' IMPEDIMENTS TO FOREIGN D I R E C T INVESTMENT IN

AFRICAN COUNTRIES- A CASE OF K E N Y A

BY

CAROLINE W. GATHUA

A Project Report Submitted to the Chandaria School

of Business in Partial Fulfillment of the Requirement for the
Degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY

USIU-A

400000019952

/Vfrica •
SUMMER 2013
 STUDENT'S DECLARATION

I , the undersigned, declare that this is my original work and has not been submitted to an
other college, institution or university other than the United States International
University in Nairobi for academic credit.

Signed: Date:

Caroline W. Gathua (ID 602490)

This project has been presented-»for examination with my approval as the appointed
supervisor.

Signed: Date:

Mr.Kepha Oyaro

Date:

idaria School of Business

Signed: Date:

Deputy Vice Chancellor, Academic Affairs

 COPYRIGHT

All rights reserved; no part of this work may be reproduced, stored in a retrieval system
or transmitted in any form of any or any means, electronic, mechanical, photocopying o
otherwise without the express written authority from the author, Gathua, Caroline
Wangui ©2013.
 ABSTRACT

The purpose of this study was to determine impediments to foreign direct investments in
African countries with a specific focus on the case of Kenya. The study sought to analyze
the effects of historical and political experiences on F D I in Kenya; the perceived
economic benefits of FDI; the effects of government policies on F D I ; and the effect of
the business environment on F D I in Kenya.

The study was carried out using descriptive and inferential research design to obtai
information concerning various aspects of F D I in Kenya. Respondents were drawn from
individual foreign investors, staff from the Kenya Private Sector Alliance and staff of
investment promotion centers in Kenya. Data was collected using questioimaires
developed by the researcher and administered by a trained research assistant. Data w
analyzed using Statistical Package for Social Sciences (SPSS) software and the resu
presented in tables and figures.

The study found that Kenyans no longer perceive F D I as post colonialism and historica
injustices by foreigners do not linger in their minds in respect to foreign investments.
Political leaders are currently viewed as pro-FDI, even though some of them feel that F D
is a threat to their political ambitions. Workers in foreign firms perceive their terms of
service as not being favorable and most complain of mistreatment and poor pay.

The research found that most respondents do not see the economic benefits of F D I . The
is a perception that management skill transfer and technical know-how from the
investors' country to the host country does not occur as most of them bring in expatriate
and use technology that is far more advanced than that found in Kenya hence no tangib
benefit. FDI is however perceived to result in an automatic multiplier effect and more
market connections for the host country. Investment promotion activities have greatly
contributed to attraction of F D I to Kenya in recent years.

Of the study respondents, 95% stated that government policies and regulations were
great impediment to FDI in Kenya. These regulations were found to affect the flow of
FDI into the country yet respondents stated that the policies in place lacked transparency
and were erratic and inconsistent. The study however found that policies in place were
not perceived to be discriminatory to foreign investors and were in fact promoting
competition rather than rivalry. Of the respondents, 95% agreed that Kenya assents
intemational trade agreements and investment incentives were found to greatly influenc
FDI attraction into the country.

The study found that the state of the business environment in Kenya is a major facto
considered by potential investors into the country. 85% of the respondents reported tha
the process of starting a business in Kenya was tedious and that there was a lot
bureaucracy in meeting legal requirements, as well as numerous and repetitive procedur
required to register a business. Most investors view Kenya's business envirormient a
good for investment and the political climate stable, but consider the cost of setting up
business here as high and the set up process slow. Other factors such as corruption a
security were also cited as disincentives to entry of FDI.

The study concludes that Kenyans have moved beyond the past are in fact open to F D
The political leaders need to step up their efforts to ensure a sound legislative an
regulatory envirormient for F D I attraction in order to achieve economic growth and
poverty alleviation in the covmtry. This is one of the goals of Vision 2030.

It is not in dispute that FDI has economic benefits to the host country which need to be
tapped and channeled to the population in beneficial ways. Sound regulation of busines
practice especially in regards to labor practices will help change the perception tha
foreign investors are harsh employers. F D I promotion efforts should also take into
account the expected market coimections to be opened up by the main investments.

Government policy does play a major role in promoting or impeding F D I . It is therefore

imperative that laws and regulations are harmonized and enforced in a way that make
doing business easier not more tedious for all investors. The fight against corruption an
insecurity needs to be given a boost as the implications are far reaching for the country
economy.

The study also concludes that the business envirormient and the ease of doing business
Kenya determines whether investors seeking opportunities settle here or move on in
search of more conducive environments elsewhere. Kenya still has a long way to go i
making setting up here easier and less bureaucratic.
The study recommends that the political leaders should promote F D I and harness it
positive attributes to increase investment in the country, and labor laws should be
enforced for all investors.

The government should continue providing support to the institutions promoting F D I , as

well as harmonize and consolidated such efforts to ensure that a clear and cohere
message goes out to likely investors. Bureaucracy and impediments to F D I should b
removed to increase efficiency of on-boarding new investors.

Sound and clear policies on F D I should be implemented. Fair competition for both locals
and foreigners should be promoted and the government should give tax and duty
exemptions to appropriate industries in order to attract F D I .

The process of starting a business in Kenya should be simplified and government shoul
enhance the capacity and competence of staff handling investors. Better service deliver
accountability, zero-tolerance of corruption, security enhancement and environmenta
protection are necessary concerns in order to attract and retain foreign investors.

The study will be of great importance to foreign investors who would be seeking for
investment information in Kenya and to the whole of Africa. The study will be of great
value to Kenya Private Sector as the findings will provide facts that can be used to
strengthen the policies and business environment. It will also be used as reference sour
of information for promotion centers to attract more investment into Kenya. This study
will be of significance to other researchers and academicians who seek to understand ho
FDI adds value to a country's economy and may want to do fiirther studies in this field.
 ACKNOWLEDGEMENTS

I acknowledge and appreciate my supervisor for his guidance on this project, my family
for supporting me through the duration of my program and my friends for bearing with
my absence while 1 worked to finish my program.

The journey of a thousand miles begins with but one step, and this one is at its en
because of all your support, encouragement and contribution.
 DEDICATION

To my mother, without whose emotional, physical and spiritual support I would not have
successfully completed this program.

To all my hidden enemies, from whom 1 draw my energy.

 T A B L E OF CONTENTS
STUDENT'S D E C L A R A T I O N ii

COPYRIGHT iii

ABSTRACT iv

ACKNOWLEDGEMENTS vii

DEDICATION viii

L I S T OF T A B L E S xii

L I S T OF F I G U R E S xiii

L I S T OF A B B R E V I A T I O N S xiv

C H A P T E R ONE 1

LO I N T R O D U C T I O N 1

L I Background of the Study 1

Problem Statement 5

1.3 General Objective 6

1.4 Specific Objectives 6

1.5 Significance of the study 6

1.6 Scope of the Study 7

1.7 Definition of Key Terms 8

1.8 Chapter Summary 8

CHAPTER TWO 10

2.0 L I T E R A T U R E R E V I E W 10

2.1 Introduction 10

2.2 Effects of Historical and Political Background on Foreign Direct Investment 10

2.3.Economic Benefits of Foreign Direct Investment 14

2.4 Effects of Government Policies on Foreign Direct Investment In Kenya 18

2.5. Effects of Business Environment on Foreign Direct Investment 24

2.6 Chapter Summary 29

CHAPTER T H R E E 30

3.0 R E S E A R C H M E T H O D O L O G Y 30

3.1 Introduction 30

3.2 Research Design 30

3.3 Population and Sampling Design 30

3.4 Data Collection Methods 32

3.5 Research Procedures 32

3.6 Data Analysis Methods 32

3.7 Chapter Summary 33

CHAPTER F O U R 34

4.0 R E S U L T S AND F I N D I N G S 34

4.1 Introduction 34

4.2. Quantitative analysis 34

4.3 Effects of Historical and Political Experiences on Foreign Direct Investment in Kenya
36

4.4 Economic Benefits of Foreign Direct Investments 38

4.5 Effects of Government Policies on Foreign Direct Investment in Kenya 40

4.6 Effects of Business Environment on Foreign Direct Investment in Kenya 44

4.7 Chapter Summary 47

CHAPTER F I V E 49

5.0 DISCUSSIONS, C O N C L U S I O N S AND R E C O M M E N D A T I O N S 49

5.1 Introduction 49

5.2 Summary 49

5.3 Discussions 51

5.4 Conclusions 54

5.5 Recommendations 56
REFERENCES 58

APPENDICES 64

APPENDIX 1: C O V E R L E T T E R 64

APPENDIX I I : T H E Q U E S T I O N N A I R E 65
 LIST OF TABLES

Table 3.1 Population Distribution 31

Table 3.2 Sample Size Distribution 32
Table 4.1 Respondents Age and Gender 35
Table 4.2 Historical and Political Experiences 37
Table 4.3 Factors on open market for FDI 39
Table 4.4 Promotion centers and private investment contribution to FDI market 40
Table 4.5 Policies and Regulations 42
Table 4.6Effects of Business Startup Process 44
Table 4.7 Appeal to investors by business approval 45
Table 4.8 Political Factors on F D I 47
 LIST OF FIGURES

Figure 4.1: Response Rate 35

Figure 4.2: Respondent's Category 36
Figure 4.3 Colonial and Political Experiences 36
Figure 4.4 Economic Benefits 38
Figure 4.5 Government Policies on F D I 40
Figure 4.6 Policies and Regulations 41
Figure 4.7 Kenya assents to trade agreements /laws 42
Figure 4.8 Investments Incentives 43
Figure 4.9: The status of Kenya business environment to attract foreign direct investment
45
Figure 4.10 Political Stability 46
 LIST OF ABBREVIATIONS

CUTS Consumer Unit and Trust Society

EPZ Export Processing Zone
FDI Foreign Direct Investment
IPC Investment Promotion Centre
LaRRI Labour Research and Resource Institute
LDC Least Developed Countries
M&A Merger and Acquisition
MNES Multinational Enterprises
OECD Organization for Economic Development
OLI Ownership, Location and Internalization
SOMO State Oil Marketing Organization
SPSS Statistical Package for Social Sciences
TNCs Transnational Corporations
UNCTAD United Nation Conference on Trade and Development
WAIPA World Association of Investment Promotion Agencies
WIR World Investment Report
 C H A P T E R ONE

1.0 INTRODUCTION

1.1 Background of the Study

"In the 1970s and 1980s several countries in Africa enforced trade restrictions and capita
controls policies of import-substitution industrialization aimed at protecting national
industries and conserving scarce foreign exchange reserves" (Rodrick, 1998). Accordin
to Himbara (1994), Kenya like most African developing nations was skeptical about the
benefits of free trade and investment and was hesitant to consider policies on foreig
direct investment. Financial Stability Forum Report (2008) indicated that "there was
substantial evidence that this inward-looking development strategy discouraged foreign
direct investment (FDI) and had deleterious effects on economic growth in the continent."

Department for Intemational Development (DflD, 2003) stated that "Foreign Direct
Investment is viewed as a major stimulus to economic growth in developing countries. It
is perceived to have the ability to deal with major obstacles such shortages of financia
resources, technology, and skills."Meyer (2005), explained that " F D I refers to investment
made to obtain a lasting management interest (usually at least 10 % of voting stock) an
secure at least 10% of equity share in an enterprise operating in a country other than th
home country of the investor". F D I can take the form of "Greenfield" investment (also
called "mortar and brick" venture) or Merger and Acquisition (M&A), depending on
whether the outlay involves mostly newly created assets or just a reassignment from
homegrown to foreign firms. "This has made it the center of attention for policy makers
in unindustrialized countries" (UNCTAD Report, 2009).

"Ideally, the purpose of investment is to profit both the investing company and the host
economy. However Mergers and Acquisitions are likely to result in gains for the investing
firm but destruction of the national industry" (Mwilima, 2003). Evidence shows that
sometimes, foreign investors come into a market with the sole intention of destroying
domestic competition and setting up a monopoly in the economy. The Social Observatory
Pilot Project Report (2011), notes that "Africa, by not drawing more F D I , is failing to
wholly benefit from the potential of foreign capital to contribute to economic
development and integration with the world-wide economy".
 According to World Bank Report (2010) FDI flows to developing countries declined in
2009, "mainly because of the economic crunch experienced globally in 2008". Howeve
technology flows persisted in growth, partly reflecting their increasing importance in the
production process. The report adds that "inflows to Africa, which peaked in 2008 driven
by the resource boom, appear to continue the declining trend of the previous year". Fo
the region as a whole, UNCTAD (2009) estimates show that " F D I inflows fell by 14% to
$50 billion in 2010, although there are significant regional variations. While the
downward trends of inflows to North Africa appear to have evened out, in sub-Sahara
Africa, inflows to South Africa dropped to barely a quarter of the 2009 level, contributing
to the large fall of FDI inflows in the sub-region". "Cross-border M&As, mainly in
mining industries, registered an increase of while the number and value of
Greenfield projects - normally the dominant mode of F D I in Africa - suffered a decline
of about 10% in 2010" (Kinuthia, 2010).

