Foreign direct investment determinants

Abstract

In recent times, the importance of Foreign Direct Investment has taken a new dimension. Debate among academics and policy makers has shifted from whether or not countries should attract FDI to how countries can attract and reap the full benefits that come with FDI. The benefits of FDI include serving as a source of capital, employment creation, technology transfer, to mention a few. As expected, the answer to the question "why is FDI important to a country" will depend on the needs of the country. The role of FDI as a source of capital has become increasingly important to Sub-Saharan Africa (SSA). The empirical literature on the determinants of FDI to developing countries has generally focused on identifying the location-specific factors that are relevant for FDI to developing countries with only a few African countries in their sample. With regards to research on the determinants of FDI to Africa, there appears to be a dearth of literature. This study had two primary objectives: 1. To identify factors that influence Foreign Direct Investment growth in Kenya 2. To evaluate foreign investor perspective on adequacy of incentives offered. To facilitate this study, a list of 54 companies with a global banking relationship with Citibank was obtained. These were multinational firms. Only 25 respondents agreed to participate in the study, with the rest saying their policies are too protracted to allow them participate. Of those who did not respond, the time frame was too short, whereas others needed to seek information from their head office. A semi-structured questionnaire was emailed delivered to relevant senior managers in the companies. Data collected was analyzed using descriptive statistics such as summarized tabulations, percentages, frequencies, and rankings. The results show there is high level of sophistication with the foreign investors with diverse needs. A large number of them are aware of the incentives given to attract foreign investments. However, they are also aware that the incentives provided are not sufficiently adequate to attract higher levels of capital and equity investments. The findings also show that many investors view Kenya as a potential economic giant with market growth opportunities, especially given its strategic location and the new government's willingness to enhance investments. Major conclusion arrived at is for the government to go back to the drawing board and restructure the incentives especially taxation. They should also work closely with the private sector in a bid to monitor changing patterns of Foreign Direct Investment in the emerging markets. The challenge is for the government to create an enabling environment.