor protection. The findings of the study investor-state dispute settlements may increase welfare but comes with additional regulatory distortions in the first period. Protected shareholder rights include those to receive pro-rata dividends, vote for directors, participating in the meetings of the shareholders, subscribing to new security issues on the same terms as the insiders, sue the directors or the majority for suspected expropriation, call extraordinary meetings of the shareholders. This right is believed to help an investor in having a good working environment.

Ashraf and Zheng (2015) notes that rules protecting the performance of investors in different jurisdictions come from different sources like corporate, defense, bankruptcy, acquisition, and competition laws, but also from stock exchange regulations and

accounting standards. Law enforcement is as vitally important. The laws and regulations in most countries are imposed in part by market regulators, in part by courts, and in part by market participants themselves.

Hua (2015) investigated on the investor protection and firm performance using a case study of China’s cross-border mergers and acquisition. The study used a sample of 1470 cross-border mergers and acquisitions from 1997 through 2011 and revealed two distinctive features of the financial market in China. First, better investor protection mechanisms at target countries, such as better law and order environments, lower corruption in the public sector and better creditor rights protection, do not create wealth for shareholders of bidding firms across the external cross-border mergers of China. Corporate governance mechanisms at the company level are more closely related to valuation effects than investor security metrics at the country level, and are therefore central to understanding firm values in China (Guan & Yam, 2015).

Hasan, Kobeissi and Song (2014) conducted a study on corporate governance, investor protection, and firm performance in MENA countries. Protecting the rights of an investor is very important because expropriation of minority investors by controlling them is very common in many countries. Expropriation is very harmful to the stakeholders of the company, whether customers, investors, the atmosphere of the employee, and the country’s economy as a whole (Zhao, Shen & Zeng, 2016). Expropriation could damage the performance of the financial system in the end. Protection of investors turns out to be crucial as expropriation of minority shareholders and creditors by the controlling shareholders is extensive in many countries (Wu, Feng, Wang & Liang, 2015). When an outside investor finance companies, they face a risk, and sometimes near certainty, that their investment returns will never materialize because they are expropriated by the controlling shareholders or managers.

Barker and Chiu (2015) researched on UK’s enhanced listing regime in comparison with the performance of investor protection regimes in New York and Hong Kong. A country's legal system need to meet the criteria of improving the performance of investor

protection, and thus provide security and protection of the rights of shareholders and other stakeholders of macro-level companies. Legal investor protection implies defining shareholders’ positions in the company and on the capital market through legislation and other regulations. Investor rights witnessed at the corporate level are secured by strengthened corporate governance, whereby shareholders and managers are the main players in the application of the principles of good corporate management. To enhance investor confidence in the corporate sector, corporate governance and manager’s continuous education need to be affirmed (Hoffmann & Post, 2016). Self-regulation and voluntary commitment to good corporate governance standards is an important factor in drawing investors from corporate companies.

Li, Hassan, Abdirashid, Zeller and Du (2012) investigated the impact of investor protection on financial performance of Islamic banks. The findings of the study show that greater investor protection in Islamic banking and financial institutions leads to better financial performance. Investors who feel sufficiently protected from negligent and incompetent management of the company and have confidence in the laws and institutions can start realizing planned investments. Once investors consider an expropriation risk, they may penalize firms that fail to disclose details about themselves contractually and bind themselves contractually to treat them well (Ochoa, Correia, Peña & Población, 2015). Since entrepreneurs incur certain costs when issuing securities, they have an opportunity to bind themselves to avoid expropriation by contracts with investors. So long as these contracts are followed, there is no need for control of the financial markets. A competent management that adheres to ethical principles when interacting with the stakeholders of the company has a positive impact on the confidence of the investor, making both the company and the economy more competitive (Sadun, Bloom & Van Reenen, 2017).

2.3.1 Diversification

Diversification is a strategy of, managing risks and it mixes a wide variety of investments within a portfolio (Schmitt, Sun, Snyder & Shen, 2015). It is basically a growth strategy that encompasses the capitalization of market opportunities through the allocation of investment risk over different classes of assets. Investing in a variety of risks is considered to be the most common path of reducing risks. In owning a large number of shares in more than one asset class, investors build larger and more broadly diversified portfolios and thus reduce unsystematic risk. This is the risk that comes with investing in a particular company. In a market downtown, a portfolio that is well diversified will outperform the one that is concentrated and will also contribute to improved performance. García-Kuhnert, Marchica and Mura (2015) suggest that diversification aims at balancing out unsystematic risk occurrences in a portfolio so some assets’ positive performance neutralizes others’ negative performance.

The main aim of an investor is to make an optimal choice that leads to risk minimization and return maximization and also ensure that there is high level of performance. Diversification advantages only apply if the portfolio securities are not perfectly correlated that is, they respond differently to market factors, often in opposing ways (Ullah, Jourdain, Shivakoti & Dhakal, 2015). Fund managers and investors frequently diversify their investments across asset classes and determine what portfolio percentages to allocate to each. Through investing in international stocks, investors will gain more diversification benefits as they appear to be less closely associated with domestic ones. Fillat, Garetto and Oldenski (2015) states that diversification is important in reducing risk within a portfolio of investments. It includes investing in various asset classes to spread the risk across various economic sectors. The mix shifts with the shortening of time horizons. Equities are the biggest component of long-term investments. When targets have shorter terms, holdings are in more secure securities such as fixed-income funds, the easiest way to diversify a portfolio is by mutual funds and ETFs.

According to Xin et al (2017), organizations choose a diversification strategy to fully utilize all its underutilized resources or capabilities in other products to entice new business from market sections not accommodated before. Secondly, to transfer underutilized managerial skills within the organization to other markets where the skills can be better used. Thirdly, for survival by having a wide range of products for different markets. Fourthly, to broaden financial risk over a variety of products and markets since the organization is able to introduce new products/services into new markets, hence the dependence on one product or market is lowered hence the organization has more products and markets to be dependent on; decreasing the total risk to the organization. Fifthly, to get away from unattractive market environments since the organization’s turnover will increase as the new markets and products/services will bring in more profits. Sixthly, to make use of surplus cash flows.

Njuguna et al. (2019) says that related diversification occurs when an organization has dissimilar business units that are somehow linked to its main business activities. Related diversification has also been defined by Amadeo (2018) as adding new products/services that can make use of resources that the organization already has; when an organization has diverse business units that are linked to each other in certain ways. Related diversification, according to Mehmood et al. (2019), is more beneficial than unrelated because it provides better output and reduces risks seeing as the organization shares resources. Eukeria et al (2014) noted that unrelated diversification is very risky and that an organization is diversified in the areas that have little similarities to each other. Unrelated diversification benefits the organization as it prevents it from being identified with only one product/service, helps avert risks and helps the organization utilize its brand strength (Tsatsoula, 2018).

Eukeria et al (2014) noted that vertical diversification comes about when an organization carries out operations at different stages of production either within the organization (internal diversification) or acquiring another firm (external diversification). According to Dhir & Dhir (2015), conglomerate diversification strategy, arises when an organization pursues different businesses that are not in the same line as their present business. 22

According to Eukeria et al. (2014), concentric diversification happens when an organization adds similar products or markets to its current product line to realize strategic fit. Diversification can also be either internal, when an organization develops a new product or business by itself; and external, when an organization ventures into a new line of business by acquiring a business unit through mergers and acquisitions.

2.3.2 Put Options

A put option is a contract which gives the owner the right, but not the obligation, to sell a specified amount of an underlying security within a specified time frame at a predetermined price (Lin & Lu, 2015). Strike price is the agreed price the buyer will sell at put option. Upside gains are generally protected when investors take profits off the table. This is a wise choice, at times. It is often the case, though, that winning stocks actually take a break before going higher. Put options are considered to be the most common method of protection that is used and it gives one the option of selling at a certain price at a specific point in the future since the underlying stock will go down in price (Szu, Wang & Yang, 2015). A protective performance measure of put options ensures that losses in the underlying assets do not exceed a certain amount.

Put options are exchanged on different underlying assets, including stocks, currencies, bonds, commodities, and indexes; a put can be contrasted with a call option which gives the holder the opportunity to purchase the underlying at a specified price on or before expiry (Damaraju, Barney & Makhija, 2015). When choosing whether to perform a straddle or strangle, they are considered to be the key to understanding, when the underlying stock price depreciates relative to the strike price, a put option becomes more. Conversely, as the underlying stock rises, a put option loses its interest. Because putting options essentially provide a short position in the underlying asset, they are specifically used for hedging or speculating purposes on price downside action. According to Wang, Wang and Liu (2017), put options are designed to protect against lower prices, limited liability with no margin deposits and the potential for higher rates to benefit from. This

combination of downside price insurance and upside potential cannot be provided by futures contracts alone.

2.3.3 Dividends

Probably the least known way to protect investments is by investing in dividend paid stocks. Dividends account for a substantial portion of total return on a stock. It may in some cases reflect the whole number (Sharif, Adnan & Jan, 2015). Owning stable dividend paying companies is a proven method of delivering above-average returns. Besides the investment income, companies that associate themselves in paying generous dividends continue to increase earnings faster than those that don't. Faster growth is believed to be a contributor to higher share prices which in the end lead to performance of higher capital gains. Dividends effectively protect investors by boosting overall return. The cushion dividends are essential for risk-averse investors when stock prices fall, and typically result in lower volatility. In accordance to De Cesari and Huang-Meier (2015), dividends are a good hedge against inflation, in addition to providing a cushion on a down-market. Through investing in blue-chip businesses that both pay dividends and have pricing power, there is an assurance of protection that equal fixed income investments cannot match with the exception of Treasury Inflation-protected Securities (TIPS).

2.3.4 Principal Protected Notes

Investors who are worried about keeping their principal might want to consider Principal- protected notes with equity participation rights. These are similar to bonds, because they are fixed-income securities that, if retained until maturity, they return your principal investment. Where they differ, however, is the equity participation, which exists alongside the principal guarantee. Lean, McAleer and Wong (2015) state that risk-averse investors will find principal-protected notes to be more attractive. Nonetheless, before jumping on board, it is important to determine the strength of the bank performance that guarantees the principal, the underlying value of the notes and the fees associated with the purchase.

