An investigation into factors hindering development of foreign direct investment in Kenya

Abstract

Foreign Direct Investment (FDI) plays an important role in fostering economic growth and development because not only does it provide capital for domestic investment but also creates employment and helps transfer technology and managerial skills. FDI can be a huge source of revenue for capital-starved countries which are typified by countries in sub-Saharan Africa. The ability to attract FDI leads to a continuing relative advantage for developing economies. Kenya was a prime choice for foreign investors in the 1960s and 1970s but has however been left out of the global surge of FDI inflow that started in the mid to late-1990s. It is worrisome that FDI inflows to Kenya have been falling in the recent years. While developing countries attracted an annual average of $41 of FDI per capita in the period 1996-2003, Kenya only averaged inflows of $1.3 per capita in the same period. Kenya is ranked 125th out of 140 countries on the UNCTAD's FDI performance index in 2006 and has not ranked better than 111that anytime since 1990. Though some studies have been done to examine FDI hindrances this Kenyan phenomenon has received little attention from scholars. Using a sample of 30 investors from a list of investors provided by the Kenya Investment Authority (KIA), this descriptive study sought to explore the factors hindering the growth of FDI in Kenya. The study found that though there are many efforts that have been made to attract foreign investment in Kenya by the government such as maintaining political and microeconomic stability, establishing policies and institutions that enhance investment, implementing the privatisation programme, institutional constraints such as unfair competition, poor justice administration, bureaucracy in the application process and politically motivated reforms have adversely affected the attractiveness of Kenya as a foreign investment destination. For this trend to be reversed, the government needs to continue its efforts at liberalization, structural reforms especially in public administration. Continued economic and political stability is still a general precondition to increased FDI.