Durban (2011) stated that "overcoming barriers for F D I remains a key challenge for
small, vulnerable and weak economies."This suggests that in the face of diminishe
financing and reduced market forecasts world-wide, transnational corporations in th
continent are concentrating on amalgamating their assets and activities so as to strength
their readiness for global expansion or survival once the health of the global economy
including countries affected by the recent financial crisis and their aftermath, is fully
restored (Kwame, 2000). As much as it is true that some African countries have bee
characterized by economic depression, military struggles, unstable political
administrations and increasing social and health problems, it is also true that there hav
been some positive developments in Africa that are highly relevant for foreign direct
investors but that are rarely reported and not widely known (Shiels, 2003). In spite of the
improvements that have taken place and the headway expected in a number of Africa
countries in terms of improving the business environment, further work is needed to
change the image of Africa and to develop among foreign investors a more positive view
of the continent and its opportunities (Tiskata et al., 2000).

Kinuthia (2010) reported that some of the main impediments to companies doing busines
in Kenya are bribery and extortion, access to intemational markets, economic and
political outlook, and access to finance among others. Kenya, and Africa in general, mus
move vigorously in market liberalization and political stability i f she is to claim her
 rightful segment of global commerce (World Investment Report, 2010). One of the
reasons why foreign investors are disinclined to invest in Africa, despite its enormous
lucrative opportunities, is the relatively high degree of uncertainty in the region, which
exposes firms to substantial risks (UNCTAD, 2010).

A report by World Bank (2011) shows Kenya has had a long past with foreign firms. The
report indicates that in the 1970s Kenya was one a preferred destination for F D I in Eas
Africa. However over the years, Kenya lost its appeal to foreign firms, a phenomenon tha
has persisted to the present."While Kenya was a prime choice for foreign investors
seeking to establish a presence in East Africa in the 1960s and 1970s, a combination
politically driven economic policies, corruption, lack of quality public services, and poor
infrastructure has discouraged foreign direct investment (FDI) since the 1980s" (US
Department of State, 2012). Starting in 2003, Kenya's performance in attracting F D I has
been slightly better at nearly US$6 per U.S. $1,000 of GDP (US$82 million in total).
However, this is lower than the FDI levels in bordering countries with smaller economies
(Worid Bank, 2004). Kenya was listed in UNCTAD's 2008 Worid Investment Report as a
poor performer within the East Africa region in terms of drawing F D I . The stock of F D I
in Kenya stood at $183 million in 2008. After enjoying an exceptional year in 2007
attracting $729 million in FDI, Kenya only attracted $96 million in 2008 and $141
million in 2009 (UNTAD, 2009). The Financial Post (2011) indicates that domesfic
investment now exceeds F D I and is making a significant impact on development in
Kenya. In 2008, Kenya launched Vision 2030 with hopes of achieving global
competitiveness and prosperity. This initiative has seen an improved commitment to
attract FDI to assist in the industrialization process. However, this initiative has not been
actualized as expected.

Investment flows to Africa have declined steadily. Africa has not attracted the levels of
FDI that had been expected. At the same time, "there remains a deeply-rooted skepticism
within Africa toward foreign investment, owing to historical, ideological, and political
reasons" (Moss, Ramachandran & Shah, 2005). In 2009 the extent of the deterioration
varied by sub-region, according to the World Investment Report (2010). West and East
Africa, the main beneficiaries of the previous commodity boom, experienced regressions
in FDI inflows. Flows to North Africa also reduced despite the fact that the sub-region's
more diversified sectors received FDI and sustained privatization programmes. Southern
 Africa also saw its inflows fall severely, although it remained the largest beneficiary sub-
region (UNCTAD, 2010).

According to CUTS (2002) a number of causes have stalled FDI into African countries.
These include lack of transparent policies, market size, and lack of profit opportunities
negative perceptions, inconsistent setup, and shortage of skills, labor regulations
corruption, poor infrastructure, and economic disorders. Social aspects such as civ
unrest and deadly diseases such as malaria dispirited investment. Emery, Wells an
Buehrer (2000) give indirect barriers as "delays in getting approval to start a business i
Africa, poor public service such as unhelpful attitude, delays beyond the necessary fo
approval or signatures, complexities caused by the need to administer poorly- designe
incentive schemes, lack of computerization or lack of capacity in registration or
regulatory applications, duplication of efforts among agencies which require the same
information, and high costs caused by the requirements for company formation, up-fron
capital taxes, insecurity and political social stability."Mwilima (2003) indicated that
"extortion, bribery, and the lack of access to global markets are some of the factors tha
discourage investors from coming to Africa."He also attributed the delay in getting
approval to start a business as a cause for the drop of FDI to Africa.

"At the macroeconomic level, F D I brings new capital for investment, contributing to the
balance of payments, adding to the country's capital stock, and potentially adding to
future economic growth." FDI is also mentioned as a more stable type of capital flow, and
thus is perhaps more appropriate and development-friendly for low-income countries than
portfolio flows (Dunning, 1993). There is also some evidence that foreign investment can
contribute to increasing exports and integrating into global economic networks."At the
microeconomic level there are also a number of supposed benefits, especially highe
productivity through new investment in physical and human capital, increased
employment, enhanced management, and transfer of technology," (Mark, 2007). Foreign
investment also is thought to have important "spillover effects on local firms through
supply and distribution chains, trading, and outsourcing" (Moss & Ramachandran, 2005).

According to the Kenya Economic Survey (2012),"Africa received 3.5% of global F D I

inflows in 2011, the lowest share of Global FDIs." Africa's share of global FDIs has
dropped over time from nine percent in the 1980s to 3.5 % last year 2011. Kenya's FD
 declined to 22 percent in 2011, compared to 40 percent and 36 percent in Uganda an
Tanzania, respectively. Some of the factors restraining Kenya to attract FDI include "poo
infrastructure, weak corporate governance, cost of doing business, the absence of larg
scale privatization programmes, relatively smaller quantities of known natural mineral
resources and inadequate F D I policy framework," (Mwithiga, 2012).

1.2 Problem Statement

The UNCTAD (2009) data on F D I in Africa indicates a reduction in inflows, a trend that
has adversely affected Africa's commodity-based economies. Remittances have shown
marked decline, investors are more opposed to risk and investment prospects are le
appealing. At the beginning of the crisis, FDI inflows to Africa were hardly affected, but
the figures for 2009 show a decline of about 39% from the previous year (Mark, 2007).
"At the same time, there remains a deeply-rooted suspicion within Africa toward foreign
investment, owing to historical, ideological, and political reasons,"(WIR, 2010). Kenya,
like other developing African Nations, is faced with economic and political challenges
despite being a preferred country for F D I in East Africa as was seen in the decline in F D
arrivals (Kinuthia 2010).

Moss (2003) reports that "attracting foreign direct investment into diversified and higher
value-added sectors remains a challenge for Africa." In the most recent 5-year period
only three countries, (South Africa, Angola, and Nigeria) accounted for 55 percent of the
total. The top fifth (10 out of 48 countries) account for 80 percent and the bottom half
account for less than 5 percent. "This trend has held for at least the last three decade
with the top 10 countries accounting for more than 75 percent of the continent's total F D
inflows."

Mwilima (2003) notes that "there has been a long-standing concentration in the extractive
sectors particularly petroleum among African countries."Almost all of the investment
going to Angola, Nigeria, Equatorial Guinea, Sudan, and Chad is oil-related, with the
greater part of the investment in the former three invested in offshore facilities. In the
latest 5-year period, these five countries accounted for 43.5 percent of Africa's total F D I
(approximately matching oil-concentration in previous periods). Furthermore, most of the
 foreign investment in Ghana, Namibia, Zambia, South Africa, and Botswana, and mor
recently Tanzania, has been in big mining projects.

The researcher sought to address these problems so as to contribute towards a gre

understanding of why there are impediments to F D I among African countries, by
focusing on the Kenyan case. The study investigated the role played by governmen
policies, market size, profit opportunities, and, political-social stability in hampering F D I
in Kenya.

1.3 General Objective

The main objective of the study was to determine impediments to foreign direct
investment in Africa, and particularly in Kenya.

1.4 Specific Objectives

1.4.1. To determine the historical and political background issues affecting foreign direct
investments.
1.4.2. To establish the economic benefits of foreign direct investment to a host country.
1.4.3. To identify the government policies affecting foreign direct investments.
1.4.4. To analyze the effect of the business environment on foreign direct investments in
Kenya.

1.5 Significance of the study

The study will be of great importance to other academicians and researchers who seek
understand how F D I adds value to a country's economy, and to foreign investors seekin
investment opportunities in Kenya and in other countries of the African continent. The
study will be of great value to investment promotion agencies in Kenya as the findings
will provide facts for them to use in attracting investors to the country. It will also be used
as a source of information for policy formulation.
 1.5.1. Regulators and Policy Makers

The study will be of significance to policy makers and regulators in Kenya as they
formulate policies that attract investors to the country and tackle existing impediments t
foreign direct investment.

1.5.2. Foreign Investors

The study findings will provide vital information to investors seeking opportunities to
invest in Kenya. This information will give them a guideline on the pitfalls to avoid as
they set up in Kenya.

1.5.3. Investment Promotion Agencies

The study will be of great significance to investment promotion agencies in Kenya as the
seek to harmonize their approach to attracting investors to Kenya in order to achieve th
goals of Vision 2030. The study will point out the impediments that need to be addresse
at policy making level so as to make it easier for investors to come into Kenya.

1.5.4. Academicians and Researchers

Other researchers and academicians would use the findings of this study as a point
reference for other studies and for further research into areas not covered by this study.

1.6 Scope of the Study

This study focused on organizations and institutions that deal with attracting foreign
investors into Kenya, as well as foreign firms that have set up investments in the country
These include investment promotion centers, foreign embassies and private investors. T
study research was conducted between the months of March and May, 2013.

With the elections in Kenya successfully completed and a new government in place, the
focus is now on delivering on the election promises, some of which revolved around the
issue of creation of jobs and improvement of economic performance of the country. There
is therefore a lot of interest in how to attract investments in Kenya and what obstacles
need to be overcome in order to get on with the task. Foreign investors and investmen
promotion centers were eager to give the researcher information on their experiences
Foreign embassies were initially reluctant to respond. However, the researcher framed th
 questionnaire professionally and assured confidentiality and this assisted in obtaining a
much accurate information and responses as possible.

1.7 Definition of Key Terms

1.7.1. Foreign Direct Investment

This refers to "a category of cross-border investment made by a resident (host) in on
economy with the objective of establishing a lasting interest in an enterprise that is
resident in an economy other than that of the direct investor (home).""A Direct investor
has a strategic long-term relationship with the direct investment enterprise to ensure
significant degree of influence by the former in the management of the latter" (OECD,
2008).

1.7.2. Host Economy

Also known as the resident economy and is the country in which the investors carry ou
entrepreneurial activities with an aim of long term relationship for a mutual benefit.

1.7.3. Impediments to Foreign Direct Investments

Impediments to F D I are defined as the barriers to foreign direct investment (Durban,

2011).

1.7.4. Incentives

Incentives are described as "policies used to attract internationally mobile investors."

Governments consider them as a way to obtain F D I (OECD, 2008).

1.7.5. Market Size

Market Size is the portion of the host economy (country) that is anticipated to consume
the product/output of the investor.

1.8 Chapter Summary

This chapter has addressed the background history on foreign direct investment in Keny
and Africa. The chapter has also outlined the main objective of the study and the specific
objectives to guide the study. It also provides the definitions of key terminologies and
concepts in the context of this study. Also included in this chapter is the significance o
the study to various stakeholders who will benefit from the study findings. Chapter two
presents a review of the information gathered relevant to the purpose of the study. Th
review was guided by the research objectives to give an in depth discussion of th
variables identified as relating to the study problem. Chapter three of the study discusse
the research methodology of the study; describes the research design applied during t
study as well as the population sample and sampling techniques, data collection method
data analysis, and data presentation methods. Chapter four discusses study results a
findings and presents these results and findings in tables and figures. Chapter five give
summary of the findings, results of the findings and deduces conclusions then make
recommendations.
 C H A P T E R TWO

2.0 LITERATURE R E V I E W

2.1 Introduction

This chapter discusses the literature review of the study. The literature review presents
review of the information gathered relevant to the purpose of the study. The review was
guided by the research objectives to give an in depth discussion of the variables identifie
as relating to the study problem.

2.2 Effects of Historical and Political Background on Foreign Direct Investment

2.2.1. Colonial Rule Experience

"Africa's early experiences with foreign companies continue to affect official and public
perceptions of F D I , " (Moss, Ramachandran& Shah, 2004). Despite the increasing
competition for F D I and Africa's ability to attract only modest amounts outside of the
mining industries, the continent still has a strong historical suspicion toward foreign
capital. "Much of the prevailing attitude toward foreign investment is rooted in history,
ideology, and the politics of the post-independence period affected by its colonial
experience and suffered post-independence traumas that affect their present attitud
toward foreign investment" (Moss, Ramachandran & Shah, 2004).

