Government and Business - Business Studies Form 2 Notes

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  • Government involvement in business activities is one of the commercial duties it owes its citizens. It is the one that provides the necessary environment for investments to be undertaken by itself, or by the local and foreign investors. This, the government may do in various ways, these include;
    1. Producing goods and services
    2. Distributing goods and services
    3. Advising producers and traders
    4. Promoting trade and economic development
    5. Protecting consumers against exploitation by producers and traders
    6. As a consumer of goods and services

Reasons for Government Involvement in Business

The following are the major reasons for the government’s involvement and participation in business activities;

  1. To prevent exploitation of the public by private businesspersons especially in the provision of essential goods and services such as sugar, transport, communication etc. the Kenya Bureau of standards (KEBS) regulates the quality of goods consumed in Kenya.
  2. To provide essential goods and services in areas where private individuals and organizations are unwilling to venture because of low profits/ high risks involved.
  3. To provide essential goods and services which private organizations and individuals are unable to provide due to the large amount of initial capital required b e.g. generation of electricity, establishment of airlines etc.
  4. To attract foreign investment by initiating major business projects
  5. To stimulate economic development in the country e.g. by providing social services
  6. To provide goods and services which are too sensitive to be left in the hands of the private sector e.g. provision of firearms.
  7. To create employment opportunities by initiating projects such as generation of electricity.
  8. To prevent foreign dominance of the economy by investing in areas where the locals are not able to
  9. To redistribute wealth where returns are very high
  10. To prevent establishment of monopolies

Methods of Government Involvement in Business

- The government gets involved in business activities through the following methods:


- This refers to Rules and restrictions the government requires business units to follow in their business activities. Through this method, the government ensures high quality goods and services and puts in control measures to protect consumers from exploitation. The government regulation measures include;

  1. Licensing
    - A license is a document that shows that a business has been permitted by the government to operate. It is usually issued upon payment of a small fee.
    - Licensing is the process of issuing licenses to businesses. Some of the reasons why the government issues licenses include;
    • Regulating the number of businesses in a given place at any given time to avoid unhealthy competition.
    • To control the type of goods entering and leaving the country.
    • To ensure there are no illegal businesses.
    • To ensure that traders engage only in trade activities that they have been licensed for.
    • To ensure that those who engage in professional activities meet the requirements of the profession.
    • To raise revenue for the government.
  2. Ensuring standards/ enforcing standards; The government regulates business activities by setting standards that businesses should and ensuring that the standards are adhered to. To achieve this purpose, the government has established bodies such as;
    • Kenya bureau of standards (KEBS) whose main responsibility is to set standards especially for the manufactured goods and see to it that the set standards are adhered to/ met. Goods that meet such standards are given a diamond mark of quality, to show that they are of good quality.
    • The ministry of public health to ensure that businesses meet certain standards as concerning facilities before such businesses can be allowed to operate. Such standards may include clean toilets, clean water and well aerated buildings.
  3. Legislation; The Government may come up with rules and regulations (laws) that regulate business activities e.g. banning hawking in certain areas, matatus required to carry certain number of passengers e.t.c.
  4. Formulating Policies - formulates policies that guide operation of business
  5. Offering Incentives - By offering incentives, the government encourages some forms of business units
  6. Taxation- use of taxation regualtes the operation of business
  7. Use of subsidies - Increase of subsidides encourages businesses while reduction discourages businesses
  8. Price control - it may set the prices of essential goods and services hence regulating their provision


- The government takes keen interest in training and advising people in business about business management strategies and better ways of producing goods and services. The government offers these services through seminars and courses. This is mainly done by the Kenya Business Training Institute (K.B.T.I).


