Kinuthia Bethuel Kinyanjui Determinants of FDI in Kenya Currency Risk by mikeholy

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									         Determinants of Foreign Direct Investment in Kenya: New Evidence

                                                       By

                                       Bethuel Kinyanjui Kinuthia
                                         Africa Studies Centre,
                                        Leiden, The Netherlands

                                                        &

                                          University of Nairobi,
                                          School of Economics.
                                             Nairobi, Kenya

      Paper submitted for the annual African International Business and Management (AIBUMA)
                                Conference in Nairobi in August 2010

                                                   Abstract

This paper investigates the main drivers of foreign direct investment (FDI) in Kenya. It is now widely
acknowledged that FDI has potential benefits that can accrue to developing countries. This view is
mainly based on the neo liberal and development economists. They suggest that FDI is important for
economic growth as it provides the much needed capital for investment, increases competition in host
countries economies, and aids local firms to become more productive by adopting more efficient
technology or by investing in human or physical capital. FDI is also said to contribute to growth in a
substantive manner because it‟s more stable than other forms of capital flows. Kenya‟s FDI record over
the years has not been impressive. Although Kenya was among one of the most favoured destination
for FDI in the 1970s in East Africa, it is now among the countries with very low levels of FDI. Few
studies have investigated the reasons for low levels of FDI in Kenya and most of these studies are
based on macroeconomic data. This paper provides fresh evidence on the determinants of FDI based on
a survey of foreign firms in Kenya in 2007. The study findings reveal that most of the foreign firms in
Kenya are marketing seeking and that the most important determinants are market size, political and
economic stability, bilateral trade agreements and a favourable climate. In addition the three main
impediments to FDI inflow to Kenya are political instability, crime and insecurity, and institutional
factors most notably corruption.


Keywords: Foreign Direct Investment, Determinants, Kenya

1.0 Introduction
The growth in foreign direct investment (FDI) has been phenomenal in the last three decades.
Prior to the recent economic and financial crisis, global FDI had risen to an all time peak to
reach $1,833 billion in 2007 well above the previous time all high set in 2000 (UNCTAD
2008: xv)1. The production of goods and services by an estimated 79,000 multinational
corporations and their 790,000 foreign affiliates continued to expand with their FDI stock
exceeding $15 trillion in 2007. Their total sales amounted $31 trillion with value added by
foreign affiliates worldwide estimated at 11 percent of world's gross domestic product


1
  During this period FDI inflow to developed countries reached $1,248 billion. In developing countries, FDI
reached the highest level ever of $500 billion, with the least developed countries also reaching their highest peak
ever of $13 billion.


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employing close to 82 million people (UNCTAD 2008: xvi). Interpretation of these trends are
commonly infused with much enthusiasm as growth is believed to be the single most
important factor affecting poverty reduction and therefore FDI is central in achieving this
objective, since FDI is considered as a key ingredient for successful economic growth in
developing countries.


Many developing countries have developed a renewed interest in FDI as a source of capital
due to the decline in official development assistance (ODA) in the 1990s. FDI usually
represents a long-term commitment to the host country and can contribute significantly to
gross fixed capital formation in developing countries. FDI has several advantages over other
types of capital flows, in particular its greater stability and the fact that it would not create
obligations for the host country. In addition to being a source of capital, FDI has other
potential benefits to host countries which include technology transfer, new management
skills, market know how and job creation. FDI can also be potentially harmful to host
economies if results in resource exploitation, pollution, abuse of market power among other
problems. Negative consequences of FDI can be avoided with proper regulation.


These real world trends have led to substantial recent interest various disciplines to
empirically investigate the fundamental factors that drive the FDI behaviour. There are many
theories and studies that have been conducted on FDI determinants. The different approaches
do no necessarily replace each other but explain different aspects of the same phenomenon.
All these studies point to the fact that no single theory can explain FDI drivers. Most of the
studies rely on secondary data and therefore tend to be macro in nature. This study however
takes a different approach and utilises a firm survey data in order to explore the main FDI
determinants in Kenya. Why?