Tough working conditions and treatment of workers added to the linking of foreign
companies and exploitation, such as in the mines under the Witwatersrand Native Labo
Association or plantations (Hochschild, 1998). Foreign companies in Africa are perceived
as agents of imperialism and mistreatment is indelibly linked in the public mind to the
slave trade as a predecessor for colonialism. Although the colonial period ended mor
than a generation ago, it has also remained a central factor in Africa's distrust ove
joining the global economy. Reflecting a common sentiment even today, Zambia's
leading daily recently editorialized:
"Since when has global capitalism been concerned about equality, fairness and
genuine justice or the lives of those it affected? From the days of mercantile
capitalism and its slave trade, through classical colonialism with its crude
extraction of raw materials from our countries, to today's neo-colonialism the
 situation of our people is basically or fundamentally the same—marginalized,
exploited, ignorant, diseased, hungry and generally poor" 2003).
As a direct consequence of these historical and political issues, African governments hav
erected a series of barriers to foreign entry. The notion that Africans needed to seiz
control of their economies after independence manifested itself in several ways tha
continue to affect foreign investment. "Even though early concerns were directed at larg
European and small South Asian investors, the more recent influx of investment from
East Asian and South African investors has helped to sustain some of these
issues,"(Daniel et al, 2003).

In the Cold War, Kenya chose to support the West. "Although supposedly allied with
market capitalism, in practice the government followed a statist strategy that rapidly
deteriorated into narrow rent-seeking and corruption". Partially because of the large
colonial settler population, there was a large foreign presence in the country, much o
which remained after independence. Big foreign banks, for instance, have continued
operations. "For the most part, legal barriers to foreigner investment have been minimal
(WTO, 2000).

2.2.2. Economic Nationalism

"Although there has been substantial turnover of political leadership in Africa over the
past decade, many of the current decision-makers (including those frequently hailed a
reformers) have held political positions for decades that were trained on the socialis
model steeped in anti-foreign investment ideology" (Craig, 2002). Even as majority of
Africa's finance ministers have become increasingly persuaded that economic opennes
can be valuable for their countries and fluent in the language of intemational capitalism,
many of their cabinet colleagues remain un-recreated economic nationalists."Some of th
ideological opposition to foreign investment is part of a general critique of capitalism and
more recently of globalization and foreign capital remains an easy target,"(Hopelain,
2004).

In the Center for Global Development Working Paper (2004), Moss, Ramachandran and
Shah indicate that, "the ideas of economic nationalism affected sentiments towards
foreign investment, and they continue to iirfluence policy today". The statement by
 Kenneth Kaunda that "political independence is meaningless without economic
independence" shaped not only Zambian investment policy but also those of his enti
generation of leaders (Tangri, 1999; Kaunda, 1979). Botswana, one of the African
countries that have followed more conventional economic policies, has not been immun
Kenneth Koma, leader of the opposition in 1999 cautioned against privatization sayin
that "lack of managerial skills and capital among Batswana will lead to a situation wher
the economy will be in the hands of foreigners which will ultimately impact on the policy
of the country" (Mmegi, 2000). Economic nationalism was used to justify extensive state
interference in the economy, including the creation of parastatals, substantial regulatio
and often nationalization or expropriation. Although this was targeted at both local and
foreign firms, many of the largest exporting ones had been foreign owned and operate
and intervention was directly targeted at them (Kobrin,1984).

Since day and age different regions have been trading and exchanging goods with ea
other while trying to enrich themselves in the process. The underlying factor for this ha
been interregional differences in supplies of primary factors, technological or climatic
conditions and different patterns of demand. Theories about the motives for F D I wil
demonstrate that these underlying factors for investment and trade have not significant
changed over the years. The theories merely classify the different motives into separa
categories, which can be used as tools to reflect the phases of economic development
each country. Narula and Dunning (2000) argue that there are four main motives fo
investment, being: "to seek natural resources, to seek new markets, to restructure existi
foreign production through rationalization, and to seek new strategic assets."

Kenya's political elites held that reliance on external investors was potentially
undependable, and economically risky, and most importantly, politically improper
(Himbara, 1994). The government therefore used state enterprises to intentionall
promote African entrepreneurs at the expense of both foreign and local Asian investor
(Holmquist, 2002). "At times antiforeigner sentiment, fuelled by government officials, led
to violence, including widespread looting of Asian-owned businesses in the early 1980s
(Himbara, 1994).Due to both internal remonstrations and external intemational pressur
and a series of errors by the goveming elite, the political system of Kenya changed
considerably.
 In 1992 Kenya held multi-party elections again. These multi-party elections were
heralded to be a substantial change in the political system. Unfortunately, right from th
beginning, the entire electoral process was manipulated and comprised by the rulin
party. This substantial electoral malpractice ensured the outright victory of K A N U . After
24 years of ruling Kenya, K A N U lost elections to Mwai Kibaki's party N A R C , in 2002.
During this election N A R C won 125 of the 210 seats in parliament, leaving only 85 seats
for KANU and numerous smaller parties.

Almost directly after the 2002 elections, tensions within N A R C increased, due to interna
altercation within the ruling party. Up until new elections in 2007, Kibaki had to
rearrange or replace members of his party several times, as a result of ministers opposi
the new constitution, corruption allegations expressed against ministers, and ongoin
quarrels between different party members. The new elections of 2007 unfortunately
resulted in civil unrest and violence. On December 29 2007, the incumbent Mwai Kibaki
(Kikuyu) was aimounced winner of the presidential elections, by a slim margin over Raila
Odinga (Luo). This announcement resulted into widespread violence in several parts o
Kenya during January and February 2008.

The election in 2007 and the violence direct after severely damaged Kenya's status a
being a politically stable country. Partially responsible for this civil unrest were the
politicians themselves, because they used ethnicity to mobilize votes, which created
division between the Kikuyus and other tribes. Other, circuitous causes of the violence
were the rumors about fraud during the elections, the use of governmental force durin
relatively peaceful demonstrations and clashes between gangs (Kinuthia, 2010).

Busse and Hefeker (2007) demonstrate that "political risk is related to the risk that a
sovereign host government will imexpectedly change "the rules of the game" under which
the businesses operate."Other critiques on F D I rely on the damaging of local cultures an
the maintenance of corrupt leadership. Several scholars argue that foreign investors ofte
create a consumer culture in other coimtries (Smith, 2009; Mathur 2010).
 2.3 Economic Benefits of Foreign Direct Investment

"There is a set of specific concerns that the benefits of F D I are not forthcoming and tha
certain kinds of government intervention are necessary to correct market
failures"(Tandon, 2002). Many of the purported benefits of F D I are frequently challenged
directly, both on ideological and empirical grounds (Penning, 2006). There is a common
critique that foreign investors lock out local firms that cannot compete because of size
financing, marketing power, or some other biased advantage (Action Aid, 2003). There
are also complaints that "foreign firms merely exploit local labor and make no
contribution to the wider economy, either through creating jobs, training workers, or in
using local suppliers" (Oxfam, 2003).

A common complaint against foreign investment is that, although the theory suggest
capital inflows, in actual sense,''FDI can be a drain on foreign exchange. This is becaus
foreign firms may be more likely to import materials (Chudnovsky and Lopez, 2000) and
repatriate profits (Oxfam, 2003). More widely, there is considerable concern that the
interests of foreign firms will differ from social development objectives or limit
governments' ability to promote economic development (Kolodner, 1994).

Rosen (2002) raised concerns on the economic benefits on foreign direct investment a
the claimed increase in exports, high productivity, and transfer of technology; most
African leaders consider the high levels of profitability as extortion and shrewdness by
foreigners and will curtail their efforts or possess the firms. Uganda has seen the mos
extreme swings in feelings toward foreigners. Idi Amin nationalized foreign businesses
and in 1972 compulsorily expelled 80,000 Asians (Ramachandran, 2004). For any
business majority-owned by foreigners, government has legal right to enforce
employment, local input, or technology conditions on the licensee. In practice, however,
the licensing process has become automatic and the national interest clause has nev
been officially entreated against a prospective foreign investor (UNCTAD, 2009).

"As much as it is true that some African countries have been characterized by economi
depression, military conflicts, unstable political regimes and mounting social and health
problems, it is also true that there have been some positive developments in Africa tha
are highly relevant for foreign direct investors but that are seldom reported and not widely
 known," (Capital Market, 2012).Investment by transnational corporations from
developing and transition economies to Africa has grown rapidly in recent years,
providing new sources of development opportunities for the region. These new sources o
investment are expected to be more resistant to the crisis than traditional ones, providin
a potential cushion against the negative impacts.'TDI flows to Africa will recover
gradually in the future once global economic and financial conditions improve and
commodity prices rebound as expected," (UNCTAD, 2009).

Capital Market Guide (2012) indicates that FDI flows to developing countries declined in
2009, mainly because of the economic crunch experienced globally in 2008. However
technology in-flows continued, partly reflecting their increasing prominence in the
production process. The report notes that "inflows to Africa, which topped in 2008
driven by the resource boom, appear to continue the downward drift of the previous
year". For the region as a whole, UNCTAD (2009) estimates show that " F D I inflows fell
by 14% to $50 billion in 2010, although there are significant regional variations."In
addition, "while the downward trends of inflows to North Africa appear to have evened
out, in sub-Saharan Africa, inflows to South Africa declined to barely a quarter of the
2009 level, contributing to the large fall of F D I inflows in the sub-region". Cross-border
M&As which are mainly in mining "registered an increase of 49%, while the number and
value of Greenfield projects - normally the main mode of F D I in Africa - suffered a drop
of about 10% in 2010".

The Capital Market Guide (2012) suggest that "in the face of diminished financing and
reduced market prospects world-wide, transnational corporations are concentrating o
consolidating their assets and activities so as to strengthen their readiness, for globa
expansion or survival once the health of the world economy, including countries affected
by the recent financial crisis and their aftermath, is fully restored."As much as it is true
that some African countries have been defined by economic depression, military
conflicts, unstable political regimes and mounting social and health problems, it is also
true that there have been some encouraging developments in Africa that are highly
relevant for foreign direct investors but that are rarely reported and not commonly known
The survey also indicated that despite the reforms that have taken place and th
developments expected in a number of African countries in terms of improving the
business envirormient, further work is needed to change the image of Africa and to
 advance among foreign investors a more differentiated view of the continent and its
opportunities.

Like any other region in the world, Africa deserves to be perceived in a different way.
Too often it is overlooked that Africa is a continent comprising over 50 countries- about a
quarter of the nation States of the world - which vary in terms of their political systems,
economic and human development and their attractiveness as sites for F D I . There is
need to take a closer and distinguished look at the conditions and opportunities for F D I in
Africa. A number of African countries have introduced economic reforms aimed at
growing the role of the private sector, for example by privatizing State-owned enterprises
In addition, they have taken steps to reestablish and maintain macroeconomic stabilit
through the devaluation of overrated national currencies and the reduction of inflation
rates and budget deficits (UNCTAD, 2009).

Forecasts by U N C T A D (2010) indicate that "the global economy has exited recession and
retumed to growth, although the path to recovery is still uncertain and fragile". The world
economy as a whole is expected to grow by 3 % in 2010, after a 2% shrinkage in 2009
"Longer-term forecasts are considered better, although the speed and scale of recove
will vary among regions and countries. More robust economic growth is expected to
facilitate the availability of investment capital and the growth of overseas markets, which
bid well for F D I prospects". At the same time, domestic investment should improve at a
faster rate, suggesting stronger business demand and opportunities for F D I . Central ban
are expected to maintain low interest rates, which will reduce the cost of corporate
financing for investment. Commodity price increases are likely to remain modest, helping
to contain operating costs.

World Bank (2011) points to "economic benefits based on firm-level factors that although
annual transactional corporations profit in 2009 were lower than in 2008, the modest
economic recovery in the second part of 2009, improved demand in a number of
industries, and successful cost cutting efforts have enhanced corporate profits slightly
since mid-2009 (section A)."The report continues to state that "as a result, the gains of th
top 500 United States and top 600 European companies should increase by one third
2010, while Japan's listed companies should see their bottom lines expand by 70 pe
cent". At the same time, the cash holding position of transnational corporations has
 improved, "due to recovering profits and reserves built up on the back of depresse
investment spending". With the improved stock market performance in 2009, "this will
increase the funds available for investments and could increase the value of cross-bord
M&A deals".

"To stem the downward F D I trend and respond to competition for investment projects
most countries have further liberalized their investment regimes and are expected t
continue doing so, which should encourage F D I ; a resurgence of targeted stat
intervention, however, could deter investment in some cases."Besides investment polic
the expected phasing out of government rescue packages will also impact on foreig
investment. On the one hand, some TNCs are still fraught with the effect of the economi
crisis, and the end of government aid schemes could hinder their ability to invest abroad
On the other hand, the privatization of rescued companies should create investme
opportunities, including for foreign TNCs. "In this context, the risk of investment
protectionism carmot be excluded, requiring continued vigilance," (Capital Market,
2012).

