Determinants of Foreign Direct Investment Inflow in Hospitality Industry in Kenya (1990 – 2014)

Abstract

The aim of the study was to establish the determinants of Foreign Direct Investment inflow in hospitality industry in Kenya, 1990 - 2014. FDIs have attracted renewed interest both in the developing and developed worlds. The increase in importance of FDI in the global economy is due to the additional resources they pool for development in the host country. Many factors determining the inflow of FDI in a host country have been discussed by many authors. However, the literature also indicates that there is no conclusive argument on factors determining FDI. Different factors work differently in different countries based on investment type and investor motive. FDI inflow in the industry has continued to decline despite the country’s comparative advantage. Why is the industry not attracting FDI inflow? The study was guided by the objectives and hypotheses. The study sought to establish the influence of political factors, bureaucratic business procedures and insecurity. A survey was carried out in North Coast, South Coast, Kilifi and Malindi Zones (Coastal Region) which provided primary data. Secondary data was obtained from economic surveys, UNCTAD and KenInvest among other sources. The study findings indicated that Kenya’s hospitality industry is largely dominated by the local private investors who lack adequate and management skills to ensure international standards required by the increasing tourist and visitors’ demands. This has subsequently undermined the industry’s competitiveness. The findings also indicated that there are few FDI in the industry and the number continues to decrease. Factors identified to be contributing to this trend are restrictive investment climate that deters potential investors at entry point; increased level of corruption due to bureaucratic business procedures and misuse of discretionary powers accorded to some public office holders has led to uncertainty on what to expect discouraging many investors; insecurity as a result of continued terrorist attacks and potential threats leading to decrease in international visitor arrivals from key market source, consequently leading to divestment. Worth noting was that the restrictive investment measures laid down were however not being implemented. Partly because of lack of harmony among the various government agencies, coupled with lack of clarity on which agency should enforce or carry out the implementation; secondly, there are no monitoring mechanisms to ensure that the already existing FDI operate within the set rules. Corrupt public officers also contribute to lack of proper monitoring of the existing enterprises, most of them receive monetary gains in form of bribes not to inspect the operation of enterprises not complying with the laid down rules. Existing investors find it easy to operate and expand since they are already familiar with the bureaucratic procedures and they know how to go about the restrictive investment climate, unlike the incoming investors who are discouraged by the business climate. In conclusion, a country’s endowed resources such as attractions; political and regulatory factors; and level of security play an important role in determining investment decisions by foreign investors in hospitality industry.