Kenya has had a long history with foreign firms. In the 1970s it was one of the most favoured
destinations for FDI in East Africa. However over the years, Kenya lost its appeal to foreign
firms a phenomenon that has continued to the present. In 2008, Kenya launched vision 2030
where it hopes to achieve global competitiveness and prosperity of the nation. This initiative
has seen a renewed commitment to attract FDI to assist in the industrialization process. This
subject has received little attention in Kenya. Thus, understanding the main drivers of FDI in
Kenya is therefore important in this endeavour which is the main focus of this paper.


The main findings in this paper suggest that FDI has risen in Kenya from the 1990s due to the
liberalization of the economy. It is mainly concentrated in the manufacturing sector and is
mainly Greenfield in nature. Most of FDI in Kenya is export oriented and market seeking.


                                               2
The most important FDI determinants are market size in Kenya as well as within the region,
political and economic stability in both Kenya and its neighbours and bilateral trade
agreements between Kenya and other countries. The most important FDI barriers in Kenya
are political and economic instability in Kenya, crime and insecurity, institutional factors such
as corruption, delayed licenses and work permits among other factors.


The rest of the paper is structured as follows. Section two of the paper provides a brief
descriptive account of foreign direct investment in Kenya. In Section three is a discussion of
the FDI theories and the related empirical evidence. Section four contains the definition of
FDI and the study methodology. The study findings are presented in section five. A
discussion of the results and conclusion follows in section six.
2.0 FDI in Kenya
Kenya is a relatively big country with a total land area of 580.4km square. Its location is
strategic within East Africa and has a population of approximately 40 million people. The
country is well endowed with a broad range of natural resources, flora and fauna and arable
land. Kenya highlands comprise of the most successful agricultural production regions in East
Africa. Foreign investment has been of considerable significance in financing development in
Kenya not only in the manufacturing but also in the primary and tertiary sectors. Before
independence in 1963, bulk of it went to primary production and plantations. The few
manufacturing industries established up to World War II were mainly for basic processing of
agricultural exports and the processing of food for the local market. After the war British
manufacturing firms begun to invest directly in the manufacturing, in part, because of the
competition from non British trading firms, which threatened Britain's share in the Kenyan
market (Rweyemamu, 1987).

After land resettlement between 1962 and 1964, the Kenyan government prevented foreign
firms from purchasing more land and as a result foreign ownership in agriculture was greatly
reduced. In commerce and industry by contrast, virtually all the expansion which took place,
that is a 50 percent increase in output between 1964 and 1970 and 100 percent increase in the
annual level of investment, was foreign owned. At first much of it involved capital transfer
out of agriculture, especially following the introduction of exchange controls in 1965. But two
years later after the initial period of uncertainty as to the government development strategy, a
substantial inflow of foreign direct investment and its diversification to other sectors
occurred. In addition the government set up institutions which would assist in the
development of the manufacturing sector. During this period Kenya had pursued import
substitution from as early as 1950s. This industrial policy advocated for a large role of the
public sector participation and protection of the infant manufacturing industries. The


                                               3
government used a combination of tariffs and quotas supplemented by foreign allocation
measures including overvaluing exchange rates to maintain import costs low, favourable
credit and interest rate policies intended to subsidize the manufacturing consumer goods
(Rweyemanu, 1987, Gachino 2006).

During this period FDI levels were reasonably high in comparison to other East African
countries (see graph 1). This was partly attributed to the fact that Kenya had maintained a
favourable investment climate. Obrien and Ryan (2002) note that Kenya was for many years a
relatively attractive locale for foreign investment. However, Bradshaw (1988) observes that
although that was case, there were already concerns by both scholars and government
planners that, because of Kenya's liberal repatriation policies, more international investment
income left Kenya in the form of profit remittances than flows into the country. As a result
the government instituted measures to encourage reinvestment of their profits in the country.
From 1974, firms with high repatriation rate had their local borrowing rights restricted by the
Central Bank. The government also attempted to cut down on the level of management
remittances and technical fees by imposing a 14 percent withholding tax. These efforts
discouraged foreign investors.

