Abstract:
Many authors and researchers have studied and analysed the impacts of FDI on a host country’s export performance. Many of them have concluded that FDI has a positive impact while a few others think the impact was negative or that there is no impact of FDI on export performance. The main objective of this paper is to illustrates theoretically how FDI could affect FDI inflow in Kenya, the barriers to FDI inflow and some government policies to attract more foreign investment.
Key Words: FDI, Export, Policies, KenInvest, Kenya
1. Introduction
Exports are often seen as a very significant to a country’s economic growth. The role of FDI in a country’s export performance should therefore be studied in depth. Kenya has enjoyed a steadily improving environment for FDI for a very long time. The government, over time, has developed economic policies that attract the inflow of FDI. Kenya is an economic hub in the East African region and has retained regional advantages in FDI location. FDI has contributed considerably to certain vibrant sectors in the economy and led to diversification of the exports (World Bank, 2004)
Kenya’s strong engine is domestic consumption, which accounts for 75 percent of Gross Domestic Product (GDP). Kenya’s weak engine remains its exports, which have been declining sharply in relative importance (World Bank 2012). Kenya’s top four main exports do not earn enough to pay for oil imports, not to mention other imports. It will be very difficult for Kenya to achieve high growth over an extended period of time because of its existing economic imbalances. Kenya needs to increase its export competitiveness.
Kenya’s attractiveness to foreign direct investment continued its slump in the 2016 to hit a six-year low even as its East African neighbours increased their appeal to foreign capital. Data from the United Nations Conference on Trade and Development (UNCTAD) shows that Kenya was in the small list of three countries that attracted less Foreign Direct Investment (FDI) inflows in 2016 compared to the previous year. The report shows that FDI inflows to Kenya dropped 36 per cent to Sh40.7 billion ($394 million) even as inflows to East Africa rose 13 per cent.
1.1 The Impact of FDI on Export Performance: Literature Review
In empirical literature, how FDI affects the host country’s exports can be seen in two perspectives: direct contribution of FDI to exports and indirect (spillover) effects of FDI on domestic firms’ exports. Most studies have found a positive relationship between FDI and export performance, while a few others have found a negative relationship.
Floroiu (2016) used vector autoregression (VAR) to analyse FDI-Eports relationship in Romania. Given that cointegration relationship exists between the two variables, the author constructed the VEC model. The main result of this study was that the FDI inflows and exports are cointegrated in the period of analysis. The finding that the time series variables were cointegrated implies that there was a long term relationship between them.
Okechukwu (2018) examine the FDI-exports relationship in Nigeria using disaggregated FDI and export data. This paper applies the ARDL cointegration approach in examining the long-run relationship between FDI and exports. Their results suggest that aggregate FDI has a positive and statistically significant long-run impact on total exports. Once exports are disaggregated into oil and non-oil exports, the positive, cointegrating relationship holds only for oil exports. When disaggregated by sector, primary sector and manufacturing sector FDI have a positive and significant long-run relationship with both total exports and oil exports but service sector FDI does not appear to have any significant influence on Nigerian exports.
Mijiyawa (2016) empirically examines the effect of foreign direct investment (FDI) inflows on exports in Africa. Using the system‐generalised method of moments estimator for linear dynamic panel data on a sample of 53 African countries and five‐year periods from 1970 to 2009, the paper finds that higher FDI inflows are positively and significantly linked with higher exports of goods and services. A large part of the FDI effect is driven by its spillover effects on exports. The paper also finds the lagged value of exports, a competitive currency, as well as increases in domestic investment and physical infrastructure, to be factors stimulating African exports.
Zhang (2019), in his paper “How does FDI affect a host country’s export performance? The case of China”, attempts to close the gap by investigating the issue with the Chinese industrial data. The estimates indicate that FDI indeed has had a positive impact on China’s export performance, its export-promoting effect is much greater than that of domestic capital, and its effect is larger in labor-intensive industries.
Samantha (2018) investigated the impact of inward FDI on export performance of Sri Lanka from 1980-2016 using Auto Regressive Distributed Lag (ARDL) model and bound test. The study found that there are insignificant long-run and short-run positive relationships between FDI and exports in Sri Lanka. Political risks and microeconomic instability hinder the chances f attracting vertically integrated assembly industries which have a significant impact on export performance of Sri Lanka.
2. Trade and Investment Patterns in Kenya
2.1 International Trade Patters in Kenya
Source: CEICDATA
Kenya is an agricultural exporting and capital goods importing nation. It routinely runs a trade deficit, hence highly depends on loans and international aid in order to finance imports. Kenya’s major exports include tea, coffee, horticultural products and petroleum products. It’s major imports include machinery, transportation equipment, petroleum products, iron and steel. The value of imports have continued to outweigh revenue from exports over the years. Agricultural products have lower prices in the global market, while the secondary products that are primary imports in Kenya have a higher monetary value in the global market.