2.4 Business Facilitation Measures in Foreign Markets and Performance of Investment Banks

Olubiyi (2015) studied how the performance of trade facilitation affects inequality using a case study of Sub-Sahara Africa (SSA). The study majored on trade facilitation effectiveness on inequality in a penal of 38 SSA countries ranging from 2005 to 2012. The findings revealed that not all variables of facilitating trade contribute to inequality reduction. The measures of facilitating trade play an important role in providing important opportunities and also contributing towards the economic growth of a country. Business facilitation measures like removal of trade barriers have greatly contributed towards the expansion of global trade. Business producers can now offer a wide range of goods and services to more customers and with regard to this, the end consumers have a wide range of choices to choose from. The processes are also believed to be lower and also chances of accessing some innovations are sufficiently provided.

Santhi and Setyari (2019) researched on the effect of trade facilitation on Export Performance in Six ASEAN Countries Period 2005-2016. The findings of the study reveal that reforms on trade facilitation improve export performance in six ASEAN countries. The measures of facilitating businesses create a wide range of increasing the prospects of producing and selling of new products and ideas that are related to the business itself both locally, regionally and globally. In the end, this leads to creation of more income opportunities which will increase the living standards of the majority. Business facilitation measures have become the key factors towards the creation of highly improved and conducive trading environment. Quality business facilitation measures are aimed at widening the building of stronger and comprehensive trade agendas that play the role of facilitating trade transactions.

Luthfianto, Priyarsono and Barreto (2016) conducted a study on trade facilitation and performance of Indonesian manufacturing export. The study findings reveal that trade facilitation geared towards customs environment of Indonesian and its trading partners positively impacts the Indonesian manufacturing export performance. Business

facilitation measures precisely help in the collection of business steps whose roles are to standardize, harmonize, simplify and modernize commercial trade activities. In order to promote greater efficiency, consistency and predictability based on regulations, standards and internationally accepted practices, business facilitation measures seeks to harmonize the various rules between countries. In order to help in ensuring predictability of operations, the measures can potentially play a role in reducing barriers and transaction costs.

Hoekman and Shepherd (2015) conducted a study to determine who profits from the initiatives of facilitating trade performance. The findings of the study revealed that trade facilitation can be beneficial in a range of countries, including those that are primarily involved in value chains as suppliers. The measures of facilitating business performance play a key role in designing and running of a successful business. The measures are concerned with all the tasks that are needed to run a very productive business. Business facilitation measures benefits the business community at large by designing the best strategies that will help managers and their employees work towards achieving a common goal that will help in improving the performance level and maintaining a strong competitive advantage. The measures can be used in improving controls, ensuring that adequate revenue collection is achieved accordingly and at the same time contributing towards the growth of the economy.

Seck (2017) conducted a study on the performance benefits of trade facilitation in Sub- Saharan Africa. The research was obtained through analyzing the extent to which various elements of the trade cost landscape in the sub-continent may have contributed in shaping trade patterns both within the region and with the outside world. The results revealed that that raising the quality of the trading environment of the sub-continent to the level of the world average would generate significant export gains that amount to reducing bilateral geographical distance. The measures of facilitating a business are aimed at serving the needs of any group who come together specifically to achieve a common goal be it decision making, problem solving or exchanging of business ideas and information that are geared towards increasing the performance level. 26

2.4.1 Ease of Doing Business

The ease to do a business has consequences for foreign direct investment (Corcoran & Gillanders, 2015). The processes, rules, and regulations established by governments that can help in promoting a business-friendly environment or holding local businesses back from their entrepreneurial ambitions affect local businesses too. When systems, processes, rules and regulations are business-friendly, establishing businesses is made easier not only for big companies but also for smaller ones with less capital and resources at their disposal. Ease of doing business can benefit businesses and local citizens in creating an open and fair performance of the economic environment (Corcoran & Gillanders, 2015).

Ease of doing a business benefits businesses and locals in various ways. This includes: access to economic opportunities, lower transaction costs and fewer corruption (Hoffman, Munemo & Watson, 2016). Because of access to economic opportunities, big businesses often find it easier to establish a shop and deal with the bureaucracy of establishing a business while smaller enterprises and startups rely on easily accessible and reliable systems to set up their businesses. This includes dealing with things like building permits, obtaining electricity, property registration, obtaining credit, paying taxes, cross-border trading, and contract enforcement, resolving insolvency, and protecting minority investors (Ruiz, Cabello & Pérez-Gladish, 2018). These formalities usually take place quickly and without much trouble for larger companies and companies that have access to the means and staff, or third-party agencies to process all the paperwork, payments and registrations (Arandarenko, 2015). However, the more red tape that exists with small and medium-sized enterprises can often lead to obstacles that ultimately prevent them from moving forward with their businesses in a timely manner or discourage individuals from investing (Fevolden, Coenen, Hansen & Klitkou, 2017).

According to Karadag (2015), transaction costs are considered to be an important part of setting up shop for small and medium-sized businesses. It is usually the case that bigger companies can take on the transaction costs of setting up their business, either by

considering their own sources of finance or financial capital from outside. Transaction costs are a major part of establishing small and medium-sized business shops (Karadag, 2015). It is usually the case that larger corporations will bear the transaction costs of setting up their enterprises, whether through their own financial resources or access to outside financial capital. Having fewer steps and less bureaucracy and red tape in setting up a business will help small and medium-sized companies control their financial resources and credit performance. It also gives them the opportunity of managing their finances and resources easily for their post-setup activities and for managing their actual businesses (Loo, 2019).

Countries with stricter regulatory environments for business establishment and entrepreneurship often experience greater forms of corruption (Hossain, 2016). For one, if the setting-up criteria are too burdensome for smaller entrepreneurs or companies, they frequently turn to the informal sector to operate their operations. This often has less protection for working conditions, is more vulnerable to economic shocks, and often creates loopholes in corruption which end up adding to the cost of doing business for them. On the other hand, official systems and channels can also face vulnerability to corruption with more steps and processes to go through. Simplifying the process of setting up small and medium-sized enterprises therefore can greatly benefit both the government and the economic environment (Cowling, Liu, Ledger & Zhang, 2015).

2.4.2 Cost of Doing Business

The cost of doing business is any expense that a business incurs while carrying on business (Chaklader & Gulati, 2015). A cost of doing business, like raw materials, could be a direct cost, or an indirect cost, like building security. Regardless of the type, managers, business owners and anyone involved in running a company need to carefully consider such costs, since the amount of the costs will play a major role in determining whether or not a company is profitable (Van, Alstyne, Parker & Choudary, 2016). Expanding sales and buying practices across international borders, whether on the same continent or across oceans, requires multiple variables to be understandable.

Commercial, national and foreign exchange risks all exist to varying degrees in international trade, and they can be costly to manage or eliminate (Dutt, Hawn, Vidal, Chatterji, McGahan & Mitchell, 2016). Failure to adequately address them may destroy all profit. Discussions with banks, insurers, and export credit agencies (ECAs) will be required to determine the cost of managing financial exposure after analyzing trade and country risk factors (Sokolovska, 2017). In international transactions, volatility is a reality, and its impact will vary depending on the countries involved and the goods or commodities being purchased or sold (Campbell, Anderson, Daugaard & Naughton 2018). Commodity prices fluctuate on a daily basis, and while commercial contracts and or guaranteed forms of payment (such as documentary letters of credit) fix prices, extraordinary circumstances can sometimes add costs or offer the importer an opportunity to lower the paid price. Extraordinary circumstances often result in unforeseen costs and this risk is often difficult to predict accurately or cost accurately (Wayne, 2015).

Competition knowledge and understanding is a vital part of any domestic or foreign trade strategy but it is more difficult to react to competitive factors on an international scale (Jessop, Nielsen & Pedersen, 2016). When dealing with specialized equipment or seasonal goods and those in limited supply, competition is less of a factor. Nevertheless, the existing realities of international trade are that competition can come from almost every part of the globe, and can impact any business venture or transaction imaginable (Teece, 2018).

The above considerations apply to both importers and exporters, and should be taken into account when contemplating international business or extending existing business into other markets (Berger, Herstein, Silbiger & Barnes, 2017). All of these factors show a higher cost to an importer or exporter and potentially lower profit margins. Once the process is under way they are difficult to control or alter. Careful planning on the costs provides the safest opportunity to anticipate and calculate the impacts and determine if the business remains viable (Morrison, McHenry, Sequeira, Gorey, Mtegha & Doepel, 2016).

2.4.3 Incentives

Incentives are usually targeted to a particular industry, region, or type of capital expenditure (Guimón & Filippov 2017). This is often done as a way to attract more of certain types of businesses to a country, like those that operate in the technology sector, or those that will be setting up significant manufacturing operations. Incentives may be offered by a government in an effort to increase investment in a certain region. They can even be offered to attract advanced capital that is not typically available in the host country. This may include overhauling their own transportation infrastructure by way of foreign investment or bringing modern tech companies into the fold (Gupta & Dubey, 2018).

Raphael, Anna, Hamid and Marc (2015) conducted a study on regulatory incentives and their influence on consolidation in the banking sector context. The reviewed literature from this study noted that regulation of banking should place emphasis on the ability and record of the bank to provide credit to customers with a low level of income. The study indicated that incentives influences consolidation at the firm level. Jun, Philip and Zhishu (2015) did a study on incentive costs using evidence from, the banking industry of China. The study established that the internal risk rating of the bank significantly predicts interest rates on loans.

2.5 Chapter Summary

This chapter has reviewed empirical studies on the variables of the study including trade policies, the rules and regulations that govern entry and operations at the foreign equity markets and business facilitation measures. Each of these variables is structured into indicators that guided the review of literature. The next chapter is the methodology of the study and it presents the research design, population and sample design, data collection methods and procedures and data analysis of the findings. Chapter four presents the findings of the analysis. A summary of the analyzed findings with discussions, conclusions and recommendations are presented in chapter five.

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

The chapter presents the methods that were used in answering the formulated research questions of the study. The chapter specifically looks at the research design, population and sampling design, data collection methods, research procedure. Also the data analysis methods are detailed in this section.

3.2 Research Design

A research design refers to a detailed framework of methods and techniques that the researcher uses to collect and analyze data on a particular topic and present the findings in a more reasonable and understandable way (Tetnowski, 2015). A descriptive research design was used by the researcher with the main aim of achieving the objectives of the study. A descriptive research design is aimed at systematically and accurately describing a situation or area of interest. As such, a descriptive research design attempts to determine the status of the phenomenon being investigated. Descriptive research design allows testing and collection of more data hence suitable for obtaining data on definitive goals of the defined issues in this study (Tight, 2016).