Reasons for government training include;

  • To expose businesspersons to modern developments in management
  • Introduce modern technology and skills in management
  • Educate the business people on efficient methods of operating a business e.g., effective methods of advertising and keeping books of accounts.
  • Expose business people to problems/ challenges facing them and their possible solutions for example, problems of raising capital and identifying investment opportunities.
  • Impart proper business ethics e.g. good customer relations and honesty.
  • Creating awareness of the available profitable business opportunities in their environment
  • Expose business people to government policies regarding business activities in the country.
  • Educate business people on how to use available resources to minimize costs and maximize profits.
  • Expose people to other opportunities that exist in the import and export market.

Trade Promotion

- This is a government initiated and supported policy to encourage local business people to enter into business. This is aimed at increasing the volume and variety of goods and services traded in. To facilitate this initiative the Kenya Trade Authority (KETA) was formed.

- Trade promotion is classified as either external trade promotion or internal trade promotion.

External Trade Promotion

  • The purpose of external trade promotion is to encourage local business people to enter into the export market.
  • It also intended to attract foreign investors into the country.
  • In Kenya, external trade promotion is done through the department of external trade in the ministry of trade and industry by the Kenya External Trade Authority.

    Functions of the Kenya External Trade Authority (KETA)
    * Provide advisory services
    * Advises on relations and practices abroad
    * Publish journals on foreign trade opportunities
    * Educate business people
    * Advertise Kenyan goods abroad
    * Assists in diversification of exports and export markets
    * Play active role in trade agreements

    Problems Facing the Kenya External Trade Authority (KETA)
    * Poor infrastructure that increases 
    * High taxes on exports make them to lack competitiveness on the global market
    * High production cost of locally produced goods hence high prices that discourage the buyers
    * Stiff competition from well established foreign firms that produce high quality goods
    * Corruption that increases the cost of doing business hence high cost of goods and services
    * Poor management of KETA that has hindered it from achieving its mandate
    * Inadequate funds for export promotion initiatives

  • External trade promotion may also be done by Commercial attaches.
    - Commercial attaches are officers sent by the country’s government to work with the embassies in foreign countries as support staff in the field of commerce. Their main duty is to look at the interests of their home countries’ exports e.g. cash crops and manufactured goods.

    Duties of commercial attaches/Ways in which commercial attachés promote exports
    1. Explore and identify new markets for more export opportunities.
    2. Research and analyze markets for exports from their home countries.
    3. Keep statistics of products such as volumes, packaging size and method of manufacturing.
    4. Attend meetings, seminars and workshops on trade patterns of the countries and keep data for new markets of exports.
    5. Publish and advertise their country’s exports in business journals and magazines.
    6. Select buyers, agents and distributors of the home country’s exports.
    7. Inform traders in their home countries of the standards required for exports.
    8. Assist sales missions from their home countries by organizing educational tours for them.
    9. Organize visits to trade fairs and exhibitions for business people from their home country.
    10. Make detailed reports on commercial activities that may help improve the exports of their countries.

    To perform these duties, the commercial attaché needs to:
    1. Keep information on prices paid for exports and terms of payments(conditions to be filled before the payment is made)
    2. Be aware of the rules that govern payment in international trade.
    3. Be aware of the working of the regional organizations that operate in developing countries such as the East African Community (E. A. C), Inter-Governmental Authority for Development (I.G.A.D), Common Market for Eastern and Southern Africa (COMESA), Economic Commission for Africa (E.C.A) and African Growth Opportunity Act (A.G.O.A).

Internal Trade Promotion

- This is done by the government through the ministry of trade. The ministry carries out various activities

Provision of Public Utilities

  • Public utilities are essential services provided by the central or county government. Eg. water and sewerage, transportation, social facilities etc.

Sources of Finance for Public Utilities

  • Government grants
  • Licenses and fees
  • Loans from governments and banks
  • Parking fees
  • Fuel levy
  • Fines
  • Rent
  • Sales of services etc.

Problems Facing County Governments

  • Political interference: Excessive control of personal interest by members of the county assembles in resource allocation
  • Inadequate capital: Delayed disbursement of funds by the national government
  • Nepotism: This has led to employment of incompetent in the county government
  • Mismanagement of funds meant for development projects
  • Poor garbage collection and disposal of waste
  • Inadequate housing in urban areas
  • Congestion on public facilities, such as health facilities, schools etc.

