The impact of tax incentives on Foreign direct investments inflows of firms listed at the Nairobi Securities Exchange

Abstract

The main objective of this study was to establish the impact of tax incentives on FDI inflows of firms listed at the NSE. It is assumed that tax incentives play a major role in attracting FDI inflows especially in developing countries. The same has been proofed empirically in developed countries. However, in developing countries the research is at its infancy stage. This study focused on the impacts of Wear And Tear Allowances; Investment Deductions and Industrial Building Deductions, towards attracting FDI inflows to firms listed at the NSE. The study involved collection of a time series data on investments and tax incentives from a sample of 10 firms listed at the NSE between years 2008 – 2011. The data was mainly from secondary sources, most attention being focused on annual reports and audited financial statements of the sampled firms. Correlation analysis was carried out on FDI inflows and tax incentives variables to establish whether there was any relationship. The results were then analyzed to arrive at a conclusion on whether tax incentives have any impact in attracting FDI inflows in firms operating at the NSE. The results of the study revealed a strong relationship between wear and tear allowances and FDI inflows. Industrial Building Deductions and Investments Deductions had no significant relationship with FDI inflows. Despite strong relationship between Wear and tear allowances and FDI, further analysis on percentage change in FDI inflows across the study period shows that the Impact of tax incentives on FDI inflows is insignificant.