2.2 FDI trend in Kenya
After independence, Sessional Paper No. 10 on African Socialism and its Application to Planning in Kenya (Republic of Kenya 1965), realized the important role played by FDI in the development of the country. (Kumar, Ndungú and Garrido 2010) note that Kenya’s investment was declining until around 1995. The lowest point was in 1992 (10.4 percentage GDP) due to stagnating public and private investment. The National Development Plan, 1997-2001 (Republic of Kenya 1996) emphasized on the need for expansion and modernization of the existing industries and attraction of new investments in light manufacturing and resource based industries to improve the living standards and create employment opportunities of Kenyans.
Due to Kenya’s past inward oriented economic policies which led to the development of an inefficient and incompetitive manufacturing characterized by underdeveloped intermediate and capital goods industries (and thus heavy reliance on imported intermediate inputs and machinery).
Kenya then developed a long-term development blue print, commonly known as the Kenya’s Vision 2030. This vision 2030 is geared towards economic, social and political pillars, with the hopes that Kenya will be globally competitive and prosperous, attain middle- income status and offer its citizens high standards of living by year 2030. From the period of 2008-2012, the level of domestic savings and investment in Kenya was an average of 13% of GDP. In comparison with other sub-Saharan countries that had an average of 17% OF GDP, Kenya’s level of investment and domestic savings was way less. This may be due to a number of reasons, including but not limited to the post election violence that occurred in Kenya after the 2008 elections. Other reasons include drought, financial crisis and high international oil and food prices.
Kenya’s attractiveness to foreign direct investment continued its slump in the 2016, which followed a 6-year downward trend. On the other hand, other East African countries continued on an upward trend in FDI attractiveness. Data from the United Nations Conference on Trade and Development (UNCTAD) shows that Kenya was in the list of three countries that attracted less Foreign Direct Investment (FDI) inflows in 2016 compared to 2015. The report shows that FDI inflows to Kenya dropped 36 per cent to Sh40.7 billion ($394 million) even as inflows to East Africa rose 13 per cent. This is due to many reasons, including but not limited to, economic strains in the UK due to Brexit. The UK, USA and India are Kenya’s top sources of foreign investment.
2.3 How FDI affects exports
Exports and FDI are complementary in economic globalization. There are many ways in which FDI can affect export performance in a host country. It can do so in two ways:
a) Direct contribution of FDI to exports
b) Indirect (spillover effect) contribution of FDI to domestic firm’s exports
FDI may enhance export-orientd activities that in turn improve the export performance of a country. Exports may also impact FDI in that, it increases productivity that attracts foreign investors to undertake in FDI. In literature, there is a common view that FDI promotes exports of host countries positively by
(a) augmenting domestic capital for exports,
(b) helping transfer of technology and new products for exports,
(c) facilitating access to new and large foreign markets, and
(d) providing training for the local workforce and upgrading technical and management skills.
On the other hand, it is sometimes seen that FDI may
(a) lower or replace domestic savings and investment;
(b) transfer technologies that are low level or inappropriate for the host country’s factor proportions;
(c) target primarily the host country’s domestic market and thus not increase exports;
(d) inhibit the expansion of indigenous firms that might become exporters; and
(e) not help developing the host country’s dynamic comparative advantages by focusing solely on local cheap labor and raw materials (Zhang 2019).
3. Main Impediments to FDI in Kenya
Factor Percentage
Political instability 27%
Crime and insecurity 19%
Climate Change 4%
Competition 5%
Unreliable infrastructure 7%
Delays in issuing licenses and wok permits 6%
Exchange rate volatility 3%
Lagging economic growth 3%
Lack of skilled labour/high cost of production 3%
lack of clear policies and regulatory impediments 5%
Lack of proper knowledge of regional blocks 2%
Weak legal infrastructure 4%
Source: Kinuthia (2010), University of Nairobi, School of Economics Paper
Mwega and Ngugi (2006) conclude that Kenya’s competitiveness in attracting FDI has declined with investors moving to its neighbors in East Africa due to low investor confidence resulting from factors like insecurity, poor infrastructure, high interest rates, high operational costs, and an unsupportive judicial system.
3.1 Political instability
Kenya is a country with around 48 tribes that speak different languages. On one hand, this has produced a very vibrant culture, but on the other hand, this diversity has been a source of conflict through out the years. In Kenya, politics tend to veer towards tribal affiliations. Since independence, campaigns and elections in Kenya, especially presidential elections are characterized by political tension and some sort of tribal violence. The worst case was witnessed in 2007, after the General presidential election.
Violence broke out in Kenya, and left over a thousand people dead and thousands more displaced, without homes. This is because a president was supported by certain tribes and not by other tribes.
Unfortunately for Kenya, foreign investors always seek a politically calm and safe environment. As seen in the graph on part 2, FDI in Kenya took a great dip in 2008 due to the violence that was going on. Looking at the general trend since independence, FDI always took a downlward trend during the election years due to fear of unrest and instability.