The development of a good infrastructviral network is not to be underrated. "Whenever

companies, who intend to move to developing countries to take advantage of lower labou
costs, have to deal with higher transport costs and disrupted service due to inadequa
transportation, they will choose not to move" (Khadaroo, 2010). Investors in Kenya stress
the importance of the infrastructural network repeatedly. Their products need to be
transported immediately after harvesting. Cargo transports need to be fast and reliabl
because the speed of the transportation determines the vase life of the product, an
therefore the price offered to the producers (Whitaker & Kolavalli, 2006). Kenya offers
the finest road and airfreight system of the whole East-African region. Especially after the
election of Mwai Kibaki as president, improvement of the infrastructure has become a
bullet point on the agenda. The development of the infrastructure has for some investor
been amongst the initial motives to invest in Kenya. Since the country is a front runner in
terms of the development of the necessary infrastructure they choose Kenya instead o
Uganda or Tanzania (Kibaki, 2010).
 2.4 Effects of Government Policies on Foreign Direct Investment In Kenya

2.4.1. Ownership Policies

Dunning (1980) argues that "first involvement on FDI on ownership is concerned with
economic activities of the host country, and thus using national resources, but concernin
goods and services directed to foreign market falls within the conventional intemationa
trade theory." The second involvement is concerned with undertakings of national
economic agents using resources located in various countries to produce goods an
services for foreign markets that fall within the domain of intemational production. He
further argues that the two are part of the same process, and that any realistic theory
intemational involvement must therefore attempt to explain the two. He asserts that in
terms of a country's involvement, one has to explain why and when foreign markets ar
sourced through F D I and intemational production rather than domestic production and
exports. In terms of a company's strategy one has to clarify why it chooses to produc
abroad and where the F D I is likely to be directed. This approach is an effort to analyze
the why and where decisions in terms of ownership, location and intemalization
advantages.

Ownership advantages are precise to a particular enterprise such as technology, marketi

and production skills. When exploited optimally, a firm can be compensated for
additional costs of establishing production facilities abroad. This advantage gives the
firm the ability to overcome competition from the local firms, which is operating in a
familiar environment. Locational advantages are specific to countries likely to attract
foreign investors. Under this advantage fall factors that the host coimtries are endowe
with that attract the foreign investors such as a large market, low wage rates, governme
policies, and the country's trade policy and superior infrastmcture. Finally the firm
discovers greater paybacks by exploiting both ownership and locational advantages b
intemalization. The ownership advantages are specific to the firm but the locational
advantage is explicit to the host covmtry and has a vital influence on a host country's
inflow of F D I .

Three advantages must occur jointly for F D I to occur. I f only the ownership advantage
occurs, firms will export their products or sell patents to service the foreign markets. I f
 only the locational advantage occurs, only domestic firms will engage in production. I f
the locational advantage is added to the ownership advantage, then F D I becomes
preferred mode of serving the foreign market, but only in the presence of locationa
advantage does FDI actually occur (Blithe «& Milner, 2008).

"The evolving ownership of universal transactional corporations, along with the

emerging investment policy setting, poses three sets of key challenges for investment fo
development: To strike the right policy balance (liberalization vs. regulation; rights and
obligations of the State and investors); To enhance the critical interfaces betwee
investment and development, such as those between foreign investment and poverty, a
national development objectives; To ensure coherence between national and intemation
investment policies, and between investment policies and other public policies." A l l this
demands a new investment-development paradigm and a sound intemational investme
regime that efficiently promotes sustainable development for all (World Investment
Report, 2010)

Most African countries still have controlled sectors in which foreigners are not permitted
to own businesses. In some cases, these are tied directly to parastatal monopolies,
liberalization has occurred together with privatization, but not always. Ethiopia legally
excludes foreigners from the financial sector, and Tanzania only allowed foreign bank
entry in the early 1990s. Ghana, which has imdergone substantial liberalization since
beginning economic reform two decades ago, still blocks foreigners from certain trading
and services sectors (Moss, Ramachandran and Shah, 2004).

Ladeyeya (2007) pointed to lack of policy transparency in some African countries;"it is

often difficult to tell what specific aspects of govenmient policies are." This is due in part
to the high rate of change of government as well as policies in the region and the lack o
transparency in macroeconomic policy. "Lack of transparency in economic policy is of
concem because it increases transaction costs thereby reducing the incentives for foreig
investment"(Johnson, 2006). The policy framework for F D I of many African countries
has become comparable to that of most other developing countries. "However, realizin
that because of the negative image of Africa as a whole, it may not be sufficient to
improve the investment climate and have economic determinants in place to catch
 investors' attention; many African countries have established investment promotion
agencies to change this image to facilitate investment" (Oxfam, 2003).
A contradiction in investment policy developments is emerging. It is characterized by
concurrent moves to additional investment liberalization and promotion on the one hand
and to escalation of investment regulation in pursuit of public policy objectives on the
other. "Economic stimulus packages and State aid have impacted on foreign investmen
with no significant investment protectionism observed so far" (UNCTAD, 2009).When
the right policies are in place, they can encourage faster upgrading of technologies an
skills, raise domestic procurement, secure more reinvestment of profits, and protect th
environment and consumers (UNCTAD, 2003).

2.4.2. Regulatory Requirements

"Many countries have legal requirements for (or have given officials wide discretionary
powers to add) performance requirements to foreign investors, such as local employmen
local partnership or local inputs"(Foster, 2003).Anxieties over protecting these conditions
led to substantial African countries' resistance to changes aimed at universalizing nationa
treatment or limiting the ability to impose certain requirements on foreign direct
investors, such as the Multilateral Agreement on Investment and more recently at the
WTO (Graham, 2000). Oxfam (2003) for example, claims that a WTO treaty on
investment could be "disastrous." Hilary (2003) also "warned against including
investment in multilateral trade negotiations because developing countries need to
regulate investment in order to protect sensitive sectors from liberalization and to
maximize the positive benefits for poor people." Yet it is precisely these measures which
would be threatened by a W T O investment treaty because host governments would b
limited in their ability to regulate in favor of the imderprivileged. The overall effect is
that, in spite of the trend of investment liberalization and privatization all through most of
Africa, there are still considerable lingering legal prejudices against foreign investment in
numerous countries.

Moss (2003) assesses the risks of an unfriendly regulatory environment and notes tha
lack of an encouraging investment climate also led to the low F D I trend witnessed in
Africa. In the past, domestic investment rules for example on profit repatriation as well as
on entry into some sectors of the economy were not favorable to the attraction of F D I
 (Srinivasan, 2002). Clearly the costs of entry, as a fraction of 1997 GDP per capita, ar
very high in Africa relative to Asia. Within Africa, the costs are greatest in Burkina Faso
(133.4%), Senegal (99.6%), Nigeria (99.3%), and Tanzania (86.8%).

Explicit legal restraints on foreigners have reduced substantially as economic reform an

liberalization has been executed, but some limitations still exist. Most African stock
markets have legal caps on the amount of equity owned by non-resident foreigners (Mos
2003). Although this mostly affects portfolio investors, any share above 10 percent is
perceived as F D I , so this is a direct restraint for any publicly listed company and a
potential reason not to list on the local exchange (Capital Market, 2012).

A listed company is required to spare at least 25%i of its ordinary shares for investment b
local investors in the listed company. The shares to be reserved should be the percenta
of the ordinary shares already listed on the securities exchange. A listed company woul
have to immediately report to the N S E all dealings that would result in the percentage o
ordinary shares held by foreign and East African investors reaching or more. I f the
25% reserved for local investors is not subscribed in full during a public offering, the
issuer may, with the written approval of the CMA, allocate the remaining shares to Eas
African and foreign investors (Lensink, 2003).

In December 1995, Kenya abolished its Foreign Exchange Control Act. There are no
remaining restrictions on transmitting funds associated with an investment. Foreign
investors may freely repatriate profits after complying with tax obligations. Kenya has
enacted the Foreign Investment Protection Act (FIPA) to guard foreign investment
against expropriation. The Foreign Investment Protection Act (Cap 518) secures capita
repatriation, transfer of dividends, and interest to foreign investors. Foreign investors can
freely convert and repatriate profits including un-capitalized retained profits, i.e.,
proceeds of the investment after payment of the relevant taxes and the principal an
interest associated with any loan. Parliament passed the Kenyan Proceeds of Crime an
Anti-Money Laundering Bill and President Kibaki signed it into law at the end of 2009.
The legislation took effect in June 2010, though implementing regulations have not been
drafted as of yet. Kenya is part of the Eastern and Southern Africa Anti-Money
Laundering Group and is collaborating with the intergovernmental Financial Action Task
Force as reported by Kenya Economic Update (2011).
 2.4.3 Investment Incentives

Hymer and Kindleberger (1985) assume that F D I is costly and risky and therefore for a
firm to engage in it there should be strong counter balancing advantages. Among th
costs of FDI abroad are costs of communication and acquisition of information that the
firm will incur in the host country, costs due to less favorable treatment by the host
country, and costs due to exchange rate risks. The counter balancing advantages a
derived from the existence of market imperfections that may be due to govenmien
intervention, imperfections in both the goods and product market and both internal and
extemal economies of scale. Market imperfections such as barriers to entry, interventio
by government, and imperfect market structures give the MNE an advantage which
enables them to separate markets and remove competition. These findings are in line wi
other studies (Larossi 2009; Heritage Foundation 2013) which show that Kenyan taxes in
general are still very high and that bribes produce a lot of secondary costs that make th
business climate less attractive for F D I .

"Promoting F D I basically includes the extension of tax holidays, exemptions from import
duties and the offer of direct subsidies" (Agnes DeFranco, 2002). Since 1998, some
countries have given special tax concessions to foreign corporations that have put u
production or administrative facilities within their borders. Typically, these allowances
are applied to multinational enterprises (MNEs) but not to local firms in the same lines of
activity (Duiming, 2003). Some countries armounced policy measures to promote foreign
investment by reducing corporate taxes (e.g. Gambia and Morocco) or enriched thei
general investment policy envirormient (e.g. Rwanda and Libya). In contrast, there was
also a constriction of the regulatory framework by adding local content requirements (e.g
Nigeria) or by bringing in new foreign ownership limitations (e.g. Algeria). " F D I flows to
Africa will recover gradually in the future once global economic and financial conditions
improve and commodity prices rebound as expected" (UNCTAD, 2010).

Kenya has several tax treaties and investment promotion and protection treaties to
encourage F D I . Exporters from Kenya enjoy favored access to world markets under a
number of special access and duty reduction programs. The Kenyan constitution
guarantees against nationalization of private property except for purposes of public use o
 security, and guarantees prompt and fair compensation in the event of such acquisitio
(Ronge, 2005).

The government boosts investment and the Kenyan economy is open to foreign investor
There are no restrictions on foreign investment, foreign ownership, and repatriation of
profits or capital. Corporate tax presently stands at 30%, while withholding tax on
dividends is Inter-corporate dividend payments between closely held companies are
exempt from withholding tax. Dividends received by financial institutions as trading
income are not subject to tax. Lower rates may apply where there is a tax treaty in force
Dividends paid to citizens of the East African Community (EAC) are taxed at Kenya
currently has tax treaties in effect with Canada, Norway, Denmark, India, Sweden,
Germany, Zambia, and the United Kingdom. France and Italy are awaiting
implementation and a "Double Tax Agreemenf is awaiting conclusion. Currently, there
are tax treaties under negotiatioft for South Africa, Mauritius, Malaysia, Iran, Kuwait, and
Thailand (Whitaker & Kolavalli, 2006).

The Kenyan govenmient often offers fiscal incentives, such as reduced tax rates and, ta
holidays to investors. Most incentives are presented to companies that are located withi
an Export Processing Zone (EPZ). In the last decade, trade liberalization, through
regional or global free-trade agreements, was seen as the answer to econom
development in developing countries. The EPZ initiatives are an example of such a free
trade agreement. The main objective of these zones, the promotion of export and
stimulation of F D I , makes them different from other kinds of free zones. The main feature
within the zone includes a 10-year tax holiday and the removal of import taxes on
production inputs, which otherwise serve as an disincentive to export-oriented production
(Rolfe, 2004). In 2004 the government introduced the K I A , to centralize the investment
procedures and to cut all unnecessary processes. Before the introduction of this authorit
investors had to visit all different ministries and local authorities for all the different
licenses. The main objective of the K I A is the promotion of foreign investments. The
authority is mainly responsible for offering assistance to new and established investors in
obtaining the necessary licenses and permits (Voorji, 2011).

In 2007, a legal notice reduced the holding of foreign ownership of listed companies on
the former Nairobi Stock Exchange from to creating a disincentive for foreign-
 owned firms concerned with an N S E listing. On the other hand, in order to promote the
spread of technology and skills, the government allowed foreign investors to invest up t
49% of local stockbrokerages and up to of local fiand management companies.
Foreign ownership goes up to 66.7% for insurance companies and 80%) fo
telecommunications companies. "The government also extended various tax incentive
like elimination of duties on agricultural exports and a zero-rating policy on all imported
inputs used in the sector Not only are the investors exempt of paying taxes over th
exported products, they are also able to produce cheaper products since necess
resources, like fertilizer, are duty free"(Ronge, 2005).