                       Graph 1: FDI inflows to the East Africa Region

            800
            700
            600
            500
   M USD




            400
            300
            200
            100
               -
           - 100
                70

                72

                74

                76

                78

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                82

                84

                86

                88

                90

                92

                94

                96

                98

                00

                02

                04

                06
             19

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             19

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             19

             19

             19

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             20

             20

             20

             20




                                                    Years

                                        Kenya       Uganda   Tanzania

Source: UNCTAD 2008


FDI in Kenya has not only been volatile but also low since the 1970s. This led to the
stagnation of the manufacturing sector which was largely been dominated by the foreign
firms. This decline was blamed on the inward oriented strategy as well as the collapse of the
East Africa Community in 1977. Ensuing economic distortions resulted in severe structural
constraints and macro economic imbalances and firms failed to develop competitive
capabilities to penetrate the international markets. The inward looking policies pursued at the
time under import substitution made it difficult to effectively participate and compete keenly
in the export markets. As a result the manufacturing industry failed to play a more dynamic




                                                4
role enough to function as an engine of county's growth and did not contributed significantly
to foreign exchange (Kenya Government 1994).


Further, the economic stagnation in the mid 1980s and 1990s affected Kenya‟s
industrialization with consequent effects on labour productivity (Gachino and Rasiah, 2003).
Political instability in neighbouring countries particularly Uganda also drew away markets
and investment in Kenya. Macro economic constraints arising from a collapse in the IMF‟s
Structural Adjustment Program (SAPs) in 1986(Mwega and Ndungu, 2002), massive
destruction of infrastructure due to El Nino rains and weak institutions had all contributed to
economic stagnation (Phillip and Obwana, 2000; Todaro, 2000; Rasiah and Gachino 2005).
Hence, although Kenya introduced a number of instruments to promote FDI and export
oriented industrialization during this period, these efforts did not yield much.


After the disappointing period of the 1990s, Kenya resumed the path to rapid economic
growth in 2002 through the implementation of the Economic Recovery Strategy paper which
was replaced by vision 2030 after it expired in 2007. During this period the government
embarked on establishment of free trade zones, improvement of business climate,
infrastructure, and development of incentives among initiatives. These efforts are aimed at
building a momentum that can sustain economic growth and promote development. At the
centre of these efforts is a commitment to attract foreign direct investment which was hoped
would assist in the industrialization process.


Foreign firms in Kenya since the 1970s have invested in a wide range of sectors. Most
notably they played a major role in floriculture and horticulture, with close to 90 percent of
flowers being controlled by foreign affiliates. In the Manufacturing sector FDI has
concentrated on the consumer goods sector, such as food and beverage industries. This has
changed in the recent years with the growth of the garment sector because of African Growth
and Opportunities Act (AGOA). Of the 34 companies involved in AGOA 28 are foreign most
of them concentrated in the Export Processing Zones (EPZs). FDI is also distributed to other
sectors including services, telecommunication among others. 55 percent of the foreign firms
are concentrated in Nairobi while Mombasa accounts for about 23 percent, thus Nairobi and
Mombasa account for over 78 percent of FDI in Kenya. The main form of FDI establishment
has been through the form of green fields establishments and Kenya has in total more than
200 multinational corporations. The main traditional sources of foreign investments are
Britain, US and Germany, South Africa, Netherlands, Switzerland and of late China and India
(UNCTAD, 2005).




                                                 5
3.0 FDI Determinants: Theory and Evidence
There is a variety of theoretical models explaining FDI and a wide range of factors that can be
experimented within empirical studies in order to find the determinants of FDI. In general
there are at least nine different approaches to factors that lead to FDI locating to different
countries. These theories are: (1) determinants according to the Neoclassical Trade Theory
and the Hecksher-Ohlin model in which capital moves across countries owing to differences
in returns (Markusen, 1995); (2) ownership advantages as determinants of FDI (including
monopolistic advantage and internalization theory) based on imperfect competition models
and the view that MNEs are firms with market power (Hymer, 1960, Caves, 1971 and
Buckley and Casson, 1976); (3) determinants of FDI in Dunnings (1993) OLI framework
which brought together traditional trade economics, ownership advantages and internalization
theory; (4) determinants of FDI according to the horizontal FDI model or Proximity-
Concentration Hypothesis (Krugman, 1983, Brainard ,1993); (5) determinants of FDI
according to vertical FDI model, Factor Proportions Hypothesis of the theory of international
fragmentation (Helpman 1984, Dixit and Grossman, 1982), (6) determinants to the
Knowledge Capital Model (Markusen, 1997), (7) determinants of FDI according to the
diversified FDI and risk diversification model ( Hanson et al, 2001, Grossman and Helpman,
2002), (8) determinants of FDI based on competitiveness and agglomeration effects (Gugler
and Brunner, 2007) and (9) policy variables as determinants of FDI when FDI is seen as the
result of a bargaining process between Multinationals and Governments (Barrel and
Pain,1996).