3.3 Population and Sampling Design

3.3.1 Target Population

Population refers to the group of elements or items that have common observable features that are of greater interest to the researcher (Falony, Joossens, Vieira-Silva, Wang, Darzi, Faust & Tito, 2016). The target population on the other hand refers to a group that is to be generalized or inferred by a researcher (Panda, Chakraborty & Dror, 2015). The target population of the study included 22 chief finance officer and 22 chief operation officers from each of the 22 investment banks in Kenya who are in the top management level. These respondents were selected because of their active involvement in coming up with

decisions on foreign equity market investment. They therefore possessed the right information being sought in the study. Therefore, the total number of the target population was 44 respondents as shown in Table 3.1.

Table 3.1: Target Population Investment Banks Chief Finance Chief Operations Total Officers Officers Population 22 1 per Investment 1 per Investment Banks Banks Total per job 22 22 44 category

3.3.2 Sampling Design

Sampling is the process that the researcher uses to identify the sample of the population that is to be included in the study. Sampling procedure ensures that representative items from the population are selected for inclusion in the study (Vasconcellos, Silva, Szklo, Kuschnir, Klein, Abreu & Bloch, 2015). The sample needs to be large enough to bear as much characteristic as possible if compared with the population.

3.3.2.1 Sampling Frame

Sampling frame is a list of units or elements of the population that should be sampled and included in the study. The sampling frame comprised of 44 employees working in the 22 investment banks in Kenya (CMA, 2020).

3.3.2.2 Sampling Technique

Sampling technique lays down the steps to be followed in selecting the sampler size. There are generally two common types of sampling techniques; probability and non- probability sampling According to Fischer (2017), in cases where the population is not more than 200, a census study would be more appropriate. This study included all the 22 investment banks in Kenya and the 44 Chief Finance and Chief Operations Officers from 32

each to help in improving the ability of generalizing the findings of the study from the entire population.

3.3.2.3 Sample Size

Sample size is a means of determining the number of elements of the population to be included in the sample (Malterud, Siersma & Guassora, 2016). The rationale for sampling is to ensure that the relatively larger population is reduced into manageable sample. The study will adopt census and thus all the 44 chief finance officers and operations officers will be targeted. Thus, the sample size was 44 respondents. The rationale for use of census was that the population was small and easily accessible with homogenous features. Yin (2017) provides that a census is ideal when the elements of the target population are less than 200.

3.4 Data Collection Methods

Data collection is the process of getting data from the field that when analyzed results into drawing of inferences about the population (Sutton & Austin, 2015). Data collection is an important step since it ensures that all required data is collected for analysis. There are commonly two key methods for collection of data namely primary and secondary methods. Primary data collection relies on first hand sources of information and it can be collected with use of questionnaires, observation and interviews. Secondary data on the other hand represent the second-hand source of information for the study and it can be collected from books, journal, periodicals and other relevant publications.

The study collected primary data using questionnaires. The questionnaires contained closed and open-ended questions for ease analysis of the findings. The questionnaire was organized in distinct sections: general information in section A; performance in section B; trade policies in section C; and level of the investor’s right protection in section D. Section E covered business facilitation measures in foreign market. The questionnaire used the five-point Likert scale where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree.

3.5 Research Procedure

The researcher sought for an introductory letter from the University which stated the purpose of the study as being for academic reason. Before carrying out the actual study, piloting was conducted among 7 seven Chief Executive Offices (CEOs) of the investment firms because they were part of the teams coming up with decisions on foreign equity market investment. The aim of the pilot study was to test for reliability and validity of the instruments of the study (Tefferi, Lasho, Begna, Patnaik, Zblewski, Finke & Gangat, 2015). Once the research instruments have been found to be valid and reliable, an authorization letter from the National Commission for Science, Technology and Innovation (NACOSTI) was sought for collecting data in the field from respondents. The questionnaire was self-administered so as to increase on the response rate.

The questionnaire was pilot tested to determine its reliability and validity. The study adopted internal measure of internal consistency called Cronbach Alpha when determining reliability of the instrument and Table 3.2 is a summary of the results. From the results in Table 3.2, all the Cronbach Alpha coefficients were above 0.7, and thus it can be deduced that the scale used in the questionnaire was reliable.

Table 3.2: Reliability Results Variable Number of Items Cronbach Alpha Coefficient Performance of Investment 6 .845 Banks Trade Policies 12 .763 Level of the Investor’s Right 16 .792 Protection Business Facilitation Measures 12 .887

3.6 Data Analysis Methods

On completion on data collection, the collected data was checked for completeness and consistent. The study used descriptive statistics including means and standard deviation to analyze the findings. Descriptive statistics were chosen because they made it possible to show the distribution or the count of individual scores in the population for a specific

variable (Norman, Mello & Choi, 2016). The presentation of the findings was done using frequency distribution tables, pie charts and graphs.

To establish the relationship between foreign equity market investment decisions and performance of investment banks, the researcher conduct inferential statistics which included simple and multiple regression analysis. Multiple regression analysis was used to estimate the changes in performance of investment banks that can be explained by the discussed variables of foreign equity market investment decisions. Statistical Package for Social Sciences (Version 24.0), an analysis tool package was used.

The study adopted regression analysis to answer each of the research questions formulated. A summary of the regression models for the three research questions and the purpose of the study are summarized in Table 3.2.

3.7 Chapter Summary

From chapter three, it is clear that an explanatory research design was employed; the total number of targeted population was 44 respondents drawn from all the 22 investment banks in Kenya. The study adopted a census technique and thus the sample size were 44 respondents. The primary data was collected with the aid of questionnaires. The collected data was summarized using descriptive statistics which included means and standard deviation used to analyze the data. Besides the descriptive statistics, inferential statistics covering linear and multiple regression analysis were conducted to make relevant deductions. A summary of the analyzed findings with discussions, conclusions and recommendations are presented in chapter five.

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

The results of analysis from the data collected by this study are presented in this chapter. The analysis was done using SPSS tool covering the response rate, reliability and general information. The analysis of the objectives is also presented based on descriptive statistics and inferential statistics which was regression analysis.

4.2 Response Rate and Background

4.2.1 Response Rate

The researcher administered 44 questionnaires to chief finance officer and chief operation officers from each of the 22 investment banks in Kenya. From this questionnaire, 31 of them were filled in and returned to the researcher. This represented a response rate of 70% as indicated in Figure 4.1. The results in Figure 4.1 indicate the response rate of the study. These results are consistent with Mugenda and Mugenda (2003) who argued that a response of 70% and above is deemed to be sufficient for presentation of the results.

Non Response 30%

Response 70%

Figure 4.1: Response Rate

4.2.2 General Information

The general information of respondents including their gender, level of education and years of experience are indicated in this section of the analysis.

4.2.2.1 Gender of the Respondents Figure 4.2 is a summary of the findings on gender distribution of the respondents. From the results, while 61% of the respondents were male, 39% were female. This implies that both male and female respondents were included in the study hence representative findings.

Female 39%

Male 61%

Figure 4.2: Gender of the Respondents

4.2.2.2 Level of Education

The levels of education of the respondents are indicated in Table 4.1. The findings indicate that while 41.9% of the respondents had degrees, 35.5% had post graduate degrees and above while 22.6% had diplomas. This means that respondents who participated in the study were schooled and thus probably able to read and interpret the research questions sought on foreign equity market investment decisions.

Table 4.1: Level of Education Frequency Percent Diploma 7 22.6 Degree 13 41.9 Post Graduate Degree and above 11 35.5 Total 31 100.0

4.2.2.3 Years of Experience

Respondents were asked to indicate the number of years they had worked in their organizations and the results were summarized and presented in Figure 4.3. The results show that while 45.2% of the respondents had 3-5 years of experience, 32.3% had over 5 years, 16.1% had 2-3 years and 6.5% had less than 1 year. This means that respondents of the study had worked in their respective organizations for a longer period of time and thus they were well versed with information on foreign equity investment decisions that the study sought.

50.0%

40.0%

30.0% 45.2% 20.0% 32.3% 10.0% 16.1% 6.5% 0.0% Less than 1 year 2-3 years 3-5 years Over 5 years

Figure 4.3: Years of Experience

4.2.2.4 Years of Organizational Existence

The results of the years that the organizations studied had been in existence are indicated in Figure 4.4. As shown, 41.9% of the firms had been in operations for 5-7 years, 25.8% for over 7 years, 19.4% for 3-5 years and 12.9% for less than 3 years. It can be deduced from these findings that majority of the firm had been in operation for a relatively longer period of time and thus probably had survived on a number of foreign equity market investment decisions that this study sought to establish.

41.9% 45.0% 40.0% 35.0% 30.0% 25.8% 25.0% 19.4% 20.0% 12.9% 15.0% 10.0% 5.0% 0.0% Less than 3 3-5 years 5-7 years Over 7 years year

Figure 4.4: Years of Organizational Existence

4.3 Trade Policies and Performance of Investment Banks

The first research question was on effect of trade policies on performance of investment banks. The dependent variable of the study was performance of investment banks while the independent variable of the study was trade policies and this section will detail the findings of descriptive statistics as well as regression analysis results.

4.3.1 Descriptive Statistics on Trade Policies and Performance of Investment Banks

Trade policies had the following measures: nontariff barriers, tariff regime and export subsidies. This section will summarize the descriptive statistics on these indicators of trade polices using means and standard deviations. The questionnaire used the five-point Likert scale where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree. This section will summarize the descriptive statistics on these indicators of trade polices using means and standard deviations.

4.3.1.1 Non-tariff Barriers

The descriptive statistics findings on non-tariff barriers are indicated in Table 4.2. From the results, the overall mean score was 3.69; which indicated that respondents agreed on

the statements provided under nontariff barriers. More specifically, respondents agreed with a mean of 3.77 that non-Tariff Barriers (NTBs) influenced the competitive advantage of the firm which in turn affected the level of performance, different tax regimes in different countries affected investment returns on foreign investments with a mean of 3.71, the involvement of various agencies in verification of exports affected performance of goods with a mean of 3.67 and that non-tariff barriers helped the firm in maintaining its competitive advantage which improved the level of performance with a mean of 3.61.