3.2 Crime and insecurity
There is a high rate of crime in Kenya, especially in the cities like Nairobi, Mombasa and Kisumu. These cities, especially the capital city of Nairobi, is where most FDI is based. The main forms of crime include corruption, terrorism, theft, carjacking amongst others.
There are about 10 hijackings in Nairobi everyday. This is where the offenders stop a car and carjack it in order to commit an armed robbery. The Kenyan authorities have limited technology and capacity to investigate these crimes.
High corruption level is also another major problem in Kenya that has slowed down its economic growth. It is among the most corrupt countries in the world. According to Transparency international, Global Corruption Perception Index, Kenya scored 28 points out of 100, despite the efforts by the Kenyan government and international organizations to curb this problem in vain.
Kenya ranks 143 out of 180 countries. Corruption affects the way of doing business in Kenya. Corruption is present even in the legal system which is supposed to be very transparent. Issuing licences and work permits take a long time and potential investors may be asked to pay bribes in order to get their permits issued faster.
Kenya has been a scene for several terrorist attacks by the islamist Al-Shabaab group. This has caused many investors to flee out of Kenya due to obdurate insecurity and fear of terrorists attacks. Some of the major attacks include the bombing of the US embassy in 1998, the Israeli-owned hotel in 2002, and Westgate Shopping in 2013. Since then, so many other businesses and schools have been closed due to terrorism.
3.3 Unreliable infrastructure
Kenya still has very inadequate infrastructure. The government increased the budget for physical infrastructure development since 2000, however, Kenya still faces a problem of congested roads, unreliable power supply, long duration for the installation of power and telephone lines, especially in the rural areas, shortage of clean and safe drinking water etc. Reliable energy and water supply will greatly cut down production cost. This highly favours foreign investment, as it also increases the ease of doing business.
3.4 Climate change
Agriculture is the main backbone of Kenya’s economy and exports. Kenya’s main exports are agricultural products including tea, coffee, flowers and other hortitultural products. The effects of rising temperatures on crop production, especially tea and coffee may adversely felt in Kenya in the coming years.
According to KenInvest, 70% of Kenya’s exports are mainly agricultural produce. There are many foreign investors in the agriculture industry, for example, Unilever, James Finlay and many others, that are based in tea, coffee and flower industries. 20% of the total FDI goes agribusiness (KenInvest). Many investors may fear that the negative impacts of climate change that are already creeping in may affect them, hence many opt to pull out.
4. Measures to attract FDI in Kenya
4.1 Policy Measures
Since the 1980s, the Kenyan government has been making efforts to attract FDI. The government of Kenya passed a law on private-public partnership in 2013 with the aim of attracting more foreign investment in the infrastructure sector. Now, there are numerous privatization programs in construction, food processing, energy and education. Special Economic Zones and export processing zones benefit from this incentive.
The mining law in Kenya was amended to limit foreign investment and participation in the oil gas and mining of minerals. In 2015, this law was amended again in favour of foreign investment in the mining sector.
The Company Act, put into effect in 2015, was meant to obligate a foreign company to reserve at least 30% of its capital to Kenyan citizens. That clause was later suspended. In 2015, the Business Registration Services (BRS) Act set up the Business Registration Service. This law supervises company registration and assigns to counties the registration of the name and concepts of a company, which cuts costs of registering a company.
The Kenyan Government also introduced the Insolvency Act in 2015 in order to improve the legal framework in case of bankruptcy of a company.
In 2017, the government announced the development of the project Kenya Investment Policy to strengthen the creation of an environment conducive to investment growth. The policy provides for the revision of legislation affecting the entire investment network. In addition to this, Kenya has signed 14 bilateral investment conventions.
4.2 Kenya Investment Authority (KenInvest)
KeninVest is a state agency that was established in 2004 by the Kenyan government of Kenya through an act of parliament. Its main function is to promote investment in Kenya by facilitating the implementation of new investment projects, assist investors in issuing licenses, providing customer care services for new and existing investors and organizing investment promotions globally. Their website and newsletters contain information for potential investors including investment opportunities and investment procedures, contact details and local news.
5. Conclusion
FDI is widely thought to have positive effects on a country’s economic growth and development through many ways. One of the major ways in which it does this, is by contributing to the host country’s export performance either directly or indirectly by spillover effects. Kenya is a developing country and needs to attract FDI in order to achieve its developing goals and to fulfil the vision 2030, which is a long-term blue print which aspires for an overall better society by the year 2013.
In order to transform the country, industrialize, improve infrastructure, provide jobs and provide its citizens with a high quality of life, Kenya needs to come up with more ways to attrack FDI and reap its benefits. It can do this by finding ways to curb corruption, fasten the process of issuing licenses to businesses and foreign investors, make its legal system more transparent, deal with insecurity, terrorism, tribal violence and political instability, as these are some of the major impediments to Kenya’s attractiveness for foreign investors.
Kenya also needs to diversify its export commodities, as at the moment, the main export commodities are majorly agricultural in nature. Due to climate change, low global price for agricultural products and price fluctuations, this may not be sustainable in the long term.
References
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