2.5 Effects of Business Environment on Foreign Direct Investment

2.5.1 Profit Opportunities

In the efficiency seeking F D I the goal is to take advantage of variances in the availability
and cost of factor endowment in different countries and it is calculated to take advantag
of economies of scale of the host country as profit opportunities. In the latter case, issue
like competence and capabilities, local competitions, availability of supporting industries
and the macro and micro policies adopted by government play a significant role.
Uncertainty in macroeconomic variables as proven by the high incidence of currency
crashes, increased inflation rates, and excessive budget shortfalls, has also limited t
regions ability to draw foreign investment. Recent evidence founded on African data
proposes that "countries with high inflation tend to attract less F D I " ( L a R R I , 2004).

Recent predictions indicate that the global economy has left recession and retumed
growth, although the path to recovery is still uncertain and fragile. "The world economy
as a whole is expected to grow by 3 % in 2010, after a 2 % contraction in 2009. Longe
term prospects are considered better, although the speed and scale of recovery will va
among regions and countries. More buoyant economic growth is expected to facilitate th
availability of investment capital and the growth of overseas markets, which augur well
for F D I prospects" (KPMG, 2007). At the same time, local investment should
recover rapidly, proposing stronger business demand and opportunities for FDI. "Centra
banks are expected to uphold low interest rates, which moderate the cost of busines
 financing for investment. Commodity price hikes are likely to remain modest, helping to
contain operating costs" (World Economy Forum, 2008).
For many developing countries, economic development depends for a large extent o
profitable investments. Hymer (1976) argues that FDI has to do with the desire to gain
control over certain trade situations. In this situation the control over the foreign
enterprise is desired in order to remove or regulate competition between that foreig
enterprise and the enterprises from other countries. Another reason is to benefit fully from
the returns of certain skills and abilities. This theory is derived in a time notorious for its
dramatic changes in political ideologies and economic systems. "During the early 1980
attitudes of governments changed towards multinational enterprises. In this period th
term 'globalization' appeared in many studies and was described as: 'the increasing cro
border interdependence and integration of production and markets for goods, services a
capital'" (Narula& Dunning, 2004).

According to both reports a long-term effect of this recognition of interdependence and

the therefore following FDI-based development strategies is an increased competitio
between governments for such investments. This development shows that the flows o
FDI only arises when there is a correlation between political interference on the one han
and economic determinants on the other. Both determinants are explained as attracti
characteristics of the host country and are put in place to compliment the missing aspec
of given domestic economies. The role of economic determinants in the debate about F D
is relatively obvious (Biithe and Milner, 2008).

Short-term investments, like portfolio flows and short-term bank loans, are often claimed
to have serious adverse consequences, since they are often subject to sudden withdraw
Other criticized short-term investment, are so-called footloose foreign investments tha
often occur within EPZs. Generally, these footloose investments result from small export-
oriented firms that are not rooted in the local community through supply and demand
linkages. These firms are often highly sensitive to changing factor costs, like wages. As
soon as the host economy is starting to develop and wages start to raise, these firms lea
to invest in less developed country (Rolfe, Woodward & Kagira, 2004).
 2.5.2. Political Instability

The first risk considered by investors is the risk of political instability and violence.
Dupas and Robinson (2011) argue that there is a close connection between politic
instability and economic growth. This statement makes sense because political unre
increases uncertainty and therefore the risk that investments made by both foreign as loc
firms could get lost. Often, political unrest combines with social unrest making the
country insecure for the investors themselves.

"Afiica is politically unstable because of the high incidence of wars, frequent military
interventions in politics, and religious and ethnic conflicts. There is some evidence tha
the probability of war a measure of instability is very high in the region" (Hanson, 2001).
In a recent study, Rogoff and Reinhart (2003) calculated regional exposure to war for th
period 1960-2001. They found that "wars are more probable in Africa than in other
regions. The regional susceptibility to war index is 26.3% for Africa compared to 19.4%
and for Asia and the Western Countries respectively". The study also indicated that
there is a significant negative correlation between FDI and conflicts in Africa. Sachs and
Sievers (1998) have also argued that "political stability is one of the most important
determinants of F D I in Africa."

"Angola has enticed most F D I in Africa, compared to its GDP, particularly in offshore
exploration of gas and petroleum". This proves that it is not sufficient to base an analysi
of F D I trends on what business determines as attractive for F D I , alone. "Angola attracted
resource-seeking F D I despite being the site of a long standing war". In the Southern
African region, Angola is followed by South Africa in FDI attraction, mostly from the US
and the U K . However, the figures given by UNCTAD also indicate that South Africa is a
huge exporter of capital. "South Africa is seen as the most attractive country for F D I by
business" ( L a R R I , 2001).

"Kenya's current business envirormient is in fiux following remarkable progression in

implementation of the constitution with expected smooth election and fransition from
government of President Mwai Kibaki" (KPMG, 2012). In theory, this should profit
foreign investors as the government wrestles one of the most prominent barriers to greate
inflows. However, the crop of aspirants also has its anti-foreigner tendencies. "In the late
 1960s Kenya's official campaign of discriminating against Asian businessmen in favor o
indigenous Africans was led by then commerce minister, Mwai Kibaki" (Himbara, 1994).
Raila Odinga in 1999, suggested that Kenya was receiving too much FDI rather than to
little, claiming, that "the government should protect local industries against undue
competition from multinationals to speed up industrialization" and that "no country could
industrialize with foreign investment alone."(Ramachandran, 2004).

2.5.3 Bureaucracy and Corruption

Bureaucracy and other impediments to foreign investment such as delays in visas fo

expatriate workers, customs clearance, and corruption are typically the indirect obstacle
to foreign direct investment. Most of these obstacles captured in the broader busine
climate, affect local firms as well, and could be considered unintended (Lim, 2001).
However, these factors are not the same for foreign firms in two significant ways. Data on
investment climate assessments suggest that "foreign firms face dissimilar envirormient
constraints than domestic firms, which implies that public policy actions to remedy these
problems could be inherently biased for or against foreign firms" (Moss, Ramachandra
and Shah, 2004).Studies done by UNCTAD, World Observatory Report (2009), revea
that a number of reasons were acknowledged to have held up F D I into African countries
These included among others, corruption. Other research indicated factors such as po
customer service at registration point and delays in processing of information.

Lim (2001) made a critical note that "in some situations such barriers are seen as in fa
unintentional, but rather as deliberate impediments to foreign entry or operation."
Political economists have often found that excess bureaucracy, erratic economic policy
and other problems associated with weak business environments have strong politic
rationality (Van de Walle, 2001). Monopolistic positions by powerful businessmen,
political leaders, or their families are frequently endangered by foreign competition.
Much of the nationalist opposition to liberalization, including worries of foreign control
or the displacement of local firms, has constricted rent-seeking roots, designed to bene
specific people or groups. In this way, clearance of investment projects may be rejecte
out of the "national interest" or imported equipment may be inexplicably delayed or lost
but in practice this is used to protect "politically connected competitors."This is seen as
the basis of corruption.
 "Since the 1980s, all SADC governments have relaxed regulations for foreign investor
by granting investors easier entry, by relaxing the ability to borrow locally although it
implies a constraint on a country's foreign currency reserves, relaxation of land and
mining concession ownership, by forming new kinds of partnerships with the private
sector (public private partnerships) in areas which were previously the responsibility o
the government such as water distribution"(LaRRI, 2001).During President
Kibaki's2003-2007 term in office, the Govermnent of Kenya began a determined
economic reform program and resumed its collaboration with the World Bank and the
IMF. "There was some movement to reduce corruption in 2003, but the government did
not sustain that momentum" (IMF, 2011).

The World Bank annually presents a report in which the ease of doing business for eac
country is discussed. Kenya ranks 98 out of 183 global economies in 2011. The investor
argue that the licensing system improved significantly throughout the years. The hardes
to obtain being the work license, which need to be renewed every two years. Before bein
able to work in Kenya, expatriates have to issue a request for a work permit. Since thes
permits are valid for only two years, investors have to apply for them regularly. The fees
for obtaining a work license are KshSO.OOO per year and are only issued after severa
other requirements, like proof of landownership are met (World Bank, 2011).World Bank
shows the bureaucratic hurdles investors must overcome before starting a business
Kenya. It shows that the number of procedures only declined with one. The total time in
days needed to register a firm declined with 11 days. This means that, on average, in 20
applying for one license took about 4 days per license. In 2011 this declined to 3 days
license. The costs, recorded as a percentage of the economy income per capita, declin
from 46.1% in 2008 to 38.3% in 2011.

Since the problems with corruption are reoccurring throughout the entire process o
starting and managing a business. One factor that has drawn a lot of attention in the F D
literature (Okado & Samreth, 2010) and is listed as an inconvenience by all investors a
well is corruption. The occurrence of corruption is no direct risk related to F D I , but it
creates a lot of inconveniences. Understanding the role of corruption in FDI is important
because it produces a lot of pitfalls and distortions by providing false information and it
heightens the uncertainty (Habib & Zurawick, 2002). Corruption mostly involves
monetary benefits but non-monetary benefits also take place. Other forms of corruption
that exists are expansive corruption and restrictive corruption. Expansive corruption
comprises activities that improve the competitiveness and suppleness of the marke
whereas restrictive corruption restricts opportunities for productivity and socially
beneficial exchange (Ngunjiri, 2010).
A study by Transparency Intemational (2006) showed that 47 percent of Kenyans had t
deal with bribing of officials in 2005. Compared to 2004 this index shows an increase of
13 percent. Most investors acknowledged K R A as the most corrupt and since investor
have to cooperate with this body on a regular, basis cormption has been high on th
agenda of N A R C in 2002 and is being battled ever since. In 2003 the party appointed th
KACC to fight cormption by investigating reports of suspected cormption. Despite this
attention and all sorts of reforms the country still ranks inadequate. Unfortunately, the
latest report of the K A C C (2010) state which organization is investigated but fail to
formulate clear steps for the future prevention of cormption. Overall, the general goal and
vision of the authority is well stated, only the necessary steps to achieve these goals a
absent.

2.6 Chapter Summary

This chapter reviewed various relevant literature carried out in relation to the research
objectives presented in this study. The chapter first reviewed literature on effects o
historical background, economic benefits, govemment policies and business environmen
on foreign direct investment, through the various parameters as discussed. The ne
Chapter discusses the research methodology that was used in the study.
 CHAPTER THREE

3.0 R E S E A R C H M E T H O D O L O G Y

3.1 Introduction

This chapter discusses the research methodology that was employed in the research pa
It elaborates on the research design that was applied in the study. It also gives t
population of study, sample and sampling techniques, data collection methods as well
data analysis and data presentation methods that were used in the study.

3.2 Research Design

The research design that was applied in this study was both descriptive and inferent
research design. Descriptive research involves field survey where the researcher goe
the population of interest to ask certain questions about the problem under the stu
(Kothari, 2000). The design was used to obtain information concerning the current statu
of the observable facts to describe what exists, with respect to variables or conditions in
situation. This involved collecting data on the historical and political backgroimd of F D I ,
the economic benefits to Kenya, govemment policies on F D I and the effects of th
business environment on F D I . The inference design used the existing information t
gather data for analysis. Research design purposes to gather data without a
manipulation of the research context, where the researcher has no control over t
variables (Mugenda and Mugenda, 1999). This provided accurate and concise data on
factors impeding foreign direct investment in Kenya and assisted in enabling the
researcher to remain focused on the impediments to FDI in Kenya.

3.3 Population and Sampling Design

3.3.1 Population

According to Cooper and Schindler (2000), a population is "the total collection of

elements about which we wish to make inferences". The target population of this stud
comprised of individual foreign investors' firms, staff from Kenya private sector and
investment promotion centers.
 3.3.2 Sample Design
3.3.2.1 Sampling Frame
Sampling frame is "an objective list of the population from which the researcher can
make a selection," (Cooper and Schindler, 2000). The authors add that a sampling fram
must be an inclusive and accurate list of members of a population. The sampling fram
for this study covered a total of 120 respondents: 60 from individual investors' firms, 30
from the Kenya Private Sector Alliance and 30 from Investment Promotion Councils.

Table 3.1 Population Distribution

Category Target population Percentage of the

Target population
Individual Investor's Firms 60 50%
Kenya Private Sector Alliance'' 30 25%
Investment Promotion Council 30 25%
Total 120 100%
3.3.2.2 Sampling Technique

The sample was determined using a statistical sampling technique. Stratified random
sampling design was used to select the sample. This method allowed the researcher
divide the sample into appropriate strata. According to Saunders, et al., (2003), this is
probability sampling procedure where the population is divided into two or more
applicable strata and a random sample is taken from each of the strata. This techniq
ensured that the sample was more representative of the general population.