Table 4.2: Nontariff Barriers Statement Mean Std. Dev Non-Tariff Barriers (NTBs) influences the competitive advantage of the firm which in turn affects the level of 3.77 .844 performance Different tax regimes in different countries affect investment 3.71 1.057 returns on foreign investments The involvement of various agencies in verification of exports 3.67 .944 affect performance of goods Non-tariff barriers helps the firm in maintaining its competitive 3.61 .919 advantage which improves the level of performance Overall Score 3.69 .941

4.3.1.2 The Tariff Regime

The second measure of trade policies was tariff regime and the results of descriptive statistics are indicated in Table 4.3. From the findings, the overall mean score on tariff regime was 3.62, which implies that respondents agreed on the statements provided under this measure of trade policies. Respondents agreed with a mean of 3.82 that additional administrative cost incurred as a result of tariff regime affected performance level, the tariff regime helped the firm in generating revenues which increased the level of performance with a mean of 3.65 and that existence of uniform tariffs had reduced incentives for tax evasion in this firm which affected performance with a mean of 3.51. However, respondents moderately agreed that uniform tariffs interfered with the level of returns recorded by the firm as shown by a mean of 3.48.

Table 4.3: The Tariff Regime Mean Std. Dev Uniform tariffs interfere with the level of returns recorded by 3.48 1.152 our firm Existence of uniform tariffs has reduced incentives for tax 3.51 .889 evasion in this firm which affects performance The additional administrative cost incurred as a result of tariff 3.82 1.076 regime affect performance level The tariff regime helps the firm in generating revenues which 3.65 .809 increases the level of performance Overall Score 3.62 .982

4.3.1.3 Export Subsidies

The other dimension of trade policies was the export subsidies. The results of the descriptive statistics indicated an overall mean of 3.64; which means that respondents agreed on export subsidies as a trade policy. Respondents agreed with a mean of 3.74 that subsidies had affected the level of performance by discouraging domestic operations of the firm with a tie at a mean of 3.64 on whether subsidies had affected performance as they have stimulated the exports of this firm or export subsidies had affected performance through reduced price on the exports. Respondents further agreed with a mean of 3.54 that export subsidies had affected performance level as the foreign clients pay less than domestic customers for similar products.

Table 4.4: Export Subsidies Mean Std. Dev Subsidies have affected performance as they have stimulated 3.64 1.018 the exports of this firm Export subsidies have affected the level of performance by 3.74 .929 discouraging domestic operations of our firm Export subsidies have affected performance through reduced 3.64 1.081 price on our exports Export subsidies have affected performance level as our foreign clients pay less than domestic customers for similar 3.54 .809 products Overall Score 3.64 .959

4.3.2 Regression Results on Trade Policies and Performance of Investment Banks

In order to achieve the first objective, the researcher performed regression analysis of the trade policies against performance of investment banks. The findings are indicated in subsequent sections.

4.3.2.1 Model Summary for Trade Policies and Performance of Investment Banks

From Table 4.5, the study established that the coefficient of correlation R was 0.830; which means that trade policies are strong correlates of performance of investment banks in Kenya. The value of coefficient of determination R square is 0.690; which infers that the model of the study was fit. The value of adjusted R square was 0.655; which implies that 65.5% variation in performance of investment banks is explained by trade policies, which comprised of export subsidies, non-tariff barriers and tariff regime.

Table 4.5: Model Summary for Trade Policies and Performance Model R R Square Adjusted R Square Std. Error of the Estimate 1 .830a .690 .655 2.28362 a. Predictors: (Constant), Export Subsidies, Non-Tariff Barriers, Tariff Regime

4.3.2.2 Analysis of Variance for Trade Policies and Performance

The results of ANOVA in Table 4.6 indicate that the value of F calculated was 19.986 while the p-value was less than 0.05. These results are interpreted to mean that the overall regression model was significant. Table 4.6: Analysis of Variance for Trade Policies and Performance Sum of Squares df Mean Square F Sig. Regression 312.680 3 104.227 19.986 .000b Residual 140.803 27 5.215 Total 453.484 30 a. Dependent Variable: Performance of Investment Banks b. Predictors: (Constant), Export Subsidies, Non-Tariff Barriers, Tariff Regime

4.3.2.3 Regression of Trade Policies and Performance

From Table 4.7, the following equation is predicted between trade policies and performance:

Thus, when trade policies are relaxed, performance of investment banks in Kenya would be at 3.177. A unit change in non-tariff barriers holding other variables constant would lead to 0.564 unit increase in performance of investment banks. A unit change in tariff regime when other variables are held constant would result into 0.132 unit increase in performance of investment banks. A unit change in export subsidies when other variables are held constant would lead to 0.108 unit change in performance of investment banks.

Table 4.7: Regression Beta Coefficients and Significance of Trade Policies and Performance Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t Sig. (Constant) 3.177 5.222 .608 .548 Non-Tariff Barriers .905 .254 .564 3.570 .001 Tariff Regime .218 .106 .132 2.057 .041 Export Subsidies .180 .056 .108 3.214 .017 a. Dependent Variable: Performance of Investment Banks

4.4 Level of the Investor’s Right Protection and Performance of Investment Banks

This section is set out to provide the descriptive statistics findings the second research question on the level of investor’s right protection and the regression results linking this with performance of investment banks.

4.4.1 Descriptive Statistics on Investor’s Right Protection

The section focuses on presenting the descriptive statistics on the level of investor’s right protection which was represented by diversification, put options, dividends and principal protected notes.

4.4.1.1 Diversification

The results in Table 4.8 indicate an overall mean of 3.79 on diversification. This means that respondents agreed that their organizations diversified probably to reduce exposure on risks in foreign markets. Respondents agreed with a mean of 3.87 that their firm had diversified its operations by investing in international stocks to improve performance, the firmed used diversification to balance out unsystematic risk occurrences to improve the level of performance with a mean of 3.82, the firm reduced reduces its risk by investing in a variety of risks to improve the level of performance with a mean of 3.77 and that the firm capitalized its market opportunities through diversification thereby increasing the level of performance as shown by a mean of 3.68.

Table 4.8: Diversification Mean Std. Dev The firm capitalizes its market opportunities through 3.68 1.179 diversification thereby increasing the level of performance The firm reduces its risk by investing in a variety of risks to 3.77 .990 improve the level of performance The firm uses diversification to balance out unsystematic risk 3.82 1.012 occurrences to improve the level of performance The firm has diversified its operations by investing in 3.87 .846 international stocks to improve performance Overall Score 3.79 1.007

4.4.1.2 Put Options

The results in Table 4.9 indicate an overall mean score of 3.78; this is interpreted to means that majority of the studied firms had embraced put options as a means of mitigating against risk exposure. Respondents agreed with a mean of 3.90 that the firm used put options to increase its return on investments which increase the level of

performance, the firm used put options to manage risk exposure which helped in improving the level of performance with a mean of 3.80, put options increased the return on investments level by ensuring that losses in the underlying assets of the firm did not exceed a certain amount with a mean of 3.73 and that put options increased the firm’s return on investments by hedging against risks with a mean of 3.69.

Table 4.9: Put Options Mean Std. Dev The firm uses put options to manage risk exposure which helps 3.80 .74919 in improving the level of performance The firm uses put options to increase its return on investments 3.90 1.04419 which increase the level of performance Put options increases the return on investments level by ensuring that losses in the underlying assets of this firm do not exceed a 3.73 .73968 certain amount. Put options increase the firm’s return on investments by hedging 3.69 .886 against risks Overall Score 3.78 0.855

4.4.1.3 Dividends

Table 4.10 indicates an overall mean score of 3.69; this means that most of the studied firms had adopted dividends as to protect the rights of investors. Respondents agreed with a mean of 3.74 that dividend paid stocks increased the firm’s return on investments by protecting its investments and that dividends increased the firm’s return on investments through hedging against inflation. Respondents also agreed with a mean of 3.66 that dividends increased performance of the firm by protecting its investors through boosting their overall return and that the firm used dividends to hedge against inflation which affects the level of performance as shown by a mean of 3.60.

Table 4.10: Dividends Mean Std. Dev Dividend paid stocks increase the firm’s return on investments by 3.74 1.094 protecting its investments Dividends increase performance of the firm by protecting its 3.66 .912 investors through boosting their overall return Dividends increase the firm’s return on investments through 3.74 .929 hedging against inflation The firm uses dividends to hedge against inflation which affects 3.60 .789 the level of performance Overall Score 3.69 .931

4.4.1.4 Principal-Protected Notes

Table 4.11 indicates that the overall mean was 3.52, this means that principal-protected notes had slightly been adopted by the studied firms in their investor’s right protection. Respondents agreed with a mean of 3.57 that principal protected notes increased firm return on investments through diversified liquidity, principal protected notes increased firm return on investments by getting its principal investment with a mean of 3.54 and that principal protected notes increased firm return on through diversified investment options with mean of 3.50. Respondents moderately agreed with a mean of 3.47 that principal-protected notes helped the firm invest in a wide range of investments which improves the level of performance.

Table 4.11: Principal-Protected Notes Statement Mean Std. Dev Principal protected notes increase firm return on investments by 3.54 .994 getting its principal investment Principal-protected notes helps the firm invest in a wide range of 3.47 .846 investments which improves the level of performance Principal protected notes increase firm return on investments 3.57 .991 through diversified liquidity Principal protected notes increase firm return on through 3.50 .632 diversified investment options Overall Score 3.52 .866

4.4.2 Regression Results on Level of the Investor’s Right Protection and Performance of Investment Banks

The second objective of the study was set out to establish the effect of the level of the investor’s right protection and performance of investment banks. To achieve this objective, the study carried out regression analysis.

4.4.2.1 Model Summary for Level of the Investor’s Right Protection and Performance of Investment Banks

The results in Table 4.12 indicate that the value of adjusted R square was 0.744; this implies that 74.4% variation in performance of investment banks in Kenya is explained by principal protected notes, diversification, put option and dividends as the levels of the investor’s right protection.

Table 4.12: Model Summary for Level of the Investor’s Right Protection and Performance Model R R Square Adjusted R Square Std. Error of the Estimate 1 .882a .778 .744 1.96649 a. Predictors: (Constant), Principal Protected Notes, Diversification, Put Option, Dividends

4.4.2.2 ANOVA for Level of the Investor’s Right Protection and Performance of Investment Banks

The findings in Table 4.13 indicate that the value of F calculated is 22.817 with the p- value being 0.000 which is less than 0.05. This means that the overall regression model of the study was significant.

