Foreign direct investment and taxation in Kenya: an empirical analysis

Abstract

Foreign Direct Investment is significant in the world economies in terms of output, employment and trade. However, attracting FDI has been a great concern to many countries especially the developing countries. This has led to the government adopting policy measures that would be favourable to Foreign Investors. In the last three decades, Kenya has lost competitiveness in attracting FDI and retaining the stock of foreign investment to the other East African countries. The objective of this paper is to investigate the relationship of taxation and foreign direct investment in Kenya and to establish the trends of factors that affect FDI in Kenya. The study used ordinary least squares for estimation of a time series data covering the period 19802012. The variables under consideration include taxation, gross domestic product, openness to trade, exchange rates and inflation. The findings of the study revealed that tax, gross domestic product, exchange rate and openness to trade have a positive impact on foreign direct investment while inflation has a negative impact on foreign direct investment.The study recommends that the government needs to dig deeper into issues concerning loopholes in tax remittance such as tax avoidance and tax evasion. The policy makers should adopt policy measures geared towards improved GDP and openness to trade and mechanisms of controlling inflation. This would promote investment opportunities and bring about macroeconomic stability thus winning investors’ confidence in the Kenyan economy