Hence, there is no one single theory of FDI but a variety of theoretical models attempting to
explain FDI location determinants. The different approaches do no necessarily replace each
other but explain different aspects of the same phenomenon. From each of the theories
mentioned, a number of determinants can be extracted these include market size and
characteristics, factors costs, transport costs, risk factors and policy variables. There is no
unanimously accepted single factor determining the flow of investment. The literature is
replete with information on the full range of factors that are likely to induce the flow of
foreign direct investment anywhere. It is often claimed that those factors that are favourable
to domestic investment are also likely to propel FDI.


While it is difficult to determine the exact quality and quantity of FDI determinants that
should be present in a particular location, it‟s never the less clear that a critical minimum of
these determinants must be present before FDI inflows begun to occur (Ngowi, 2001). One
would rationally expect that investors would choose a location in accordance to its
profitability. In an extensive literature review on the determinants of FDI, Ajayi (2007) has


                                               6
identified the following factors as determinants: market size and growth, costs and the skills
of workers, availability of good infrastructure, country risk, openness, institutional
environment, natural resources, agglomeration effects, returns on investment, macroeconomic
policies among others. More recently Faeth (2009) presents a more elaborate work and
observes that R&D and advertising expenditure, skills and technology intensity, the existence
of multi plant enterprises and firm size are important ownership advantages in a number of
studies, while in other studies aggregate variables such as market size, growth, trade barriers
have an effect on FDI.


In Kenya few studies have been conducted on FDI determinants. Kinaro (2006) using time
series analysis finds that FDI in Kenya is determined by economic openness, human capital,
real exchange rate, inflation, and FDI in the previous periods. Opolot et al (2008) find using
panel data for Sub Saharan African Countries, Kenya included that market potential, openness
to trade, infrastructure, urbanization, and rate of return on investment positively affect foreign
direct investment inflows to Sub-Saharan Africa, while macroeconomic instability is a
disincentive to foreign direct investment. Other variables such as government consumption,
financial development, natural resources, wage and political rights are found to be
insignificant. Mwega and Rose (2007) using panel data of 43 countries with a Kenyan dummy
find that Kenya is not different from other countries and that FDI is determined by growth
rates, terms of trade shocks, external debt ratio and quality of institutions.


UNCTAD (2005) argue that Kenya's inability to attract FDI is due to growing problems of
corruption and governance, inconsistencies in economic policies and structural reforms,
deteriorating public service and poor infrastructure. Todd et al (2005) argues that Kenya
officially encourages and grants national treatment to foreigners but that the problem is
Kenya's political elites who resent FDI perceiving it to lead to dependency. Himbara (1994)
shares similar sentiments. Kareithi (1991) concerned with the impact of foreign-owned media
upon the body politic of Kenya argues that foreign ownership undermines both national
sovereignty and even the rudiments of political freedom. The primary focus in his paper was
on the British corporate conglomerate, Lonrho and the standard newspaper in Kenya.


4.0 FDI definition and Methodology
According to the BPM52 which the study adopts, FDI refers to an investment made to acquire
lasting interest in enterprises operating outside of the economy of the investor. Further, in


2
  Definitions of FDI are contained in the Balance of Payments Manual: Fifth Edition (BPM5) (Washington, D.C.,
International Monetary Fund, 1993) and the Detailed Benchmark Definition of Foreign Direct Investment: Third
Edition (BD3) (Paris, Organisation for Economic Co-operation and Development, 1996).


