Challenges of Foreign Direct Investment Faced by Firms in the Apparel Manufacturing Industry in the Kenyan Export Processing Zones

Abstract

Foreign Direct Investment (FDI) is a complex foreign market entry mode which involves the ownership and control of assets in a foreign market or direct ownership of facilities in the target country. Foreign Direct Investment contributes to the growth of domestic firms through complementarities in production and productivity spillovers. With the ever-changing environment, entry mode decisions and how to cope with such changes are very challenging to International Business Managers as wrong decisions could be irreversible and costly on the long run. Kenya has been involved in Global trade for many years, but mainly in the agricultural sector and with the US Congress passing the African Growth and Opportunity Act (AGOA) in 2000, and enhanced by the formation of the Export Processing Zones ( EPZ) in Kenya, there is renewed interest in the once declining apparel manufacturing industry with the inflow of Foreign Direct Investments into the apparel sector mainly within the Export zones in order to reap the incentives offered by the EPZ Scheme. With the window of opportunity presented by AGOA which provided the major market expected to close in September 2015 and compounded by other challenges like the deterioration of the Kenyan infrastructure, port congestion, poor supply and cost of electricity, and high cost of labor, this study attempted to investigate the challenges of Foreign Direct Investment faced by firms in the apparel manufacturing industry in the Kenyan export processing zones and the measures adopted by the firms in dealing with the challenges. Data for the study was collected from fourteen out of the fifteen FDI firms in the apparel manufacturing industry in the Kenya export processing zone using drop and pick method. Analysis of the data concluded that fiscal policy, state and cost of infrastructure, customs regulations and market and product are the major sources of challenges. The study highlighted that political, legal and social variables, human resource variables are not major challenges with land related challenges not a challenge.EPZ Authority generated measures were the most effective measure in dealing with the challenges faced by the FDI. Flowever, others such as corporate social responsibility measures, in-house generated measures, parent company generated and globally outsourced measures equally play a pivotal role in helping deal with the effects of the challenges. Trade organization /affiliates, Nongovernmental /lobby groups and other Kenya Government ministry /agency were providing the least assistance to overcome the challenges. A study on the factors that promote effective growth of foreign direct investment in apparel manufacturing industry in Kenya, a comparative study on challenges that affect locally owned and foreign direct investment in apparel manufacturing industry in Kenya and a study on the service levels, the strengths and effectiveness of the Export processing zones authority is recommended. The Government by strengthening the EPZ Authority, ministries and affiliates should facilitate more interaction with the foreign direct investors to overcome the challenges. The investors on their part should form lobby group to enable them to market their product more easily. v