Table 4.13: ANOVA for Level of the Investor’s Right Protection and Performance Sum of Squares df Mean Square F Sig. Regression 352.940 4 88.235 22.817 .000b Residual 100.544 26 3.867 Total 453.484 30 a. Dependent Variable: Performance of Investment Banks b. Predictors: (Constant), Principal Protected Notes, Diversification, Put Option, Dividends

4.6.2.2 Beta Coefficients for Level of the Investor’s Right Protection

From the results, when the level of the investor’s right protection is held constant, performance of investment banks would be at 4.769 units. A unit change in diversification when all other variables are held constant would lead to 0.879 change in performance of investment banks. A unit change in put option when all other variables are held constant would lead to 0.143 unit change in performance of investment banks. A unit change in put options when all other variables are held constant would bring about 0.326 unit change in performance of investment banks in Kenya.

Thus, diversification as a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Taking the significant level as 5%, the study established that diversification (p=0.000<0.05), put option (p=0.003<0.05) and dividends (p=0.019<0.05) all were found to have significant effect on performance of investment banks in Kenya. On the other hand, principal protected notes (p0.913>0.05) was insignificant.

Table 4.14: Beta Coefficients for Level of the Investor’s Right Protection Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t Sig. (Constant) 4.769 6.562 .727 .474 Diversification 1.561 .172 .879 9.076 .000 Put Option .240 .089 .143 2.697 .003 Dividends .535 .138 .326 3.877 .019 Principal Protected Notes .021 .193 .011 .110 .913 a. Dependent Variable: Performance of Investment Banks

4.5 Business Facilitation Measures in Foreign Market and Performance of Investment Banks

The results of descriptive statistics and regression results on business facilitation methods in foreign market and performance of investment banks are indicated in this section.

4.5.1 Descriptive Statistics on Business Facilitation Measures in Foreign Market

The subsequent sections provide summary of the descriptive statistics on business facilitation measures.

4.5.1.1 Ease of Doing Business

The results in Table 4.15 show that the overall mean on ease of doing business was 3.47; this could an indication that the ease of doing business in the foreign markets were moderately favorable to the firms. Respondents agreed with a mean of 3.77 that the rules formulated by the government in relation to protection of foreign investments increased firm’s returns on investments, it was a bit easier for this firm to increase its returns on investments because of the ease of doing business with a mean of 3.54 and that the presence of favorable regulations had lowered the transaction costs which had increased the returns on investments of firm with a mean of 3.53. On the other hand, respondents disagree with a mean of 3.04 on whether the regulations formulated by the government in relation to repatriation of profits were favorable in increasing the performance of the firm.

Table 4.15: Ease of Doing Business Statement Mean Std. Dev The rules formulated by the government in relation to protection of 3.77 1.023 foreign investments increases firm’s returns on investments The regulations formulated by the government in relation to repatriation of profits are favorable in increasing the performance 3.04 1.112 of the firm Presence of favorable regulations have lowered the transaction 3.53 .963 costs which have increased the returns on investments of firm It is easy for this firm to increase its returns on investments 3.54 .929 because of the ease of doing business Overall Score 3.47 1.007

4.5.1.2 Cost of Doing Business As shown in Table 4.16, cost of doing business had an overall score of 3.99; this means that respondents agreed on it as a business facilitating measure in the foreign market. Respondents agreed with a mean of 4.15 that fluctuation of commodity prices in

international markets affected the performance level of this firm, extraordinary circumstances in foreign markets often resulted in unforeseen costs which affected the performance of the firm with a mean of 4.11, the overall costs incurred in foreign markets determined the performance level of this firm with a mean of 3.87 and the firm carefully determined its costs to gauge if the level of performance was high as supported by a mean of 3.83.

Table 4.16: Cost of Doing Business Statement Mean Std. Dev The overall costs incurred in foreign markets determine the 3.87 .805 performance level of this firm Extraordinary circumstances in foreign markets often result in 4.11 1.028 unforeseen costs which affects the performance of the firm The firm carefully determines its costs to gauge if the level of 3.83 .898 performance will be high The fluctuation of commodity prices in international markets 4.15 .901 affect the performance level of this firm Overall Score 3.99 .908

4.5.1.3 Incentives

The results in Table 4.17 indicate that incentives had an overall score of 3.67; showing that they were practiced in foreign markets. Respondents agreed with a mean of 3.75 that incentives in host countries reduced the overall costs of doing business in foreign markets which increased the firm’s performance, the firm used incentives to increase its gross sales which had an effect on the level of performance as shown by a mean of 3.74, incentives provided in foreign markets motivated the firm to increase its performance with a mean of 3.68 and that the firm used incentives to attract its advanced capital which increases the level of performance as shown by a mean of 3.51.

Table 4.17: Incentives Mean Std. Dev Incentives provided in foreign markets motivate our firm to 3.68 .926 increase its performance Incentives in host countries reduce the overall costs of doing business in foreign markets which increase the firm’s 3.75 1.081 performance The firm uses incentives to attract its advanced capital which 3.51 .851 increase the level of performance The firm uses incentives to increase its gross sales which has an 3.74 1.031 effect on the level of performance Overall Score 3.67 .972

4.5.2 Regression Results on Business Facilitation Measures in Foreign Market and Performance of Investment Banks

Regression analysis was used to establish the effect of business facilitation measures in foreign markets and performance of investment banks in Kenya. The results are presented in subsequent sections.

4.5.2.1 Model Summary for Business Facilitation Measures in Foreign Market and Performance of Investment Banks

Table 4.18 indicates the results of the model summary. From the findings, The value of adjusted R square was 0.482; this means that 48.2% variability in performance of the investment banks is explained by incentives, ease of doing business, cost of doing business. Table 4.18: Model Summary for Business Facilitation Measures in Foreign Market and Performance of Investment Banks Model R R Square Adjusted R Square Std. Error of the Estimate 1 .731a .534 .482 2.79788 a. Predictors: (Constant), Incentives, Ease of Doing Business, Cost of Doing Business

4.5.2.2 ANOVA for Business Facilitation Measures in Foreign Market and Performance of Investment Banks

From Table 4.19, the value of F calculated is taken as 10.310 and the p-value is 0.000. This means that the overall regression model of the study was significant.

Table 4.19: ANOVA for Business Facilitation Measures in Foreign Market Sum of Squares df Mean Square F Sig. Regression 242.125 3 80.708 10.310 .000b Residual 211.359 27 7.828 Total 453.484 30 a. Dependent Variable: Performance of Investment Banks b. Predictors: (Constant), Incentives, Ease of Doing Business, Cost of Doing Business

4.5.2.3 Beta coefficients for Business Facilitation Measures in Foreign Market and Performance of Investment Banks

The findings showed that when all the variables of the study are held constant, performance of investment banks would be at 36.530 units. A unit change in the ease of doing business when holding other variables constant would lead to 0.438 unit increase in performance of performance of investment banks in Kenya. A unit change in cost of doing business when all other variables are held constant would lead to 0.398 change in performance of investment banks in Kenya. Hence, ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. At 5%, the study established that the cost of doing business (p<0.05) and the ease of doing business (p<0.05) all were significant. However, incentives (p>0.05) was not significant.

Table 4.20: Beta coefficients for Business Facilitation Measures in Foreign Market Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t Sig. (Constant) 36.530 7.528 4.853 .000 Ease of Doing Business .291 .103 .438 2.828 .009 Cost of Doing Business .338 .132 .398 2.564 .016 Incentives .050 .216 .031 .232 .818 a. Dependent Variable: Performance of Investment Banks

4.6 Overall Regression Results on the Determinants of Foreign Equity Market Investment Decisions and Performance

The purpose of this study was to investigate the determinants of foreign equity market investment decisions on performance of investment banks in Kenya. To achieve this objective, the study used multiple regression analysis where business facilitation

measures in foreign market, level of investors’ right protection and trade policies as independent variables were regressed against performance.

4.6.1 Model Summary of Determinants of Foreign Equity Market Investment Decisions and Performance

From Table 4.21, the value of adjusted R square is 0.681, this means that 68.1% change in performance of investment banks in Kenya is jointly explained by business facilitation measures in foreign market, level of investor’s right protection and trade policies as the determinants of foreign equity market investment decisions. Table 4.21: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .844a .713 .681 2.19661 a. Predictors: (Constant), Business Facilitation Measures in Foreign Market, Level of Investor’s Right Protection, Trade Policies

4.6.2 Analysis of Variance of the Determinants of Foreign Equity Market Investment Decisions and Performance

The results of the ANOVA are shown in Table 4.22. From the findings, the value of F calculated for the study is taken as 22.328, this implies that the overall regression model of the study was significant.

Table 4.22: Overall ANOVA Results Sum of Squares df Mean Square F Sig. Regression 323.206 3 107.735 22.328 .000b Residual 130.277 27 4.825 Total 453.484 30 a. Dependent Variable: Performance of Investment Banks b. Predictors: (Constant), Business Facilitation Measures in Foreign Market, Level of Investor’s Right Protection, Trade Policies

4.6.3 Beta Coefficients and Significance

Table 4.23 shows that holding the determinants of foreign equity investment decisions constant, performance of investment banks would be at 78.163. A unit change in trade policies when other variables are held constant would lead to 0.310 unit change in performance of investment banks in Kenya. A unit change in level of investor’s right protection when all other factors are held constant would bring about 0.848 increase in 53

performance of investment banks. A unit change in business facilitation measures in foreign markets when all other determinants are held constant would lead to 0.10 unit change in performance of investment banks.

Therefore, level of investor’s right protection had the largest effect on performance of investment banks in Kenya followed by trade policies and lastly the business facilitation measures in foreign market. At 5%, the study noted that the level of investor’s right protection (p<0.05), trade policies (p<0.05) and business facilitation measures in foreign market (p<0.05) all have significant effect on performance of investment banks.

Table 4.23: Overall Coefficients and Significance Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t Sig. (Constant) 78.163 14.638 5.340 .000 Trade Policies .310 .078 .154 3.974 .016 Level of Investors 3.122 .390 .848 8.001 .000 Right Protection Business Facilitation Measures in Foreign .202 .090 .108 2.244 .019 Market a. Dependent Variable: Performance of Investment Banks

4.7 Chapter Summary

The chapter has presented the results of analysis on the data that was sought by the study. The key findings established were that investor’s right protection, trade policies and business facilitation measures in foreign market all have significant effect on performance of investment banks in Kenya. The next chapter will summarize the findings drawing conclusions and recommendations.

CHAPTER FIVE

5.0 DISCUSSION, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

The findings of the study are summarized in this chapter with discussions as guided by the reviewed literature. The conclusions and recommendations for improvement and for further research are also provided in this chapter. The contents in each of these sections were guided by the research questions of the study.

