The determinants of Foreign direct Investment in the manufacturing sector in Kenya

Abstract

In this era of increasingly globalized world economy, FDI is a particularly significant driving force behind the interdependence of national economies. Even though most of the FDI flows have always concentrated in the developed countries, its importance is undeniable for developing countries as well. Through private direct investments, developing countries are participating more than ever before in the global production network. It is widely acknowledged that FDI has potential benefits that can accrue to developing countries. This view is based on the theories that 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. Theories and studies conducted on FDI determinants have different approaches and do not necessarily replace each other but explain different aspects of the same phenomenon. This paper provides fresh evidence on the determinants of FDI inflows on the manufacturing sector in Kenya based on a survey of foreign firms in Kenya as at 2011. Results from this study show that Kenya needs to improve its macroeconomic environment i.e. economic growth and stability and strengthen its institutional base which affect political environment and regulatory policies. The government should put a lot of resources to curb crime and restore law and order, embrace positive democratic practices, maintain stability and embrace zero-tolerance on corruption in order to gain substantially in investment growth and FDI flows.