Foreign Direct Investment and Financial Performance of Manufacturing Firms Registered by the Kenya Association of Manufacturers

Abstract

The manufacturing industry is considered as among the primary drivers for achieving a steady annual economic Growth rate of 10% in Kenya Vision 2030. The manufacturing industry in Kenya can have a future potential to contribute to employment and economic growth. Kenya's manufacturing sector accounts for 70% of the industrial sector's share in Gross domestic production. Total Factor Productivity (TFP) in manufacturing grew about 20percent from 2003 to 2007. The manufacturing sector's growth rate fell to 3.3 percent in 2011 from 4.4 percent in 2010, indicating underperformance by manufacturing. The objective of the study was to establish the effect of foreign direct investment on financial performance of manufacturing firms registered by the Kenyan association of manufacturers. Both exploratory and cross-section survey methods were adopted targeting 38 KAM member manufacturing firms and census was used. Information was gathered from auxiliary sources and analyzed using SPSS covering means and standard deviations, correlation and regression analysis. The findings indicate that foreign board membership (β=.373, p<0.05 & t>1.96) had the greatest significant effect on financial performance of manufacturing firms in Kenya followed by Foreign equity shareholding (β=.287, p<0.05 & t>1.96) and lastly foreign technological flow (β=.074, p<0.05 & t>1.96). The study concludes that foreign direct investment significantly enhances financial performance of the manufacturing firms in Kenya. It was recommended that the government of Kenya has a major responsibility of establishing a conducive environment that supports and encourages an inflow of foreign investors within the sector. The Kenya Revenue Authority should provide more tax incentives that would motivate foreign investors to flow into the country and support the manufacturing sector. The policy makers in the government should formulate sound policies that would be used to foster good bilateral and multilateral relationships with other countries so that more foreign investors will flow in the country. The government has an obligation of putting in place measures to counter corruption and other negative vices that may otherwise hurt the publicity and reputation of the country slowing down an inflow of foreign investors.