5.2 Summary

The purpose of the study was to establish the determinants of foreign equity market investment decisions on performance of investment banks in Kenya. The study was guided by the following research questions: How do trade policies affect the performance of investment banks in Kenya? How does the level of the investor’s right protection affect the performance of investment banks in Kenya? What are the effect business facilitation measures in foreign market on performance of investment banks in Kenya? The study adopted descriptive research design where 44 finance officer and chief operation officers from 22 investment banks in Kenya were targeted. The study used a census and thus all the 44 respondents were covered. The study collected primary data using questionnaires. The analysis of the collected data was conducted using descriptive statistics like means and standard deviations and inferential statistic which is regression analysis. The findings were presented using tables and figures.

The first research question sought to determine how trade policies as determinants of foreign equity market investment decisions affected the performance of investment banks in Kenya. From the descriptive statistics, nontariff barriers had an overall mean score of 3.69; which indicated that respondents agreed on the statements provided under nontariff barriers. More specifically, respondents agreed with a mean of 3.77 that non-Tariff Barriers (NTBs) influenced the competitive advantage of the firm which in turn affected the level of performance, different tax regimes in different countries affected investment 55

returns on foreign investments with a mean of 3.71. The overall mean score on tariff regime was 3.62, which implies that respondents agreed on the statements provided under this measure of trade policies. Respondents agreed with a mean of 3.82 that additional administrative cost incurred as a result of tariff regime affected performance level; the tariff regime helped the firm in generating revenues which increased the level of performance with a mean of 3.65. The results of the descriptive statistics indicated an overall mean of 3.64; which means that respondents agreed on export subsidies as a trade policy. Respondents agreed with a mean of 3.74 that subsidies had affected the level of performance by discouraging domestic operations of the firm.

In order to answer the first RQ, the researcher performed simple regression analysis of the trade policies against performance of investment banks. The value of adjusted R square was 0.655; which implies that 65.5% variation in performance of investment banks is individually explained by export subsidies, non-tariff barriers, tariff regime as the trade policies. The results of indicate that the value of F calculated was 19.986 while the p<0.05. Thus, when trade policies are relaxed, performance of investment banks in Kenya would be at 3.177. A unit change in non-tariff barriers holding other variables constant would lead to 0.564 unit increase in performance of investment banks. A unit change in tariff regime when other variables are held constant would result into 0.132 unit increase in performance of investment banks. A unit change in export subsidies when other variables are held constant would lead to 0.108 unit change in performance of investment banks. Thus, non-tariff barriers had the largest effect on performance of investment banks followed by tariff regime and lastly export subsidies. At 5% level of significance, the study established that non-tariff barriers had p-value of 0.001, tariff regime had 0.041 and export subsidies had 0.017.

The second research question of the study sought to establish how the level of the investor’s right protection as a determinant of foreign equity market investment decisions affected the performance of investment banks in Kenya. The results of descriptive statistics indicate an overall mean of 3.79 on diversification. Respondents agreed with a mean of 3.87 that their firm had diversified its operations by investing in international 56

stocks to improve performance, the firmed used diversification to balance out unsystematic risk occurrences to improve the level of performance with a mean of 3.82. The results on put option indicate an overall mean score of 3.78; this is interpreted to means that majority of the studied firms had embraced put options as a means of mitigating against risk exposure. Respondents agreed with a mean of 3.90 that the firm used put options to increase its return on investments which increase the level of performance; the firm used put options to manage risk exposure which helped in improving the level of performance with a mean of 3.80. On dividends, the overall mean score was 3.69; this means that most of the studied firms had adopted dividends as to protect the rights of investors. Respondents agreed with a mean of 3.74 that dividend paid stocks increased the firm’s return on investments by protecting its investments and that dividends increased the firm’s return on investments through hedging against inflation. On principal-protected notes, the overall mean was 3.52; this means that principal- protected notes had slightly been adopted by the studied firms in their investor’s right protection. Respondents agreed with a mean of 3.57 that principal protected notes increased firm return on investments through diversified liquidity, principal protected notes increased firm return on investments by getting its principal investment with a mean of 3.54.

Regression results indicate that the value of adjusted R square was 0.744; this implies that 74.4% variation in performance of investment banks in Kenya is explained by principal protected notes, diversification, put option and dividends as the levels of the investor’s right protection. The ANOVA findings indicate that the value of F calculated is 22.817 with the p<0.05. This means that the overall regression model of the study was significant. From the results, when the level of the investor’s right protection is held constant, performance of investment banks would be at 4.769 units. A unit change in diversification when all other variables are held constant would lead to 0.879 change in performance of investment banks. A unit change in put option when all other variables are held constant would lead to 0.143 unit change in performance of investment banks. A unit change in put options when all other variables are held constant would bring about 0.326 unit change in performance of investment banks in Kenya. Thus, diversification as 57

a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Taking the significant level as 5%, the study established that diversification (p=0.000<0.05), put option (p=0.003<0.05) and dividends (p=0.019<0.05) all were found to have significant effect on performance of investment banks in Kenya. On the other hand, principal protected notes (p=0.913>0.05) was insignificant.

The third research question of the study sought to assess the effects of business facilitation measures in foreign market as a determinant of foreign equity market investment decisions on performance of investment banks in Kenya. In view of the descriptive statistics, the overall mean on ease of doing business was 3.47; this could an indication that the ease of doing business in the foreign markets were moderately favorable to the firms. Respondents agreed with a mean of 3.77 that the rules formulated by the government in relation to protection of foreign investments increased firm’s returns on investments; it was a bit easier for this firm to increase its returns on investments because of the ease of doing business with a mean of 3.54. The cost of doing business had an overall score of 3.99; this means that respondents agreed on it as a business facilitating measure in the foreign market. Respondents agreed with a mean of 4.15 that fluctuation of commodity prices in international markets affected the performance level of this firm, extraordinary circumstances in foreign markets often resulted in unforeseen costs which affected the performance of the firm with a mean of 4.11. The results indicate that incentives had an overall score of 3.67; showing that they were practiced in foreign markets. Respondents agreed with a mean of 3.75 that incentives in host countries reduced the overall costs of doing business in foreign markets which increased the firm’s performance; the firm used incentives to increase its gross sales which had an effect on the level of performance as shown by a mean of 3.74.

From the findings of regression analysis, the value of adjusted R square was 0.482; this means that 48.2% variability in performance of the investment banks is explained by incentives, ease of doing business, cost of doing business. From ANOVA results, the value of F calculated is taken as 10.310 and the p-value is 0.000. This means that the 58

overall regression model of the study was significant. From the results, when all the variables of the study are held constant, performance of investment banks would be at 36.530 units. A unit change in the ease of doing business when holding other variables constant would lead to 0.438 unit increase in performance of performance of investment banks in Kenya. A unit change in cost of doing business when all other variables are held constant would lead to 0.398 change in performance of investment banks in Kenya. Hence, ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. At 5%, the study established that the cost of doing business (p<0.05) and the ease of doing business (p<0.05) all were significant. However, incentives (p>0.05) was not significant.

The purpose of this study was to investigate the determinants of foreign equity market investment decisions on performance of investment banks in Kenya. From multiple regression results, the value of adjusted R square is 0.681, this means that 68.1% change in performance of investment banks in Kenya is jointly explained by business facilitation measures in foreign market, level of investor’s right protection and trade policies as the determinants of foreign equity market investment decisions. The results of the ANOVA indicate the value of F calculated for the study as 22.328, this implies that the overall regression model of the study was significant. From the results, when the determinants of foreign equity investment decisions are held constant, performance of investment banks would be at 78.163. A unit change in trade policies when other variables are held constant would lead to 0.310 unit change in performance of investment banks in Kenya. A unit change in level of investor’s right protection when all other factors are held constant would bring about 0.848 increase in performance of investment banks. A unit change in business facilitation measures in foreign markets when all other determinants are held constant would lead to 0.10 unit change in performance of investment banks. Therefore, level of investor’s right protection had the largest effect on performance of investment banks in Kenya followed by trade policies and lastly the business facilitation measures in foreign market. At 5%, the study noted that the level of investor’s right protection (p<0.05), trade policies (p<0.05) and business facilitation measures in foreign market (p<0.05) all have significant effect on performance of investment banks. 59

5.3 Discussion

5.3.1 Trade Policies and Foreign Equity Market Investment Decisions and Performance of Investment Banks

The study established that 65.5% variation in performance of investment banks is explained by export subsidies, non-tariff barriers, tariff regime as the trade policies. Curran (2015) researched on how trade policy affects the performance of global networks using the case study of solar panel. The study adopted the use of trade data and interviews together with press reports and position reports. The findings revealed that there needs to be incorporation of intuitional factors like trade policy, more effectively into Global Production Networks (GPN) analysis. Asfaw (2015) researched on trade policy and the performance of the Sub-Saharan economy in Africa. The study revealed that openness to international trade acts as a stimulator to both economic growth and investment. Trade policies like average weighted tariff rate and the real effective rate of exchange impacts the performance of the economy both directly and indirectly. Trade policies between countries allow the flow of goods for mutual benefit from one country to another, as different products are available to the importing country, which otherwise would not be available to consumers (Seck, 2017).

A unit change in non-tariff barriers holding other variables constant would lead to 0.564 unit increase in performance of investment banks. Navaretti et al. (2018) sought to determine the role of non-tariff measures on the performance of competitive advantage established that non tariffs have an influence on competitive advantage and performance of the firm. A unit change in tariff regime when other variables are held constant would result into 0.132 unit increase in performance of investment banks. Curran et al. (2019) conducted a study to determine the interaction between tariff regimes and performance of the global networks. The study was conducted among EU member states. From the findings, existence of high tariffs directly impacts on sourcing in the EU market. A unit change in export subsidies when other variables are held constant would lead to 0.108 unit change in performance of investment banks. The result contradicts Defever et al. (2017) who did a study on the performance effectiveness of export subsidies in the 60

context of Nepal and noted that subsidies have not significantly impacted on values of exports, quantities, prices and growth rates at the firm level.