                                                     7
cases of FDI, the investor´s purpose is to gain an effective voice in the management of the
enterprise3. Some degree of equity ownership is almost always considered to be associated
with an effective voice in the management of an enterprise; the BPM5 suggests a threshold of
10 per cent of equity ownership to qualify an investor as a foreign direct investor4. The forms
of investment by the direct investor which are classified as FDI are equity capital, the
reinvestment of earnings and the provision of long-term and short-term intra-company loans
(between parent and affiliate enterprises).5 Aggregate FDI flows are the sum of equity capital,
reinvested earnings, and other direct investment capital; hence, aggregate FDI flows and
stocks include all financial transfers aimed at financing of new investments, plus retained
earnings of affiliates, internal loans, and financing of cross-border mergers and acquisitions.
FDI flows can be observed from the perspective of the host economy, which records them as
inward FDI along with other liabilities in the balance of payments, or from the perspective of
the home economy, which records them as outward FDI, a category of assets6.The sum of all
direct capital owned by non residents in a given country in a certain time period constitutes
the existing stock of FDI at that time.


In this study the firm survey was conducted in 2007 by Kenya Institute for Public Policy
Research and Analysis (KIPPRA) in Kenya. The initial FDI data base was compiled from
several lists obtained from the Kenya Investment Authority, KIPPRA, Kenya Private Sector
Alliance (KEPSA) and Kenya Industrial Research and Development Institute (KIRDI). This
was based on the fact that no comprehensive study on FDI has even been undertaken in
Kenya. Therefore the number of foreign firms‟ establishment in Kenya is unknown. This
initial list contained a total of 812 firms. A sample of foreign firms was drawn from this list
based on the sector involved and availability of address e.g exact location, telephone number,
and country of origin. This yielded a total of 210 firms; 70 firms from Africa, 70 from OECD
countries and 70 from Asia. All these firms were contacted through telephone and where
necessary a visit to the premise. A questionnaire was then administered to these firms. A total
number of 137 questionnaires were successfully completed and returned which constituted 65
percent response rate. The data obtained was analysed using SPSS 11 software.

3
  The foreign entity or group of associated entities that makes the investment is termed the "direct investor". The
unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in which direct investment is made-
is referred to as a "direct investment enterprise".
4
  Voting shares give the stockholder the right to vote on matters of corporate policymaking and on the appointment
of the board of directors. If the equity share of control is 50 percent or more, the controlled firm is often defined as
a subsidiary
5
  Cited by UNCTAD website www.UNCTAD.org
6
   Three main types of private capital flows appear in the balance of payment accounts of a country: international
debt, international portfolio flows, and FDI. FDI and portfolio investment are both a form of international equity
investment, i.e., they represent shares of ownership of foreign firms, unlike private and public debt that is pledged
to be returned at the end of the life of the international loan that generates it. The difference between FDI and
portfolio equity, instead, is that the latter lacks the objective of influencing the management decisions of the
controlled firm, and as such is generally more liquid and short term.


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5.0 Study Findings
5.1         Information on the primary respondent
The study revealed that 43 percent of the respondents were in the entities top management
comprising of the chief executive officers, general managers and directors. 55 percent of the
respondents were in the middle level management such as finance managers, chief
accountants and operations managers. Only 1 percent comprises of the technical experts and
the public relations officers (see table 1).

                           Table 1: Job Titles
                                           Job Titles                      Percentages
                           Managing Director/ CEO/General Managers             43
                            Other Managers-Finance/ Operations e.t.c           55
                                Officers and Technical personnel                1
                          Source: Author‟s compilation

In addition the study revealed that 55 percent of the respondents at these senior positions were
not expatriates. However 65 percent had foreign experience before occupying current
positions. A majority of these respondents had international exposure from mainly African
countries, Europe and Asia7. Few had exposure from the USA, Latin America and Australia.
79 percent of the employees had less than 10 years in their current positions and 61 percent
were not involved in the establishment of the entity in Kenya (see table 2).
            Table 2: Respondents Characteristics(percent)
            Expatriates Experience      No years in position                      Establishment
            Yes No Foreign Local <5 >5&<10 >10&<20                          >20   Yes      No
              45    55      65      35 54           25       14               7       39     61
            Source: Author‟s compilation

