The Impact of Tax Incentives on Foreign Direct Investments in Kenya

Abstract

The motivation behind this project was to demonstrate the substantial impact of tax incentives on FDI inflows in Kenya. Specifically, the paper sought to lay out the impact of tax inducements (incentives) as the predictor variable together with interest rate, inflation rate, and economic growth as control variables on the FDI inflows as the outcome variable. Tax incentives were estimated using normal algorithm of yearly tax incentives given by the government. The interest rate was estimated by the CBK annual lending rate. Inflation rate was estimated by the annual inflation rate. Economic growth was estimated by yearly GDP. The FDI was estimated by yearly net inflows in Kenya. Utilizing the correlational research design, this paper gathered secondary data from different government and inter-governmental organizations official sources for 10 years (2012 – 2021) on annual basis. The paper adopted descriptive statistics (mean, median, and standard deviation) to describe the center and spread of the data and pattern plot (trend plot) examination to depict the presentation of the data across the investigation period. The study then conducted diagnostics analyses to ensure linear regression assumptions were met. Thereafter, the study conducted inferential statistics to illustrate the significant impact of tax incentives on FDI inflows in Kenya. With the aid of SPSS software version 23.0, the regression analysis provided R-Square of .588 and F-statistics of .269. The discoveries uncovered that though tax incentives predict nearly 59% of changes in FDI annual inflows, the F-Statistics indicate that model did not explain the substantial impact of tax incentives on FDI inflows in Kenya. This was also evident in the regression coefficients output where tax incentives, interest rate, inflation rate, and economic growth recorded significant values greater than .05. The study, therefore, concluded that there is no significant impact of tax incentives on FDI inflows in Kenya. The study recommends a need to review existing tax policies and laws of FDI and align them to the long-term economic stability of the country. At the same, there is a need for policymakers to ensure that tax incentives do not turn out to be costlier for the government. The limitation of this study is that it approached tax incentives in totality. Further research should attempt to establish impact of individual tax incentives on FDI inflows in Kenya.