3.3.2.3 Sample Size

" A sample must be carefiilly selected to be representative of the general population an

the researcher also needs to ensure that the subdivisions entailed in the analysis a
accurately catered for." (Saunders, Lewis and Thomhill, 2003) A proportionate
probability ratio of 0.8 was used to ensure at least 80%) of the target population response
Table 3.2 Sample Size Distribution

Category Target population Sample ratio Sample size

Individual Investor's Firms 60 0.8 48
Kenya Private Sector Alliance 30 0.8 24
Investment Promotion Council 30 0.8 24
Total 120 0.8 96

3.4 Data Collection Methods

The method used to collect data in this study was primary data collection method. Da
was collected using a questionnaire which was developed by the researcher based on
research objectives. The questionnaire was divided into 5 sections; the first sectio
contained questions on the demographic information of the respondent. The rest of t
sections focused on the specific objectives of the study, ensuring that the instrument w
reliable and valid.

3.5 Research Procedures

The questionnaire was pre-tested to ensure that it was suitable before it was actua
administered to the respondents. The pre-testing was carried out by giving out th
questionnaire to 5 respondents who were selected randomly fi-om the target population
120. This enabled the researcher to fine tune the questionnaire for objectivity an
efficiency of the process of researching as well as determine the time needed p
questionnaire. A research assistant qualified in communication and interviewing
respondents using the questionnaire tool, was used to administer the refined questiorma
as well as help in data entry.

3.6 Data Analysis Methods

The study used quantitative and qualitative method of data analysis. The questionnaire
were coded according to the variables of the study to ensure a reduction in the margin
error and assure accuracy during analysis. Quantitative analysis was applied usin
descriptive statistics. This involved a process of transforming a collection of unprocesse
data into tables, charts with frequency distributions and percentages which are a crucia
part of making meaning of the data (Saunders et al, 2003). Data analysis was carried o
using Statistical Package for Social Sciences (SPSS) software and data presented usi
tables and figures to provide a comprehensive picture of the research findings.

3.7 Chapter Summary

The chapter describes the methodology that was used in carrying out the study. Th
research design was descriptive in nature focusing on foreign firms and institutions of
foreign investment. The chapter shows the study population as 120 respondents from
foreign firms and foreign investment institutions. The sample size, the sampling
techniques and questionnaire as a primary data collection instrument are all described
The chapter had also indicated that data was analyzed using descriptive statistics aided b
SPSS and presented in form of figures and tables. The next chapter presents the finding
and results of the research.
 CHAPTER FOUR

4.0 R E S U L T S AND FINDINGS

4.1 Introduction

This chapter presents the results and findings on the impediments to foreign direc
investments in Africa, and particularly in Kenya; data collected using the questionnaires
was analyzed through the selected quantitative and qualitative methods of data analys
and presents the results and findings in tables and figures. Data presented was th
interpreted and summary of the findings made. It is from the interpretation of results and
findings conclusions are deduced and recommendation made in the next chapter. Th
chapter begins by analysis of response rate and describes the quantitative and qualitat
techniques adopted to analyze and present the research findings.

4.2. Quantitative analysis

Quantitative analysis was carried out to analyze numerical data obtained using closed en
questions.

4.2.1 Analysis of the Response Rate

For the study to determine the number of the respondents who actively participated in th
research study, the analysis of the response rate was carried out as shown in figure 4.1.

Figure 4.1 presents response rate of sampled population and shows that a 93% of t
respondents participated in the research and this indicates that more than 30% of th
respondents answered and submitted back the research questiormaires.
 7%

93%

Figure 4.1: Response Rate

4.2.2 Respondents Gender and Age

Table 4.1 shows that a total of 44 respondents were the majority in the age bracket
above 55 years of age that consisted of 33 males and 11 females, followed by age brac
46 to 55 who were 27 in total with 6 males and 21 females, the age bracket 25 to 35 ha
the least with a total of 7 respondents, and above 46 had a total of 11 respondents. T
indicates that majority of the respondents were females.

Table 4.1 Respondents Age and Gender

25-35 36-45 46-55 Above 55 Total

Male 2 8 6 33 22

Female 5 3 21 11 67

Total 7 11 27 44 89

4.2.3 Respondent's Category

The distribution of respondents as per the respondent's category was as shown in figu
4.2 below.

Figure 4.2 shows that 40% of the respondents were individual investment firms,
were from promotion centers and 25% from private alliance sector. This shows that, mos
of the respondents that were engaged in the study had experience in foreign dire
investment and this guaranteed gathering of reliable findings.
 Figure 4.2: Respondent's Category

4.3 Effects of Historical and Political Experiences on Foreign Direct Investment in

Kenya

4.3.1 To determine the effect of colonial and political experience and whether the
current crop of political leaders favor F D I or not.
The figure shows that 73 percent of the respondents indicated that it was false that Keny
still perceives F D I as post colonialism, 27 percent of the respondents indicated that it wa
true Kenyans still perceive F D I as post colonialism, 60 percent of the respondents
indicated that the current crop of political leaders were favorable to F D I and 30 percent
indicated that they were unfavorable

Colonial and Political Exprieuce

Figure 4.3 Colonial and Political Experiences

4.3.2 On views about the historical experience with foreigners, the respondents gave
their opinion as follows:

Table 4.2 shows that of the respondents, 40 percent disagreed and 20 percent stron
disagreed with the fact that historical injustices by foreigners still lingers in the mind of
Kenyans. Only 20 percent and 10 percent agreed and strongly agreed. On wheth
Kenyans were skeptical on F D I , 40 percent of the respondents disagreed and 10 perc
strongly disagreed, 20 percent were neutral and 30 percent agreed. That workers in F
firms experience mistreatment and are poorly paid even to date, this was strongly agre
by 40 percent of the respondents and agreed by 30 percent of the respondents. On lead
perception of F D I as a threat to freedom of self rule, 40 percent of the responden
strongly agreed and 25 percent agreed, only 20 percent disagreed. To determine whet
FDIs were a threat to political ambitions of most leaders, 50 percent of the responden
strongly agreed and 20 percept agreed, 15 percent disagreed and 5 percent stron
disagreed.

Table 4.2 Historical and Political Experiences

Historical and political experiences

bX) S
1 £ cs
5 ^ -a
a) Historical injustices by foreigners still 10 20 10 40 20
lingers in the mind of Kenyans
b) Kenyans are a bit skeptical on F D I 10 20 20 40 10

c) Workers in F D I experience mistreatment 40 30 10 15 5

and poor payments even to date.
d) Most Leaders perceive F D I as threat to 40 25 15 10 10
freedom of self rule
e) FDIs are a threat to political ambitions of 50 20 10 15 5
many leaders
4.4 Economic Benefits of Foreign Direct Investments

4.4.1 On how most Kenyans perceive the economic benefits of FDI, the response

was as in figure 4.4.

The figure shows that 62 percent of the respondents see no economic benefits while

percent see the benefits of F D I .

• TRUE • False

62%

Figure 4.4 Economic Benefits

4.4.2. On the various factors that provide an open market for foreign direct
investment, the response was as follows:

Table 4.3 shows that of the respondents, 40 percent agreed and 10 percent strongly agr
with the fact that F D I does not convert to increased productivity. Only 20 percent and 1
percent disagreed and strongly disagreed. On whether the host country may n
experience much of management skill transfer as may be expected, 40 percent of t
respondents agreed and 30 percent strongly agreed, 10 percent were neutral and
percent disagreed. As to whether there was little or no transfer technical know-how from
the home country, 35 percent strongly agreed and 30 percent of the respondents agre
20 percent disagreed. On to whether F D I always resulted in more market connections, 5
percent of the respondents strongly agreed and 20 percent agreed, only 20 percent w
disagreed. Whether there was an automatic multiplier effect from F D I , 60 percent of the
respondents strongly agreed and 10 percent agreed, 15 percent disagreed and 10 per
strongly disagreed.
Table 4.3 Factors on open market for F D I

w S
2J CS

T3
a) F D I does not convert to increased productivity10 40 20 20 10
b) The host country may not experience much of
40 30 10 15 5
management skill transfer as may be expected
c) There is little or no transfer of technical know-
30 35 15 10 10
how from home country
d) F D I always resultsin more market connections 50 20 10 15 5
e) There is an automatic multiplier effect from
60 10 5 15 10
FDI

4.4.3. On whether promotion centers and private investments contribute to the

market aspects of foreign direct investment, the respondents gave their
opinion as follows;

The table shows that majority of the respondents - 40 percent strongly agreed that th
opening up of multiplier projects as a priority by promotion centers and private
investment contributed to opening up markets for F D I while 20 percent disagreed
Promotion activities were seen not to be ill conceived as 40 percent of the responden
strongly disagreed while 20 percent strongly disagreed and 35 percent agreed. T
whether promotions centers and private investments contributed to opening up for F D
through intemational relations with host country of the total respondents 30 percen
strongly agreed and 30 percent agreed while 30 percent disagreed.
Table 4.4 Promotion centers and private investment contribution to F D I market

V 1 S
R
2 2 eJD J: .52 vo
•B 5 ^
-a
a) Opening up of multiplier projects as a 40 30 10 10 10

priority
b) Promotion activities strategies ill 10 25 5 20 40

conceived
c) Intemational relations with host country 30 30 10 20 10

4.5 Effects of Government Policies on Foreign Direct Investment in Kenya

4.5.1 On whether government policies in Kenya were a great impediment to F D I ,

the response was as follows:

The figure shows that the govemment policies on F D I in Kenya were great impediments
to F D I as indicated by 95 percent of the respondents. Only 5 percent who indicated this a
false.

• 1
• o

Figure 4.5 Government Policies on F D I

4.5.2 To what extent do set policies and regulations influence the flow of Foreign
Direct Investment into the country.

To what extent the policies and regulations influence the flow of F D I , majority of the
respondents who were 66 percent indicated that set policies and regulations influence
flow of F D I to a very great extent, 14 percent felt this was to a greater extent, only 14
percent indicated that this was to a lesser extent while 6 percent indicate no extent at all

Influence of set iioliciei^ an«l regulationision F D I

Figure 4.6 Policies and Regulations

4.5.3 Respondent's opinion on Policies and Regulations

The table shows that 50 percent of the respondents strongly agreed that policies on F D I
Kenya lack transparency, 30 percent agreed and only 15 disagreed. Majority of the
respondents who were 75 percent indicated that erratic and inconsistent policies wer
considered as likely causes of losses in F D I , only 20 percent disagreed. Regulato
requirements were not seen as discriminatory to foreigners as 40 and 30 percent o
respondents strongly disagreed and disagreed respectively. On whether the policies ma
are only favorable for market accessibility and not competition, 50 % of the respondents
agreed and 40 percent disagreed. The table shows that, 50 percent of the responde
disagreed that the set policies promote business rivalry rather than competition.
Table 4.5 Policies and Regulations

«
2 •So 2i
58 S
5 ^ -a
a) Policies on F D I in Kenya lack transparency
50 30 5 10 5

b) Erratic and inconsistent policies are

40 35 5 10 10
considered as likely causes of losses F D I

c) Regulatory Requirements are Discriminatory

5 10 15 30 40
to Foreigners

d) The set policies open up competition for both

local and foreign investors. 30 30 10 20 10

e) The policies are only favorable for market

accessibility and not competition 20 30 10 20 20

f) The set policies promotes business rivalry

15 25 10 40 10
rather than competition

4.5.4 On whether Kenya assents to international trade laws/agreement, the

responses were as follows:

The figure show that 95 percent of the respondents agreed that Kenya assents to
intemational trade agreements and laws. Only 5 percent disagreed.

Kenya assent to trade agreement.s/laws

• No

Figure 4.7 Kenya assents to trade agreemen?s®Jlllj|^^.'''t^^Mt/M«/

4.5.5 On to the extent that investment incentives initiated by the government affect
F D I , the response was as follows;

The figure shows that imports and exports duty exemptions affect F D I to a very grea
extent as indicated by 64 percent of the respondents, 24 percent of the respondents fe
affected to a great extent and only 12 percent felt it was only to a little extent. Taxatio
exemption affected FDI to a great extent as indicated by 72 percent of the responde
and to a very great extent as indicated by 20 percent, only 8 percent indicate the effect
be of little extent. On land leasing incentives, 45 percent felt that this affected F D I to
little extent and 25 percent indicated the effect as moderate extent. Only 20 and 1
percent who indicated that land leasing incentives affected F D I to a great extent and ve
great extent respectively. The respondents indicated that removal of trade barrie
affected F D I to a very great extent by 40 percent, to a great extent by 30 percent, to
moderate extent by 20 percent and to a little extent by 10 percent.

