EFFECT OF SELECTED FISCAL POLICY INSTRUMENTS ON FOREIGN DIRECT INVESTMENT INFLOW IN KENYA

Abstract

Foreign Direct Investment serves as a crucial connection between developing and industrial nations. In Kenya, a substantial obstacle looms in the form of a formidable challenge: the nation grapples with drawing and maintaining Foreign Direct Investment (FDI) at rates imperative for unlocking the full potential of associated capital inflows and harnessing the benefits of global integration and technology transfer. Despite the widely acknowledged significance of FDI, the country finds itself struggling to cultivate an environment conducive to optimal FDI inflow. This deficiency not only hampers domestic investment opportunities but also significantly impedes the realization of robust economic growth. The need to tackle this problem is intensified by the incomplete knowledge of how fiscal policy tools impact FDI inflows in Kenya, highlighting the importance of a concentrated analysis. The main aim of the research was examine the how selected fiscal policy tools impacted the flow of cross border direct influx into Kenya between 2002 and 2021. This study aimed to investigate four key objectives: to establish how tax incentives impact foreign direct investments in Kenya, to examine the impact of recurrent expenditure on foreign direct influx in Kenya, to determine the impact of external debt on international capital investment in Kenya, and to examine how currency exchange rates moderate the relationship betwixt fiscal policy instruments and foreign international investment in Kenya. The study focused on the period 2002-2021 because this is the period where Kenya had persistent international capital Investment, especially after the 2008 post-election violence, global economic recess, and the COVID-19 pandemic. Descriptive, correlation and causal research design were adopted. Secondary time series data from the World Bank, UNCTAD, Macroeconomic, IMF and Government Finance Statistics from CBK, Tax Expenditure Reports, and KNBS collected through document analysis was used in the study. Descriptive statistics computed using E views software were computed to observe the general trend of sampled variables. Correlation analysis results showed a moderate positive correlation (r = 0.573509) between Tax Incentives, Recurrent Expenditure ( r = 0.516856), and Currency Exchange Rate ( r = 0.391773) with FDI Inflow. It also showed a moderate inverse relationship (r = -0.457851) between External Debt and FDI Inflow. The Augmented Dicky Fuller (ADF) test showed that External Debt was stationary at levels 1(0), while FDI Inflow, Tax Incentives, current Expenditure and forex Rate were found to be stationary at the first difference 1(1). During post-estimate test diagnostic, the Breusch Godfry Test showed there was no serial autocorrelation present in the regression residuals. Additionally, the Breusch-Pagan-Godfrey Test indicate the absence of heteroscdasticity in the equation. Furthermore, the Jarque-Bera statistics test indicated that the regression residuals were normally distributed. The regression model estimates indicated that a unit growth in incentive tax would increase FDII by 29.0502 percent at p = 0.0002 <0.05 holding significant other factors constant. A unit increase in in recurrent expenditure would increase FDI by 25.7703 percent at p = 0.288 < 0.05 significantly holding other factors constant. It also shows an unit increase in external debt would decrease FDI inflow by 45.7851 percent at p=0.0061 < 0.05) significantly citeris paribus. Results further indicated a statistically significant positive intervening influence of currency rates of exchange on the association between explanatory variables and the dependent variable. To enhance the flow od global Investment, the research suggested that policymakers should customize incentives to boost investor trust and the government should implement measures to guarantee that a significant part of regular spending encourages activities that support FDI Inflow. Policymakers should prioritize strategies to manage and reduce external debt burdens responsibly.