Foreign Direct Investment in Kenya

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FOREIGN DIRECT INVESTMENT IN KENYA

By

Mathew Nyamwange X50/70602/2007

A case study of Kenya's FDI between 1980 and 2006, in partial fulfillment for my Masters in economics, course XET502: ADVANCED MICROECONOMIC THEORY II, School of economics, University of Nairobi.

1. Introduction
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An agreed framework definition of foreign direct investment (FDI) exists in the literature. That is, FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a business enterprise operating in a country other than that of the investor defined according to residency (World Bank, 1996). Such investments may take the form of either “greenfield” investment (also called “mortar and brick” investment) or merger and acquisition (M&A), which entails the acquisition of existing interest rather than new investment. In corporate governance, ownership of at least 10% of the ordinary shares or voting stock is the criterion for the existence of a direct investment relationship. Ownership of less than 10% is recorded as portfolio investment. FDI comprises not only merger and acquisition and new investment, but also reinvested earnings and loans and similar capital transfer between parent companies and their affiliates. Countries could be both host to FDI projects in their own country and a participant in investment projects in other counties. A country’s inward FDI position is made up of the hosted FDI projects, while outward FDI comprises those investment projects owned abroad. Sub-Saharan Africa as a region now has to depend very much on FDI for so many reasons. The preference for FDI stems from its acknowledged many advantages. Therefore African countries have struggled to implement FDI, and these efforts by several African countries to improve their business climate stems from the desire to attract FDI. In fact, one of the pillars on which the New Partnership for Africa’s Development (NEPAD) was launched was to increase available capital to US$64 billion through a combination of reforms, resource mobilization and a conducive environment for FDI. Unfortunately, the efforts of most countries in Africa to attract FDI have been futile. This is in spite of the perceived and obvious need for FDI in the continent. The development is disturbing, sending very little hope of economic development and growth for these countries. Further, the pattern of the FDI that does exist is often skewed towards extractive industries, meaning that the differential rate of FDI inflow into sub-Saharan African countries has been adduced to be due to natural resources, although the size of the local market may also be a consideration Foreign Direct Investment (FDI) not only provides the African countries with much needed capital for domestic investment, but also creates employment opportunities, helps transfer of managerial skills and technology, all of which contribute to economic development. Recognizing that FDI can contribute a lot to economic development, all governments of Africa including that of Kenya want to attract it. Indeed, the world market for such investment is highly competitive, and Kenya in particular, seeks such investment to accelerate her development efforts. With liberal policy frameworks becoming common place and losing some of their traditional power to attract FDI, Kenya is paying more attention to the measures that actively facilitate it. Hence, the economic determinants remain very important. What is likely to be more critical in the future is the distinctive combination of location advantages, especially, created assets that Kenya can offer potential investors. 2

The level of FDI in Kenya has been low and stagnant over the past couple of years and well below Kenya's potential. There has also been a worrying trend of foreign investors moving out of Kenya and gravitating to other countries....
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