The Impact of Tax Incentives on Foreign Direct Investments Inflows in Kenya

Abstract

The role of tax incentives in promoting foreign direct investments has been the subject of many studies. Their relative impact has, however, not been clearly established. Some researchers contend that the effect of tax incentives on foreign direct inflows is significant while others argue that tax incentives are both bad in theory and in practice since they have a negative impact on the investment decisions. This study sought to determine the effect of tax incentives on foreign direct investments inflows in Kenya. The independent variable was tax incentives as measured by the natural logarithm of quarterly tax incentives provided by the government. The control variables were interest rates as measured by the Central Bank of Kenya lending rate on a quarterly basis, economic growth as measured by quarterly GDP growth rate and inflation as measured by quarterly inflation rate. FDI inflows in Kenya were the dependent variable which the study sought to explain and it was measured by FDI inflows in the country on a quarterly basis. Secondary data was collected for a period of 10 years (January 2008 to December 2017) on a quarterly basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.664 which means that about 66.4 percent of the variation in FDI inflows in Kenya can be explained by the four selected independent variables while 33.6 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with FDI inflows (R=0.815). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 17.295. Therefore the model was fit to explain FDI inflows in Kenya. The results further revealed that individually tax incentives, interest rates and economic growth are not significant determiners of FDI inflows in Kenya while inflation is a significant determiner. This study recommends that there is need for policy makers to regulate inflation levels prevailing in the country bearing in mind that they significantly influence FDI inflows in the country.