5.2         The entity in Kenya
The study comprised of entities from different sectors. 13 percent were from the agricultural
sector, 47 percent from manufacturing and 40 percent from the service sector. Of the 137
companies only 15 were listed in a stock exchange. Most of the firms were listed in the
Nairobi stock exchange and were from the manufacturing sector. 5 for the firms were listed in
foreign stock markets (Table 3).
                                    Table 3: Entity composition
                                                     Sectors (%) Listed in SE
                                    Agriculture          13            1
                                    Manufacturing        47           10
                                    Services             40            4

                                    Foreign                            5
                  Source: Author‟s compilation




7
    Data available on request.


                                                         9
The entities perform various functions in relation to the parent8. 65 percent of the companies
produce part or whole components that would be either sold to the parent or another affiliate.
18 percent produce and sell products that are similar to those of the parent, while 15 percent
of the entities sell products supplied to by the parent. Only 5 percent of the entities are an
outlet or distribution arm of the parent (Table 4).
                      Table 4: Entity’s main Purpose within the group (%)
                      Sells products supplied by group                                      15
                      Produces/ Makes/ whole or part                                        62
                      sells products same as parent                                         18
                      Output distribution                                                    5
                      Source: Author‟s compilation.

The entities also revealed interesting characteristics in relation to the nature of their main
products market share and their participation in the exports market. All the entities were able
to identify one main product in their line of business. Only 78 of the entities identified a
second main product while 52 entities identified a third product. The main product‟s market
share in the domestic market varied widely among the entities. 80 percent of the entities enjoy
less than 50 percent of the market share compared to 20 percent of the firms which enjoy
more than 50 percent of the market share. Hence some firms seem to have monopoly over
their main products in the Kenyan market. 51 percent of the entities reported that they did
export some of their main product (Table 5).


               Table 5: Market and Export share of the entity’s main products
                           Main Product 2nd main Product 3rd main Product
               <5                   23                  13                14
               >5 & < 10            17                  13                11
               >10 & <20            17                  20                19
               >20& < 50            23                  28                29
               >50                  20                  36                27
               Export               51                  14                35
             Source: Author‟s compilation.

Table 5 further reveals information relating to the other products produced and sold by the
entities. 64 percent of the entities that reported to have had a second main product enjoy less
than 50 percent domestic market share. 14 percent of these entities sell some of this product to
the export market. For the entities dealing with a third product, 73 percent enjoy a market
share of less than 50 percent and 35 percent participate in the export market.
5.3 The Parent’s company’s entry to Kenya
Information on the parent‟s company‟s operations in Kenya was also analysed. Surprisingly
29 percent of the companies in the sample began operations in Kenya in the 1990s while 45
percent after 2000. Thus most of the firms began operations in Kenya after the 1990s a period
that coincided with the liberalization of the Kenyan economy. Only 26 percent of the firms

8
    The foreign company which has invested in the entity (or has sold it as a franchise).



                                                           10
had their operations in Kenya prior to 1990. In addition most of the firms begin their
operations in less than two years after finalising on the legal procedures.

                              Table 6: Establishing the entity in Kenya (%)
                              Year          Legal Procedures Operations
                              Before 1970                    13          13
                              1970-1979                       7           7
                              1980-1989                       6           6
                              1990-1999                      29          26
                              2000-2006                      45          48
                             Source: Author‟s compilation


Prior to investing in Kenya 36 percent of the entities had some form of prior contact with
Kenya. The most important avenues through which these contacts had been established were;
their sales representative office in Kenya and via local agent. In addition these firms had also
exported their products to Kenya (Table 7).
        Table 7: Parent’s company’s contact in Kenya prior to operations
        Nature                                              Contact
                                                              Yes
        Franchise                                              1
        Sales rep office                                       20
        Imported                                               9
        Sale via local agent                                   17
        Other                                                  2
        Total                                                  49
        Percentage                                             36
        Source: Author‟s compilation

These companies also adopted various forms of entry into the Kenyan market. The most
common mode of entry was through new establishments (Greenfield). Other modes include
full and partial acquisitions of existing private, foreign, state owned and corporate enterprises
as well as through establishing a franchise (table 8).
       Table 8: Parent’s company’s choice of entry and type of ownership
                                           Type of Ownership
      Mode of entry       No Private Foreign State Owned Corporate
      Franchise             6       4
      Full acquisition     12      11         1
      Greenfield          103
      Joint Venture         6       3                        1
      Partial acquisition   9       3         3              1          2
      Total               136
    Source: Author‟s compilation


Most of the companies did not consult with any public agencies prior to their operations in
Kenya. Only 35 percent of the firms had prior contact and 75 percent of them found
information useful. 25 percent of the firms found the information not useful and difficult to
obtain (Table 9).


