Effect of Tax Incentives on the Growth of Listed Manufacturing Firms in Kenya

Abstract

Tax incentives remain very important factors that help spur economic growth by improving the conditions the businesses need to grow and innovate, creating employment for the people However, these incentives were are optimally utilized by the firms, thus leaving a large gap in how tax incentives affect growth of listed manufacturing firms in Kenya. Therefore, the overall aim of this study is to investigate the effect of tax incentives on the growth of listed manufacturing firms in Kenya. The study specifically examined the impacts of capital allowance on the growth of listed manufacturing firms in Kenya, analyzed the impact of allowable deductions on the growth of listed manufacturing firms in Kenya and evaluated the effects of Investments deductions on the growth of listed manufacturing firms in Kenya. The study was anchored on new growth theory, tax discrimination theory and innovation diffusion theory. The study employed descriptive research design. The study population consisted of the 12 listed manufacturing firms on the Nairobi Securities Exchange (NSE). A census method was used. Document guide was used to collect secondary data from firms’ annual reports. Quantitative data was analysed using descriptive statistics and inferential statistics. The study employed multiple regression models to establish the effect of tax incentives on the manufacturing sector’s growth. Findings showed that 28.1% of the variability in ROA (growth of listed manufacturing firms in Kenya) can be explained by the capital allowances, allowable deductions, investment deductions, software and human capital in the model (R2=0.281). The results indicate that capital allowances (β = -0.083, p = 0.851), allowable deductions (β = -0.144, p = 0.498), and investment deductions (β = 0.344, p = 0.430) have no significant impact on the growth of listed manufacturing firms in Kenya. In contrast, human capital (β = 0.515, p = 0.024) has a significant positive effect on firm growth. However, software (β = -0.747, p = 0.000) has a significant negative impact. Based on the study findings, it can be concluded that tax incentives, particularly capital allowances, allowable deductions, and investment deductions, do not significantly contribute to the growth of listed manufacturing firms in Kenya. Despite their potential, these incentives showed no substantial impact on firm performance. Therefore, the study recommends that managers focus on other strategic factors to drive growth, as relying solely on these tax incentives may not yield the desired results. Additionally, managers should explore ways to optimize operational efficiency and invest in areas such as human capital and technology to foster sustained growth and competitiveness.