Thus, non-tariff barriers had the largest effect on performance of investment banks followed by tariff regime and lastly export subsidies. At 5% level of significance, the study established that non-tariff barriers had p-value of 0.001, tariff regime had 0.041 and export subsidies had 0.017. Jointly, the study established that trade policies have significant effect on performance of investment banks. Ferraz et al. (2017) noted that non-tariff measures have a negative relationship with export of the country. Byrne and Rice (2018) showed that 9.6% reduction in flow of trade performance between Ireland and UK is due to increase in border waiting time. Okute (2017) indicated that involvement of various agencies in verification of exports and documentation procedures all affect the flow and performance of goods across east Africa region. Bigsten et al. (2016) failed to established evidence that reduction in output tariffs resulted into improvement in productivity. Bussolo and Vargas-Da-Cruz (2015) noted that firms with high exposure on input tariffs perform better in sectors with a large amount of input tariff, accessibility to markets and greater opportunities for profitability. Curran et al. (2019) established that existence of high tariffs directly impacts on sourcing in the EU market. Defever et al. (2017) noted that subsidies have not significantly impacted on values of exports, quantities, prices and growth rates at the firm level.

The results of descriptive statistics indicated that respondents agreed on the statements provided under nontariff barriers. More specifically, respondents agreed that non-Tariff Barriers (NTBs) influenced the competitive advantage of the firm which in turn affected the level of performance. A study among European Union member countries by Navaretti et al (2018) to determine the role of non-tariff measures on the performance of competitive advantage established that non-tariffs have an influence on competitive advantage and performance of the firm. Different tax regimes in different countries affected investment returns on foreign investments.

5.3.2 Investor’s Right Protection as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

Regression results indicate that 74.4% variation in performance of investment banks in Kenya is explained by principal protected notes, diversification, put option and dividends as the levels of the investor’s right protection. According to Choi et al. (2016), effective investor protection acts as an incentive to a country's business environment, contributing to development and performance of the financial market and enhancing the economic competitiveness as a whole. Wardhani (2015) revealed that investor protection impacts positively on the performance of corporate governance’s implementation and degree of convergence of local standard to IFRS. Investor Protection is a legal system encompassing rules, regulations, and enforcement aimed at protecting the minority investor’s rights (Klöhn et al., 2016). Kohler and Stähler (2019) noted that protected shareholder rights include those to receive pro-rata dividends, vote for directors, participating in the meetings of the shareholders, subscribing to new security issues on the same terms as the insiders, sue the directors or the majority for suspected expropriation, call extraordinary meetings of the shareholders.

From the results, a unit change in diversification when all other variables are held constant would lead to 0.879 changes in performance of investment banks. Diversification is a strategy of, managing risks and it mixes a wide variety of investments within a portfolio (Schmitt et al., 2015). It is basically a growth strategy that encompasses the capitalization of market opportunities through the allocation of investment risk over different classes of assets. Investing in a variety of risks is considered to be the most common path of reducing risks. In owning a large number of shares in more than one asset class, investors build larger and more broadly diversified portfolios and thus reduce unsystematic risk. This is the risk that comes with investing in a particular company. In a market downtown, a portfolio that is well diversified will outperform the one that is concentrated and will also contribute to improved performance. García-Kuhnert et al. (2015) suggest that diversification aims at balancing out unsystematic risk occurrences in a portfolio so some assets’ positive performance

neutralizes others’ negative performance. A unit change in put option when all other variables are held constant would lead to 0.143 unit change in performance of investment banks. A unit change in put options when all other variables are held constant would bring about 0.326 unit change in performance of investment banks in Kenya. Put options are considered to be the most common method of protection that is used and it gives one the option of selling at a certain price at a specific point in the future since the underlying stock will go down in price (Szu et al., 2015). A protective performance measure of put options ensures that losses in the underlying assets do not exceed a certain amount.

Thus, diversification as a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Fillat et al. (2015) states that diversification is important in reducing risk within a portfolio of investments. It includes investing in various asset classes to spread the risk across various economic sectors. The mix shifts with the shortening of time horizons. Equities are the biggest component of long-term investments. When targets have shorter terms, holdings are in more secure securities such as fixed-income funds, the easiest way to diversify a portfolio is by mutual funds and ETFs

Taking the significant level as 5%, the study established that diversification (p=0.000<0.05), put option (p=0.003<0.05) and dividends (p=0.019<0.05) all were found to have significant effect on performance of investment banks in Kenya. On the other hand, principal protected notes (p=0.913>0.05) was insignificant. Jointly, investor’s right protection had the largest effect on performance of investment banks in Kenya. Wardhani (2015) revealed that investor protection impacts positively on the performance of corporate governance’s implementation and degree of convergence of local standard to IFRS. Investor Protection is a legal system encompassing rules, regulations, and enforcement aimed at protecting the minority investor’s rights (Klöhn et al., 2016). Ashraf and Zheng (2015) notes that rules protecting the performance of investors in different jurisdictions come from different sources like corporate, defense, bankruptcy, acquisition, and competition laws, but also from stock exchange regulations and accounting standards. Hua (2015) noted that better investor protection mechanisms at 63

target countries, such as better law and order environments, lower corruption in the public sector and better creditor rights protection, do not create wealth for shareholders of bidding firms across the external cross-border mergers of China. Hasan et al. (2014) said that protecting the rights of an investor is very important because expropriation of minority investors by controlling them is very common in many countries. Li et al. (2012) showed that greater investor protection in Islamic banking and financial institutions leads to better financial performance and that investors who feel sufficiently protected from negligent and incompetent management of the company and have confidence in the laws and institutions can start realizing planned investments.

The results of descriptive statistics indicated diversification that diversification had been adopted by the studied organizations. Respondents agreed that their firm had diversified its operations by investing in international stocks to improve performance, the firmed used diversification to balance out unsystematic risk occurrences to improve the level of performance. Diversification is a strategy of, managing risks and it mixes a wide variety of investments within a portfolio (Schmitt et al., 2015). It is basically a growth strategy that encompasses the capitalization of market opportunities through the allocation of investment risk over different classes of assets.

The results on put option indicate were interpreted to means that majority of the studied firms had embraced put options as a means of mitigating against risk exposure. Respondents agreed that the firm used put options to increase its return on investments which increase the level of performance; the firm used put options to manage risk exposure which helped in improving the level of performance. A put option is a contract which gives the owner the right, but not the obligation, to sell a specified amount of an underlying security within a specified time frame at a predetermined price (Lin & Lu, 2015).

5.3.3 Business Facilitation Measures in Foreign Market as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

From the findings of regression analysis, 48.2% variability in performance of the investment banks is explained by incentives, ease of doing business, cost of doing business. Olubiyi (2015) said that measures of facilitating trade play an important role in providing important opportunities and also contributing towards the economic growth of a country. Business facilitation measures like removal of trade barriers have greatly contributed towards the expansion of global trade. Santhi and Setyari (2019) reveal that measures of facilitating businesses create a wide range of increasing the prospects of producing and selling of new products and ideas that are related to the business itself both locally, regionally and globally. Luthfianto et al. (2016) reveal that trade facilitation geared towards customs environment of Indonesian and its trading partners positively impacts the Indonesian manufacturing export performance and that business facilitation measures precisely help in the collection of business steps whose roles are to standardize, harmonize, simplify and modernize commercial trade activities. In order to promote greater efficiency, consistency and predictability based on regulations, standards and internationally accepted practices, business facilitation measures seeks to harmonize the various rules between countries. In order to help in ensuring predictability of operations, the measures can potentially play a role in reducing barriers and transaction costs.

From the results, a unit change in the ease of doing business when holding other variables constant would lead to 0.438 unit increase in performance of performance of investment banks in Kenya. Ease of doing a business benefits businesses and locals in various ways. This includes: access to economic opportunities, lower transaction costs and fewer corruption (Hoffman et al., 2016). Because of access to economic opportunities, big businesses often find it easier to establish a shop and deal with the bureaucracy of establishing a business while smaller enterprises and startups rely on easily accessible and reliable systems to set up their businesses. This includes dealing with things like building permits, obtaining electricity, property registration, obtaining credit, paying

taxes, cross-border trading, and contract enforcement, resolving insolvency, and protecting minority investors (Ruiz et al., 2018).

A unit change in cost of doing business when all other variables are held constant would lead to 0.398 change in performance of investment banks in Kenya. The cost of doing business is any expense that a business incurs while carrying on business (Chaklader & Gulati, 2015). A cost of doing business, like raw materials, could be a direct cost, or an indirect cost, like building security. Regardless of the type, managers, business owners and anyone involved in running a company need to carefully consider such costs, since the amount of the costs will play a major role in determining whether or not a company is profitable (Van et al., 2016). Expanding sales and buying practices across international borders, whether on the same continent or across oceans, requires multiple variables to be understandable.

Hence, ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. According to Karadag (2015), transaction costs are considered to be an important part of setting up shop for small and medium-sized businesses. It is usually the case that bigger companies can take on the transaction costs of setting up their business, either by considering their own sources of finance or financial capital from outside. Transaction costs are a major part of establishing small and medium-sized business shops (Karadag, 2015).

At 5%, the study established that the cost of doing business (p<0.05) and the ease of doing business (p<0.05) all were significant. However, incentives (p>0.05) was not significant. Jointly, business facilitation was found to have least effect on performance of investment banks in Kenya. The result contradicts Raphael, Anna, Hamid and Marc (2015) who conducted a study on regulatory incentives and their influence on consolidation in the banking sector context. The reviewed literature from this study noted that regulation of banking should place emphasis on the ability and record of the bank to provide credit to customers with a low level of income. The study indicated that incentives influences consolidation at the firm level. Jun et al. (2015) did a study on

incentive costs using evidence from, the banking industry of China. The study established that the internal risk rating of the bank significantly predicts interest rates on loans.

In view of the descriptive statistics, the overall mean on ease of doing business was an indication that the ease of doing business in the foreign markets was moderately favorable to the firms. Respondents agreed that the rules formulated by the government in relation to protection of foreign investments increased firm’s returns on investments; it was a bit easier for this firm to increase its returns on investments because of the ease of doing business. Countries with stricter regulatory environments for business establishment and entrepreneurship often experience greater forms of corruption (Hossain, 2016). For one, if the setting-up criteria are too burdensome for smaller entrepreneurs or companies, they frequently turn to the informal sector to operate their operations.

The cost of doing business had an overall score that was interpreted to mean that respondents agreed on it as a business facilitating measure in the foreign market. Respondents agreed that fluctuation of commodity prices in international markets affected the performance level of this firm; extraordinary circumstances in foreign markets often resulted in unforeseen costs which affected the performance of the firm. Commercial, national and foreign exchange risks all exist to varying degrees in international trade, and they can be costly to manage or eliminate (Dutt et al., 2016). Failure to adequately address them may destroy all profit.