Effects of iiiestmeiits incentives

80
70
60
50
40
30
20
10
0

Figure 4.8 Investments Incentives

4.6 Effects of Business Environment on Foreign Direct Investment in Kenya.

4.6.1 To assess the extent to which respondents were satisfied with the effects of
business environment on business start up for FDI, the responses were as
follows:

The table shows that majority of the respondents 55 percent strongly agreed that th
process of starting up business in Kenya was tedious, while 30 percent agreed, only
percent who disagreed. On too much bureaucracy 55 percent strongly agreed and
percent agreed that there was too much bureaucracy in meeting legal requirements
investors. On the steps required to start up business, 60 percent and 30 percent of
respondents strongly agreed and agreed that the steps were numerous and repetitive.

Table 4.6 Effects of Business Startup Process

1 2
u S w)
2 2 2
-fc .ss ^
5 ^
a) The processes of starting up
55 30 5 10 0
business in Kenya are tedious
b) There is too much
bureaucracy in meeting legal 50 35 0 10 5
requirements by investors
c) The steps required are
60 30 0 5 5
numerous and repetitive

4.6.2 To what extent these services in business approval appealed to investors, the
response was as follows;

Table 4.7 below shows that a total of 85 percent of the respondents cited the cost o
business approval as hampering F D I to a very great and great extent. Another 85 perce
of respondents cumulatively cited customer service as hindering F D I to a very great an
great extent. The cost of processing documents for approval, stages of busines
registration and compliance with statutory requirements had 60 percent, 55 percent an
50 percent of respondents citing them as hampering F D I to a great extent. Only 1
percent of respondents stated that all the above factors hampered F D I to a little or n
extent.

Table 4.7 Appeal to investors by business approval

12 2 t
C «
| l - § 1
Z
O *
C8

a) The cost of business

investment approval hampers 55 30 5 5 5
FDI
b) Customer service 45 40 5 5 5

c) Cost of processing documents

60 20 10 5 5
of a approval

d) Stages of business registration 55 25 10 5 5

e) Compliance with statutory 50 35 5 5 5

and regulatory requirements

4.6.3 Status of Business Environment

The figure show that 60 percent of the respondents felt the status of Kenya busines
environment was very good and 30 percent felt the business envirormient was good
attracting F D I . Only 5 percent who felt the business environment to be fair and poo
respectively.

On the status of business environment the response was as shown below:

Figure 4.9: The status of Kenya business environment to attract foreign direct
investment
4.6.4 Political Stability
From the figure, 66 percent indicated that Kenya was politically stable to attract foreign
direct investment, while 34 percent indicated that Kenya was still unstable politically for
foreign direct investment. On opinions about political stability, the response was as
follows:

Political Stability

34%

66%

Figure 4.10 Political Stability

4.6.5 Political Factors on FDI

As to what extent the stability factors affect Foreign Direct Investment, the response was
as follows:

The table below indicates that, 45 percent of the respondents indicated that incidences
war affected F D I to a very great extent and 20 percent to a great extent, 25 percent to
moderate extent and only 5 percent affected to a little extent and no extent all. Ethni
confiicts was indicated to affect F D I to a very great extent and great extent by 35 percen
respectfully and 20 percent to a moderate extent. Military interventions in war torn areas
was indicated to affect F D I to a vey great extent and great extent by 30 percent and to
moderate extent by 20 percent. The extent of political and economic instability was
indicated to affect F D I to a very great extent and great extent by 30 and 40 percen
respectively while 20 percent indicated the effect to be of moderate extent.
Table 4.8 Political Factors on F D I

- so
«S ©s g s o
X _
O
=> ^
Z «
a. Incidences of war
45 20 25 5 5

b. Ethnic conflicts 35 35 20 5 5

c. Military interventions in war

torn areas 30 30 20 10 10

d. Political-Economic
Instability 30 40 20 5 5

4.7 Chapter Summary

The study showed that a over 70% of the respondents did not perceive FDI as being a
extension of colonialism. Historical injustices have been forgotten even though there is
still skepticism due to perceived mistreatments of workers in foreign investors' firms. The
current political regime favors foreign investment even though some leaders still view it
as a threat to their political ambitions.

As many as of the respondents do not see the economic benefits of F D I and

think it does not convert to increased productivity. Management skill and technical know-
how are not transferred to the host country though F D I is perceived to result in more
market connections and a multiplier effect for the host economy. The current investmen
promotion efforts are perceived to be well conceived by of the respondents and
intemational relations between Kenya and potential investor countries is perceived to be
good.

Govenmient policies on F D I are to a large extent perceived to be a great impediment to

F D I according to of the study respondents. Even though regulatory requirements are
not viewed to be discriminatory to foreigners, policies are perceived by of the
respondents to be erratic and inconsistent. According to the study, Kenya does assent
intemational trade laws and agreements, and investment incentives play a great role
attracting F D I .

The Kenyan business environment is perceived to be an impediment to FDI due to tediou

business start up procedures - 85%; bureaucratic legal requirements - numerous
and repetitive procedures - high cost of investment and compliance with statutory
regulations, according to the study. The Kenyan business environment is howeve
perceived as being good for attraction of FDI and the political climate stable.

The next chapter discusses the summary of the findings, discussions of the impedimen
to foreign direct investment in Kenya, conclusion of the findings and recommendations o
the research study.
 CHAPTER FIVE

5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter discusses in summary the findings, conclusions and makes recommendatio
on the research study. It gives an in-depth explanation of the findings obtained on th
historical and political background issues affecting foreign direct investment, its
economic benefits to Kenya, how govemment policies affect F D I and the effect of the
business envirormient on F D I in Kenya. Recommendations are made and suggestions f
further studies are made.

5.2 Summary

The study found out that most of the respondents indicated that it was not tme tha
Kenyan still perceive F D I as post colonialism; most respondents expressed tha
colonialism was a thing of the past and had no role to play in the current state of foreig
direct investment. Kenyans have forgotten the past and it was no longer an issue of wh
colonized the country with regard to foreign investments. On the current crop of political
leaders, a majority of respondents felt that they were favorable to F D I . Most responden
indicated that the political leaders valued foreign direct investment and are working
towards more of F D I inflows.

On historical and political experience on foreign direct investment, most of respondents

strongly disagreed that historical injustices by foreigners still linger in the minds of
Kenyans. This was felt to be a thing of the past and it was not being experienced amon
Kenyans. Kenyans were no longer skeptical of F D I as this was found to be of economi
benefit to the host country in many ways. Although F D I provided employment
opportunities, workers in F D I firms experienced mistreatment and poor working
conditions and pay. Most leaders were found to still perceive F D I as a threat to freedom
of self mle since some investors were engaging intemational or own country mles o
operation and cooperation with the host country. This in retum required the host
govemment to abide by the mles of which most African leaders perceive as denial o
freedom of self mle. In this regard as expressed by a majority of the respondents, F D I i
perceived to be a threat to the political ambitions of many leaders.
On economic benefits of F D I to host country, the study found that most Kenyans see n
economic benefits of foreign investors. Most of the respondents agreed that FDI does n
necessarily convert to increased productivity and that the host country may not experien
much of management skills transfer as may be expected. There is little or no transfer
technical know-how from the home country as was expressed by a majority of the
respondents, most foreigners brought in their own technology which was far from the
reach of the host country. The study found out that F D I always results in more marke
connections and there was an automatic multiplier effect from F D I as many othe
investment opportunities were found to spring up from investment by foreign firms.

The study found out that promotion centers and private investment sector contributed
opening up of the F D I market as most respondents expressed that on the ground
opening up multiplier effect as a priority, F D I would find market. Majority of respondents
indicated that promotion activities were seen not to be ill conceived. The study found tha
promotions centers and private investments contributed to opening up of FDI through
improving intemational relations with the host country.

The study found out that, govemment policies on F D I in Kenya were found to be a grea
impediment to F D I as indicated by most of the respondents. The set policies and
regulations influenced the flow of FDI to a great extent. This was attributed to lack of
transparency in policies on F D I . Most of the respondents indicated that the policies wer
erratic and inconsistent, factors that were considered as likely causes of losses in F D
However, regulator requirements were not seen as discriminatory to foreigners and th
policies made were favorable for market accessibility and promoted competition, no
rivalry in business.

Kenya assents to intemational agreements and laws as indicated by most of th

respondents in the study. The study found out that imports and exports duty exemptio
and taxation exemption affected F D I to a very great extent as expressed by a majority o
respondents. The exemptions attracted investors who were interested in export produc
Most respondents indicated that land leasing incentives affected F D I to a little extent bu
removal of trade barriers affected FDI to a very great extent. These incentives were see
as considerations by most of the investors for investing in Kenya.
The study found out that the business environment had an effect on F D I in Kenya. Mos
of the respondents expressed that the process of starting up a business in Kenya w
tedious and there was too much bureaucracy in meeting legal requirements by investor
Most respondents indicated that the steps required were numerous and repetitive. The co
of business approvals for investments was found to hamper F D I in Kenya to a grea
extent. Customer service, stages of business registration and compliance with statuto
and regulatory requirements were found to be important considerations for investors a
indicated by most of the respondents.

The study found out that the status of the business envirormient in Kenya is good a
expressed by a majority of the respondents who also indicated that Kenya was politicall
stable to attract foreign direct investment. The study found out that political factors that
were considered by investors were incidences of war, ethnic conflicts, military
interventions in war torn areas and political and economic instability, which a majority of
respondents indicated to have an effect on investment. These factors were feared b
investors to be likely to impact negatively on investments made i f they were to occur.
Most investors will consider the condition of a country based on these factors, before
investing.

5.3 Discussions

5.3.1 Effects of Historical and Political Experiences on FDI

Foreign Direct Investment is regarded as a major incentive to economic growth in

developing countries. In the 1970s, Kenya had a long history with foreign firms and was
one of the most favored destinations for F D I in East Africa. However, Kenya's F D I
declined in the 90s and regained flow from 2003, but reduced in 2009. From the study
Kenyans are no longer skeptical about F D I and they no longer perceive it as pos
colonialism. Kenyans have forgotten the past and it is no longer an issue of who
colonized the country with regard to foreign investments. The current crop of political
leaders is also favorable to FDI and they value foreign direct investment and wish to
attract more of F D I inflows.

Historical experiences on foreign direct investment no longer affect the Kenyan

perspective on F D I . Historical injustices by foreigners no longer linger in the minds of
Kenyans. Despite this positive perspective, workers in foreign firms experienc
mistreatment and poor payment even though F D I provided employment opportunitie
Kenyans. Some leaders perceive F D I as a threat to freedom of self-rule since s
investors were engaging intemational or own country mles of operation, which req
the host govemment to abide by the mles which most African leaders perceive as d
of freedom of self mle. In this regard FDIs were found to be a threat to political ambitio
of many leaders, and thus some leaders scoffed at investors. This discour
opportunities for investment in Kenya.

5.3.2 Economic Benefits of FDI

There is notable delay in realizing economic befits and a concem on whether the F
gains are realistic. Kenyans see no economic benefits of F D I as most foreign inves
operate at a different level from the host in terms of size, financial capacity and ma
access. Kenyans perceive foreigners to be draining the economy as opposed to bene
it. From the findings of the study, F D I does not necessarily convert to increas
productivity and the host country may not experience much of management skills tran
as may be expected. There is little or no transfer of technical know-how from the ho
country as foreign firms bring in their own technology which is more advanced compa
to that of the host country. Although FDI results in more market cormections, there
increased competition for local investors and foreign firms make huge profits which
perceived as extortion. Kenyans benefited from automatic multiplier effect on FDI
many other investment opportunities were found to spring from the initial investments.

In an effort to attract and benefit from F D I , Kenya has come up with strategies to prom
the economy. The Kenya Vision 2030, Brand Kenya Initiative and revitalization of Ken
Investment Authority ( K I A ) aims to promote Kenya and open up FDIs, thus as the stu
found promotion centers and private investment sector have contributed to opening
F D I market through multiple marketing efforts and through improved intemation
relations with potential investor countries.
5.3.3 Effects of Government Policies on F D I

Ownership and locational advantages are often factors of host country policies. Whil
ownership advantages are specific to the firm, locational advantage is specific to the ho
country. Striking the balance on these policies is a challenge between the investor and t
host country. Govenmient policies on F D I in Kenya were found to be a great impedimen
to F D I which means that the ownership and locational advantages balance has not be
realized. The study found that there is a lack of transparency in policies on F D I , as mo
were found to be enatic and inconsistent, factors that were considered as likely causes
losses in F D I . However, regulator requirements were not seen as discriminatory t
foreigners and the policies made were favorable for market accessibility. The set policie
do not promote business rivalry but instead encourage competition.

Kenya assents to intemational-agreements and laws as noted in the findings. This is

positive step in increasing market opportunities. Exemption from imports and exports
duty and taxation are key factors of consideration by investors, as the study found tha
they greatly influenced F D I flow into Kenya, especially for investors interested in export
products. Land leasing incentives were not considered to affect FDI as most would afford
the leasing fees set but removal of trade baniers was to a great extent an importa
consideration.

5.3.4 Effects of Business Environment on F D I

Conducive business envirormient is considered as a major factor for profit opportunities

by investors who aim to take advantage of differences in cost and economies of scale. Th
business envirormient for FDIs in Kenya is affected by the process of starting up busines
in Kenya which was noted to be tedious and too bureaucratic in terms of the lega
requirements to be met by investors. The steps required to start up a business a
considered numerous and repetitive. The cost of business approvals was found to hamp
FDI in Kenya to a great extent.