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            Table 9: Contact with public agency and the usefulness of the information
            Contac                 Percent                  Usefulness of Information
                                                             1       2         3                 4          5
            Yes                    35                        6       19        31                38         6
            No                     65
                   1= too difficult to access; 2= Available but not helpful at all; 3 of some use; 4 very
                         Helpful but also needed additional information; 5 sufficient on its own
          Source: Author‟s compilation


The three most valuable sources of information when making their decisions to invest in
Kenya were; research conducted by the entity, customers and existing investors in the host
country. In addition some of the companies did conduct research both in Kenya and their
home country. Few relied on research entirely conducted in their home countries (Table 10).

           Table 10: Parent company’s most valuable sources & location of information
           Sources                                                          Rank
           Research done by entity                                            1
           Customer/Client                                                    2
           Existing Investor                                                  3
           Location
           Kenya                                                              1
           Both Home and Kenya                                                2
           Home country                                                       3
         Source: Author‟s compilation


The government does not appear to offer any form of assistance to many parent companies.
Only 14 percent of companies contacted the government for assistance. 79 percent of the
companies found government‟s assistance at least some what important. 21 percent of the
companies that contacted the government found its assistance as of no effect or not important
at all (table 11).
            Table 11: Government’s assistance to the parent companies
            Contact                     Percent          Usefulness of Information
                                                           1        2          3        4         5
            Yes                                    14      7       14         21       36         21
            No                                     86
                1= Not important at all; 2= no effect; 3 =some what important; 4 =Very important; 5
                                                       =critical
         Source: Author‟s compilation


The most common form of government‟s assistance that firms received during the sample
period was through subsidies and a reduction in land rents (Table 12). Although other forms
of government assistance exist few firms appear to have benefit from them.




                                                              12
                               Table 12: Form of government assistance
                                                                    percentage
                               Tax Breaks/Holidays                           4
                               Subsidies/Cash Payments                      21
                               Import duty concessions                      10
                               Reduction of land rents/Utilities            16
                               Guarantee of profit and repatriation         12
                               EPZ Packages                                 12
                               Others                                        5
                               Source: Author‟s compilation


Foreign investors are attracted to Kenya due to many factors. The most common factors that
were critical in firms‟ decisions to invest here are given in table 13 below. From this table the
most important factor is market access both in Kenya and within the East African region as
well as Africa. Thus Kenya‟s strategic location within the east African region makes its
favourable. The second most important factor is political stability which accounts for 18
percent of the respondents. Other important factors include economic growth and stability, its
favourable climate, bilateral trade agreements, low cost of production and availability of raw
materials. All these factors account for about 80 percent of the reasons given.


 Table 13: Reasons for parent companies investing in Kenya (%)
 Market in Kenya and Neighbouring countries                 36
 Favourable Climate                                          7
 Political Stability/Economic                               18
 Liberalization of the economy                               1
 cheap labour and cost of production                         5
 Bilateral trade agreements                                  6
 Absence of Maximum retail price                             1
 Human resource availability                                 2
 Stable and growing economy                                  7
 Existence of similar businesses                             2
 Kenya's popularity world wide                               1
 Entrepreneurial spirit in Kenya                             1
 Easy process of acquiring licenses                          1
 Resources and Raw material availability                     4
 EPZ concessions                                             1
 Strategic infrastructure e.g port                           1
 Beauty of the people                                        1
 Financial systems                                           3
Source: Author‟s compilation