Enabling Environment

- Refers to favourable atmosphere that is attractive to start and sustain business

Ways in which the Government Uses to Create Enabling Environment for Business

  • Provision of efficient infrastructure networks such as means of transport and communication
  • Provision of credit facilities to businessmen at favourable interest rates
  • Favourable state policies that support and encourage investors
  • Favorable political will and political stability
  • Reliable and efficient legal system
  • Provision of security services in the country
  • Protection of local industries from competition from foreign firms

Merits of Government Involvement in Business

  • It ensure essential services are provided
  • It ensures control of sensitive business in the country
  • It creates employment opportunities to its citizens
  • It reduces foreign domination of the economy by regulating the entry of foreign firms
  • It increases investments in the country
  • Helps in wealth redistribution through taxation measures
  • Its involvement generates revenue for financing government expenditure

Demerits of Government Involvement in Business

  • Scares away investors
  • May create monopoly which leads to inefficiency in production of goods and services delivery
  • Government and political interference may lead to poor management
  • Government business may make losses due to such things like poor management of funds
  • Government business sometimes offer poor services due to lack of competition
  • Corruption and embezzlement of funds is common in government owned business
  • Operation in large scale may lead to diseconomies of scale

Consumer Protection

  • Refers to the methods used by various parties to prevent exploitation of consumers by the business community

Reasons Why Consumers Need Protection

  • To protect them from being overcharged on goods and services
  • Low quality goods: traders may supply low quality goods in the market
  • Less measures and quantities: traders may sell underweight goods or wrong measurements
  • Unsafe goods: to protect them from getting poisonous goods
  • Producers and sellers sometimes may wrongly label goods or use misleading advertisements


Methods of Consumer Protection

  • They are usually of two types
    • Government initiated methods
    • Consumer initiated methods

Government Initiated Methods

  • Food and drug act - They ensure that producers and sellers do not include harmful substances into products sold to the public
  • Public health act - Ensures that products sold are hygienics and of good quality
  • Rents control act - Ensures that tenants are not exploited by landlords
  • Weights and measures act - Ensures that weighing and measuring equipment are accurate and correct
  • Setting up standards - Through KEBS, to ensure that the set standards are kept and maintained by traders and producers
  • Price controls - sets standard prices beyond which essential goods cannot be sold
  • Sale of goods act/trade descriptions act - Ensures that producers do not cheat by providing false information about the products they produce

Government Institutions Involved in Consumer Protection

  • Kenya Bureau of standards (KEBS) which ensures that the set standards are maintained
  • Business Rent Tribunal which arbitrates on rent disputes between tenants and landlords
  • Department of Weights and Measures

Functions of KEBS

  • Follow up on consumer complaints regarding standards of goods
  • Setting up standards for all goods and services to meet in Kenya
  • Publish information on the standards which goods should have
  • Ensure maintenance of standards by traders
  • Take legal action against traders who sale counterfeit goods and low quality goods
  • Testing samples of goods for quality and standards

Consumer Initiated Methods

Functions of the Kenya Consumer Organization

  • Receive and deal with consumer complaints
  • Educate consumers on their rights and responsibilities
  • Publish information for consumers
  • Work closely with government in promoing consumer interests
  • Presents consumers complaints
  • Take legal actions in the interest of consumers

Problems Facing Kenya Consumer Organization

  • Inadequate funds for dealing with consumer complaints
  • Insufficient information regarding consumer exploitation
  • Inadequate interests among the consumers to take up legal issues
  • Inadequate government support
  • Ignorance of consumers on their rights and responsibilities
  • Firm lacks authorities to enforce cases

Limitations of Using Consumer Initiated Methods in Consumer Protection

  • Inadequate government support
  • inadequate information from consumers
  • Consumer ignorance about their rights
  • Consumer apathy by failing to report cases of malpractices
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