Customer service, stages of business registration and compliance with statutory an

regulatory requirements were important considerations for investors as indicated by mos
of the respondents. Cormption and hidden costs that most investors had to meet befo
starting to operate were cited as hindrances to F D I . The investors stated that the licensin
system has improved significantly through the years, with the hardest license to obtain
being the work permit. This permit is renewable every two years and costs Ksh. 100,000/=
per year. The study findings indicate that the status of the business environment in Keny
is good and that Kenya is politically stable enough to attract foreign direct investment.
However a number of political factors that were considered to be impediment to FDIs
were incidences of post-election violence, the threat of terrorism, ethnic conflicts, military
interventions in war torn areas and political and economic instability. These factors were
feared by investors to be likely to impact negatively on investments made i f they were to
occur.

5.4 Conclusions

The study reviewed and analyzed impediments to FDI in Africa and Kenya in particular
focusing on effects of historical and political experiences on FDI in Kenya, economic
benefits of F D I , govemment policies affecting F D I and the effects of the business
environment on F D I in Kenya.

5.4.1 Effects of Historical and Political Experiences on F D I

The literature review of the study indicated that in early 1970s and 80s, Kenya had been
key interest for F D I in the region but has not attracted as much as was being expected i
recent years. Kenya enjoyed early F D I flow which accelerated rapid economic growth.
The study revealed that there was no effect of post colonialism and Kenyans were no
longer skeptical on F D I . The current crop of leaders seems to favor F D I although only
time will tell.

Mistreatment of workers in foreign firms is still being experienced up to date which is

still a concem which may be the case across Africa. The economic nationalism has a lon
way to go as leaders still feel threatened by FDIs in the interest of self-mle verses
fulfilling investors' preconditions and mles.

5.4.2 Economic Benefits of FDI

The direct economic benefits are yet to be seen by Kenyans, which may be attributed to
the expectations of workers' terms and conditions of service. Most FDIs operate at a
higher level in terms of size, financial capacity and market access thus F D I does not
necessarily convert to increased productivity and the host country may not experienc
much of management skills benefits as may be expected. From the findings there is litt
or no transfer of technical know how from home country, as most foreign firms bring in
their own expatriates. F D I results in more market connections and Kenyans benefite
from automatic multiplier effect on F D I from other investment opportunities coming
along with the FDIs.

Promotion centers and private investment sector have contributed to opening up F D

opportunities through improved intemational relations and aggressive marketing. Keny
has taken up initiatives to stimulate economic growth by attracting more of F D I . A
number of reforms have been carried out to boost F D I inflow, which means Kenya stil
needs F D I to realize the desired economic benefits.

5.4.3 Effects of Government Policies on F D I

The study has revealed a lack of comprehensive and transparent investment policies.
consistent policy framework is necessary for attracting and retaining F D I . Govemmen
policies on F D I in Kenya were found to be an impediment to investment. Thus, se
policies and regulations influenced flow of F D I to a great extent in Kenya. The regulatory
requirements were not seen as discriminatory to foreigners, policies made were favorab
for market accessibility and set policies were perceived to promote business competitio
not rivalry. This pointed to the fact that most investors were well informed in view of the
long term benefits they were aiming at.

Kenya assenting to intemational agreements and laws indicates global perspective

market opportunities. Products exported from Kenya by foreign investors still place
Kenya in the global market hence incentives in form of exemption of investors from
imports and exports duty and tax holidays would appeal to investors, especially thos
interested in producing export products. Land leasing incentives and removal of barrier
to trade were also found to be appealing to investors.

5.4.4 Effects of Business Environment on F D I

Kenya business environment is not conducive to attract FDI as delays in getting approva
to start a business are still a challenge. Poor public service such as delays beyond t
necessary for approval, lack of computerization, duplication of efforts among govemmen
agencies, insecurity, and lack of aptitude in registration of applications, high costs o
company formation, up-front capital taxes, corruption and socio-political instability
resulted in loss of F D I opportunities.

5.5 Recommendations

To overcome impediments to foreign direct investment in Kenya and so to other African

countries the study makes the following recommendations:

5.5.1 Recommendations for Improvement

5.5.1.1 Historical and Political Experiences on FDI

The current political leaders should endeavor to promote F D I and harness its positiv
attributes to increase investment in the country, stimulate economic growth and crea
employment for the Kenyan people. The Ministry of Labor in Kenya and African
countries in general should provide clear guidelines and put in place enforcemen
mechanisms to ensure that labor laws are honored and employees are treated humanely
all - whether local or foreign investors.

5.5.1.2 Economic Benefits of F D I

The govemment should continue providing support to the institutions promoting F D I and
dealing with investors to improve on efficiency and eradicate poverty. Kenya currently
has numerous initiatives to promote investment; these should be harmonized an
consolidated to ensure that a clear and coherent message goes out to likely investors. D
collected in such investment promotion centers such as Kenya Investment Promotio
Council should be used to inform policies and laws goveming foreign investments to
ensure that bureaucracy and impediments to F D I are removed or addressed to increa
efficiency of on-boarding new investors.

5.5.1.3 Government Policies on FDI

Sound and clear policies on FDI should be implemented. A common complaint of mos
interviewed investors was the fragmented nature of policies and laws to comply with
before setting up. This needs to be addressed to make it easier to set up shop in Ken
Fair competition for both locals and foreigners should be promoted and the govemmen
should give tax and duty exemptions to appropriate industries in order to attract F D I
Other issues such as tackling security concerns and corruption prevalence especially i
the public service should also be prioritized in order to improve Kenya's image as a
preferred F D I destination.

5.5.1.4 Business Environment on F D I

The process of starting a business in Kenya should be simplified and made a one sto
activity. The numerous licensing requirements need to be harmonized and incorporation
cost lowered. The stages of business registration should be reduced and information o
the process made easily accessible, online. The govemment should enhance the capac
and competence of staff handling investors especially in the area of customer servic
skills, as this was a major concem of foreign investors interviewed. Both the govermnent
and the business community should ensure better service delivery, accountability, firm
discouragement of cormpt practices, sustenance of security enhancement initiatives an
environmental protection in order to attract and retain foreign investors.

5.5.2Recommendations for Further Research

There are a number of impediments to foreign direct investments in Kenya as well as in

other African countries. There are also numerous economic benefits that come with F D I
and which need to be tapped for any economy to grow. Although much has not been
realized by this study in terms of solutions to the identified problems in Africa, the study
has made some recommendations on what needs to be done in the case of Kenya.
suggestion for additional research is made, especially in the case of other African
countries, as well as in-depth study into the root causes of each of the impediments to F D
that have been identified in this study.
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 APPENDICES

APPENDIX 1: C O V E R L E T T E R

CAROLINE GATHUA

UNITED S T A T E S INTERNATIONAL U N I V E R S I T Y

P.O. B O X 14634, 00800,

NAIROBI.

Dear Respondent,

I am carrying out a research on the factors that impede foreign direct investment in
African countries, a case study of Kenya. This is in partial fulfillment of the requirements
for the degree of Master in Business Administration at the United States Intemationa
University.

This study seeks to determine the issues affecting foreign direct investment, its effects o
the recipient country and the role of govemment policy in attracting it or otherwise.
Foreign investors, staff of Kenya Private Sector Alliance, selected embassies and Keny
Investment Authority have been identified as the respondents from which you have bee
selected. This is an academic research and confidentiality is strictly emphasized, you
name will not appear anywhere in the report. Kindly spare some time to complete the
questionnaire attached.

Thank you in advance.

Yours sincerely.

Caroline Gathua
APPENDIX I I : T H E QUESTIONNAIRE

This study is a requirement for the partial fiilfillment of a Master in Business

Administration program at the United States Intemational University Africa (USIU-A).
The purpose of this study is to determine the issues affecting foreign direct investment, i
effects on the recipient country and the role of govemment policy in attracting it or
otherwise. The results of this study can be used to formulate policy as well as tackle th
identified bottlenecks to attraction of foreign investments into Kenya. This is an academi
exercise and all information collected from the respondents will be treated with utmos
confidentiality.

S E C T I O N 1: D E M O G R A P H I C INFORMATION

Kindly answer all the questions either by ticking in the boxes or writing in the
spaces provided.

1. Gender
• Male
• Female
2. Age
• 25-3 5Yrs
• 35-45Yrs
• 45-55Yrs
• 55-65Yrs
• 65Yrs and Over
3. Respondent Working Experience
• 2-5yrs
• 5-lOyrs
• 10-15yrs
• 15-20yrs
• 20 and Over
4. Respondent Category
• Foreign Firm
• Promotion Center
• Private Sector Alliance
S E C T I O N 2: E F F E C T S O F H I S T O R I C A L AND P O L I T I C A L BACKGROUND

ON F O R E I G N D I R E C T INVESTMENT IN K E N Y A

1. Kenyans still perceive F D I as post colonialism.

• True

• False

2. Would you classify the current crop of political leaders as favorable or

unfavorable to F D I in Kenya?

• Favorable

• Unfavorable

3. In the view of the historical experience of foreigners, what is your view regarding
the following statements on F D I :

2 M
ex>
1 i s R
M) w .52
*5 DX)
a) Historical injustices by foreigners still
lingers in the mind of Kenyans
b) Kenyans are a bit skeptical on F D I
c) Workers in F D I experience mistreatment
and poor payments even to date.
d) Most leaders perceive F D I as a threat to
freedom of self-rule
e) FDIs are a threat to political ambitions of
many leaders
 SECTION 3: ECONOMIC BENEFITS OF FOREIGN DIRECT

INVESTMENTS IN K E N Y A

1. Most Kenyans see no economic benefits from F D I .

• True

• False

2. To what level do you agree that the following factors provide an open market for
foreign direct investment?

"ei) 2 2 2
e
2 2 2 s
Z Q
.ss
a) F D I does not convert to
increased productivity
b) The host country may not
experience much of
management skill transfer as
may be expected
c) There is little or no transfer of
technical know-how from
home country
d) F D I always results in more
market connections
e) There is an automatic
multiplier effect from F D I

3. Does the promotion centers and private investment sector contribute to the
following market aspects of foreign direct investment?

bX)
2 •3d 2
u UD
R 5 bX)
2 2 bc 0 R
•B WD u Q
Z
1 .52
a) Opening up of multiplier
projects as a priority
b) Promotion activities strategies
ill conceived

c) Intemational relations with

host country
S E C T I O N 4: E F F E C T S O F G O V E R N M E N T P O L I C I E S ON F O R E I G N D I R E C T

INVESTMENT IN K E N Y A

1. Govemment policies on F D I in Kenya are a great impediment to F D I .

• Tme

• False

2. Indicate to what extent the set regulations influence the flow of Foreign Direct
Investment into the country.

• Very great extent

• Greater extent

• Moderate extent

• Little extent

• No extent at all

3. Do you agree with the following statements:

1 -a 2
u •*->
M
3 cs
.52
<u
Q
Z
a) Policies on FDI in Kenya lack
transparency

b) Erratic and inconsistent policies are

considered as likely causes of losses
FDI
c) Regulatory Requirements are
Discriminatory to Foreigners

d) The set policies open up competition for

both local and foreign investors.

e) The policies are only favorable for

market accessibility and not competition

f) The set policies promotes business

rivalry rather than competition
 4. Does Kenya assent to intemational trade laws/agreements?

• Yes

• No

5. To what extent do these investment incentives initiated by the govemment if any

affect F D I :

cs

a) Import /Export Duty

Exemptions
b) Taxation Exemptions
c) Land Leasing Incentives
d) Removal of trade barriers

S E C T I O N 5: E F F E C T O F T H E BUSINESS ENVIRONMENT ON F O R E I G N

D I R E C T INVESTMENTS IN K E N Y A

1. To what extent do you agree with the following statements:

2 w) 2
B B
2 S W)
2 2
CS
U
Z
i: .ss
a) The processes of starting up
business in Kenya are
tedious
b) There is too much
bureaucracy in meeting
legal requirements by
investors
c) The steps required are
numerous and repetitive
 2. State to what extent would these factors appeal to investors:

2 ^
« c e
ts
1
a) The cost of business investment
approval hampers F D I
b) Customer service
c) Cost of processing documents
of a approval
d) Stages of business registration
e) Compliance with statutory and
regulatory requirements

3. What is the status of the Kenyan business environment in attracting foreign d

investment?

• Very Good

• Good

• Fair

• Poor

4. In your opinion is Kenya stable politically to attract foreign direct investment?

• Stable

• Unstable

5. Indicate to what extent the following factors affect Foreign Direct Investment

^ R B R e g e

Z U R
o 2
a) Incidences of war

b) Ethnic conflicts

c) Military interventions in war torn areas

d) Political-Economic Instability

THANK Y O U F O R TAKING YOUR TIME TO COMPLETE THE

QUESTIONNAIRE.
 United States
International University
Library