The study also identified several factors that present potential risks to foreign firms and may
hinder their investment decision in Kenya. These factors are presented in table 14 below.
Based on this table, 27 percent of the respondents consider political instability in Kenya and
its neighbouring countries mainly Somalia is the single most important factor that hinders
foreign investment in Kenya. 19 percent of the respondents consider crime and insecurity as


                                                          13
the second most important factor that hinders foreign investors. Thus political instability and
insecurity are the main reasons for low foreign investment.
                   Table 14: Main impediments to foreign direct investment in Kenya
                   Political instability and its neighbours                      27
                   Crime and Insecurity                                          19
                   Climate change                                                 4
                   Competition                                                    5
                   Unreliable infrastructure                                      7
                   Delays in licenses & Work permits                              6
                   Lack of law enforcement/weak legal infrastructure              4
                   Lack of proper knowledge of regional blocks                    2
                   corruption                                                     9
                   Lack of clear policies and regulatory impediments              5
                   Exchange rate volatility/Currency risk                         3
                   Economic growth                                                3
                   Lack of skilled labour/High cost of production                 3
                   Cost of financing                                              4
                                                                                100
                 Source: Author‟s compilation

In addition institutional factors such as corruption, delays in licenses, lack of clear policies
also seem to affect foreign investors. Institutional factors account for 26 percent of the foreign
investment impediments. Other important factors include climate change, macro economic
instability and infrastructure and financing.
6.0 Discussion and Conclusions

The results of this study reveal very useful insights in understanding foreign investments in
Kenya. Form the study one observes that most of the firms sampled have non expatriates at
senior management level but with previous experience obtain from abroad. This could suggest
that the manpower in Kenya compares well to the rest of the world. In addition this labour is
fairly mobile given that most of them have held their current positions over a period of less
then 10 years. A good proportion was also not involved in the establishment of the entity.


From the sampled firms, it appears that much of the FDI in Kenya is mainly concentrated in
the manufacturing and services sectors. This is a good sign since the manufacturing sector in
Kenya has stagnated for a very long period due to lack of competitiveness. Introducing FDI in
this sector has potential to not only create more linkages with the rest of the economy but also
will assist domestic firms to improve on their competitiveness among other benefits. The
dominance of these firms‟ products in the market suggests that FDI has potential of operating
as monopolies which could be harmful. However, due to liberalization of the Kenyan market
this could potentially attract other firms in to these segments to take advantage of the
abnormal profits enjoyed. In addition the government can encourage new entrants into these




                                                14
sectors to enhance healthy competition. There is also evidence of FDI in Kenya has an
outward export orientation.


The liberalization of the Kenyan economy seems to have encouraged foreign entities to invest
in Kenya. Most of these firms had previously established some form of earlier contact in
Kenya. Greenfield establishments suggest that most of them were going to operate in Kenya
for a foreseeable future. This has the potential for capital accumulation and employment
creation which has been very low in Kenya. Most of these companies relied on their own
individual research and networks. Only a few foreign firms did consult with the government
and other public agencies. In addition few foreign entities received any form of assistance
from these institutions.


The role of the government and public agencies in encouraging FDI in Kenya is largely
missing. Very few firms seem to have contacted the government for any form of assistance.
There appears to be a lose link between the government and its related agencies with the
foreign investors. Most foreign investors perceive the government to be unfriendly and hostile
to their operations. There is need for a greater government‟s appreciation of the importance of
FDI through provision for an avenue for interaction in order to address their concerns.


Most FDI has been market seeking in nature mainly targeting Kenya and its neighbouring
countries. This has been as a result of the formation of regional blocks as well as bilateral
trade agreements as well as the political stability that has been maintained in Kenya for a long
time. Recent political instability in Kenya and its neighbours, weak institutions and insecurity
are the main impediments to a successful flow of FDI.

In conclusion, this study entailed a firm survey of FDI firms in Kenya for the period 2007.
Drawing from a sample of 137 foreign firms spread out in three sectors the study sought to
identify the FDI determinants in Kenya. The study findings suggest most of the FDI in Kenya
is market seeking and is export oriented. The main FDI determinants in Kenya are market
size, political and economic stability, bilateral trade agreements and a favourable climate. The
three main impediments that the Kenya government must address in order to attract FDI are
political instability, crime and insecurity and institutional factors.




                                                 15
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