5.4 Conclusion

5.4.1 Trade Policies as Determinants of Foreign Equity Market Investment Decisions and Performance of Investment Banks

The highly practiced aspects of trade policies in the foreign markets noted by the study were nontariff barriers followed by export subsidies and lastly the tariff regime. A significant proportionate change in performance of investment banks in Kenya was seen to be explained by changes in trade policies as a determinant of foreign equity market investment decisions. Based on the findings of the beta coefficients, non-tariff barriers 67

had the largest effect on performance of investment banks followed by tariff regime and lastly export subsidies. Furthermore, non-tariff barriers, tariff regime and export subsidies all were found to have significant effect on performance of investment banks in Kenya. Jointly, the study established that trade policies had the second largest significant effect on performance of investment banks in Kenya.

5.4.2 Investor’s Right Protection as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

The study revealed that the widely practiced aspects of level of the investor’s right protection among the investment banks in Kenya were diversification followed by the use of put options, dividends and lastly the principal-protected notes. Diversification as a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Furthermore, only diversification and dividends had an effect on performance of investment banks in Kenya. Jointly, the study established that the level of the investor’s right protection had the largest significant effect on performance of investment banks.

5.4.3 Business Facilitation Measures in Foreign Market as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

The highly practiced business facilitation measures in foreign market included the cost of doing business while incentives the ease of doing business was moderately practiced. The ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. However, although incentives were being practiced, they were however not significant. Only the ease of doing business had had significant effect on performance of investment banks followed by the cost of doing business. Jointly, the study noted that business facilitation measures in foreign markets had the least but significant effect on performance of investment banks in Kenya.

5.5 Recommendations

5.5.1 Recommendations for Improvement

5.5.1.1 Trade Policies as Determinants of Foreign Equity Market Investment Decisions and Performance of Investment Banks

Based on the findings of the beta coefficients, non-tariff barriers as dimension of trade policies had the largest effect on performance of investment banks followed by tariff regime and lastly export subsidies. Therefore, this study recommends that the management of the investment banks in Kenya should capitalize and leverage on non- tariff barriers and tariff regimes to enhance their performance. The investment banks in Kenya should place more emphasis on non-tariff barriers and tariff regimes with less attention on export subsidies. Jointly, trade policies had the second largest effect on performance of investment banks in Kenya. This study therefore recommends that the management of the investment banks should rely on the trade policies when making foreign equity market investment decision so as to enhance on their performance.

5.5.1.2 Investor’s Right Protection as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

Diversification as a level of the investor’s right protection had the largest effect on performance of investment banks followed by dividends and lastly put option. Furthermore, only diversification and dividends had significant effect on performance of investment banks in Kenya. Based on these findings, the study recommends that investment banks in Kenya should focus more attention on diversification and dividends as part of their Investor’s Right Protection since they can significantly enhance their performance. Jointly, investor’s right protection had the largest effect on performance of investment banks in Kenya. Thus, this study recommends that the senior managers of the investment banks in Kenya should divert most resources and attention on the investor’s right protection when making foreign equity market investment decisions so as to enhance on their performance.

5.5.1.3 Business Facilitation Measures in Foreign Market as a Determinant of Foreign Equity Market Investment Decisions and Performance of Investment Banks

The ease of doing business had the largest effect on performance of investment banks followed by the cost of doing business. Based on this finding, the study recommends that investment banks in Kenya should focus more on the ease of doing business in the foreign markets than the costs of doing business should come latter. This will have an influence on their performance. The management team of the investment banks in Kenya should pay least emphasis on the incentives in the foreign market since they do not significantly influence performance of their organizations. However, when jointly making the foreign equity market investment decisions, the management of the investment banks in Kenya should pay least emphasis on business facilitation measures in the foreign market since they have the least contribution towards performance of the organization.

5.5.2 Recommendations for Further Studies

The present study was conducted among 22 investment banks operating in Kenya. On overall, the sample size of the study was relatively small standing at 44 respondents having used a census. This relatively small sample size has act as a limitation of the study since it has an effect on generalization of the findings to a wider population. Thus, the study recommends further studies to be conducted using relatively larger sample sizes that would allow wider generalization of the findings of the study.

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APPENDICES

Appendix I: Questionnaire

Dear Respondent

I am a student at United States International University (USIU) currently pursuing a Master’s Degree. I am undertaking a study on DETERMINANTS OF FOREIGN EQUITY MARKET INVESTMENT DECISIONS ON PERFORMANCE OF INVESTMENT BANKS IN KENYA. In order to achieve the purpose of this study, you have been selected as one of the respondents. I wish to assure you that the information disclosed will be treated with utmost confidence and used only for the purpose of this study.

I will be most grateful for your assistance and cooperation

Yours sincerely,

Humphrey Gathungu

SECTION A: GENERAL INFORMATION 1. Kindly indicate your gender

Male ( ) Female ( )

2. Kindly indicate by ticking in the provided box your highest level of education.

Certificate ( ) Diploma ( ) Degree ( ) Post Graduate Degree and above ( ) Other………………..

3. Kindly indicate the number of years you have worked in your present institution

Less than 1 year ( ) 2-3 years ( ) 3-5 years ( ) Over 5 years ( )

4. Kindly indicate the number of years that your organization has been in operations

Less than 3 year ( ) 3-5 years ( ) 5-7 years ( ) Over 7 years ( )

SECTION B PERFORMANCE OF INVESTMENT BANKS

5. Below are several statements on performance of investment banks. Kindly indicate the extent of your agreement with each of these statements. Use a scale of 1-5, where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree.

Statement 1 2 3 4 5 The firm has been profitable in the last 3 years in terms of Net profits after tax The Profitably trend has been upwards in the last 3 years The firm has been able to satisfy its customer needs in the last 2 years The firm has been able to maintain the inflow and outflow of commodities The firm has been able to retain productive staffs who are geared towards improving its overall performance The firm has been able to maintain high levels of integrity that keeps on attracting its customers

SECTION C: TRADE POLICIES AND PERFORMANCE OF INVESTMENT BANKS

6. Below are several statements on trade policies. Kindly indicate the extent of your agreement with each of these statements. Use a scale of 1-5, where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree. Statement 1 2 3 4 5 NONTARIFF BARRIERS Non-Tariff Barriers (NTBs) influences the competitive advantage of the firm which in turn affects the level of performance Different tax regimes in different countries affect investment returns on foreign investments The involvement of various agencies in verification of exports affect performance of goods Non-tariff barriers helps the firm in maintaining its competitive advantage which improves the level of performance THE TARIFF REGIME Uniform tariffs interfere with the level of returns recorded by our firm Existence of uniform tariffs has reduced incentives for tax evasion in this firm

which affects performance The additional administrative cost incurred as a result of tariff regime affect performance level The tariff regime helps the firm in generating revenues which increases the level of performance EXPORT SUBSIDIES Subsidies have affected performance as they have stimulated the exports of this firm Export subsidies have affected the level of performance by discouraging domestic operations of our firm Export subsidies have affected performance through reduced price on our exports Export subsidies have affected performance level as our foreign clients pay less than domestic customers for similar products

SECTION D: LEVEL OF THE INVESTOR’S RIGHT PROTECTION AND PERFORMANCE OF INVESTMENT BANKS

7. Below are several statements on level of investor right protection. Kindly indicate the extent of your agreement with each of these statements. Use a scale of 1-5, where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree.

Statement 1 2 3 4 5 DIVERSIFICATION The firm capitalizes its market opportunities through diversification thereby increasing the level of performance The firm reduces its risk by investing in a variety of risks to improve the level of performance The firm uses diversification to balance out unsystematic risk occurrences to improve the level of performance The firm has diversified its operations by investing in international stocks to improve performance PUT OPTIONS The firm uses put options to manage risk exposure which helps in improving the level of performance The firm uses put options to increase its return on investments which increase the level of performance Put options increases the return on investments level by ensuring that losses in the underlying assets of this firm do not exceed a certain amount. Put options increase the firm’s return on investments by hedging against risks DIVIDENDS Dividend paid stocks increase the firm’s return on investments by protecting its investments Dividends increase performance of the firm by protecting its investors through boosting their overall return

Dividends increase the firm’s return on investments through hedging against inflation The firm uses dividends to hedge against inflation which affects the level of performance PRINCIPAL-PROTECTED NOTES Principal protected notes increase firm return on investments by getting its principal investment Principal-protected notes helps the firm invest in a wide range of investments which improves the level of performance Principal protected notes increase firm return on investments through diversified liquidity Principal protected notes increase firm return on through diversified investment options

SECTION E: BUSINESS FACILITATION MEASURES IN FOREIGN MARKET AND PERFORMANCE OF INVESTMENT BANKS

8. Below are several statements on business facilitation measures in foreign markets. Kindly indicate the extent of your agreement with each of these statements. Use a scale of 1-5, where 1= strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree.

Statement 1 2 3 4 5 EASE OF DOING BUSINESS The rules formulated by the government in relation to protection of foreign investments increases firm’s returns on investments The regulations formulated by the government in relation to repatriation of profits are favorable in increasing the performance of the firm Presence of favorable regulations have lowered the transaction costs which have increased the returns on investments of firm It is easy for this firm to increase its returns on investments because of the ease

of doing business COST OF DOING BUSINESS The overall costs incurred in foreign markets determine the performance level of this firm Extraordinary circumstances in foreign markets often result in unforeseen costs which affects the performance of the firm The firm carefully determines its costs to gauge if the level of performance will be high The fluctuation of commodity prices in international markets affect the performance level of this firm INCENTIVES Incentives provided in foreign markets motivate our firm to increase its performance Incentives in host countries reduce the overall costs of doing business in foreign markets which increase the firm’s performance The firm uses incentives to attract its advanced capital which increase the level of performance The firm uses incentives to increase its gross sales which has an effect on the level of performance

87 Appendix II: List of Investment Banks

1. ABC Capital 2. African Alliance Kenya Investment Bank 3. Afrika Investment Bank 4. Apex Africa Capital 5. CBA Capital 6. Discount Securities (Under Statutory management) 7. Dyer & Blair Investment Bank 8. Equity Investment Bank 9. Faida Investment Bank 10. Hakuna Ventures 11. Francis Drummond & Company 12. Genghis Capital 13. Kestrel Capital 14. Kingdom Securities 15. Ngenye Kariuki & Co (Under Statutory management) 16. NIC Securities 17. Old Mutual Securities 18. Renaissance Capital (Kenya) 19. SBG Securities 20. Standard Investment Bank 21. Sterling Capital 22. Suntra Investment Bank

Source; CMA & NSE (2020)

88 Appendix III: Nacosti Research Permit