Foreign Direct Investment, Absorptive Capacity, Business Environment and Performance of Manufacturing Firms in Kenya

Abstract

Scholars appear to agree on the need for foreign direct investment for a country's prosperity, but their views on its influence differ. The main point of their divergence is how foreign direct investment affects the performance of local economy a concern that need to be reflected on before developing policies to spur foreign investment. The general objective of the research was to look into the effect of foreign direct investment, absorption capacity, and the business environment on performance of manufacturing firms in Kenyan. The specific objectives were to determine the effect of foreign direct investment on performance of manufacturing firms, the mediating and moderating roles of absorptive capacity and the business environment respectively on the relationship. The joint contribution of foreign direct investment, absorption capacity and the business environment on performance of Kenyan manufacturing firms was also investigated. The study was based on eclectic theory, dynamic capabilities theory, knowledge based theory and resource dependence theory. An empirical gap in the literature of foreign direct investment, absorptive, and business environment was identified to guide the formulation of the conceptual framework. The study included 100 firms that were registered with KAM and had 10% or more foreign ownership. The Chief Executive Officers or their appointed officers in the organizations were the respondents. A structured questionnaire was used to acquire primary data. The data was found to be reliable by Cronbach's Alpha reliability tests. The study received a response rate of 75%, which was higher than the recommended response rate of 50%. The data was analyzed using descriptive and inferential statistical methods. Diagnostic tests were performed prior to regression analysis and the data found to meet all of the required conditions. The findings of the study confirmed the link between foreign direct investment and performance of manufacturing firm. Furthermore, the research affirmed that absorptive capacity mediated and the business environment moderated the relationship between foreign direct investment and manufacturing firm performance. These findings add to our understanding of foreign direct investment inflows and support the significance of foreign direct investment in the economic development of Kenya. According to the findings, the country's authorities should be concerned not only with attracting foreign direct investment but also with ensuring spillover to domestic businesses. Furthermore, they should ensure that concerns such as absorptive capacity and business environment that impede the flow of capital, technology, and expertise to domestic enterprises from foreign direct investment are fully remedied. The study contributes to our knowledge by proposing a model that links foreign direct investment, absorptive capacity, the business environment and firm performance. Future research could include more respondents from different levels of the organization and improve generalizability by focusing on organizations in similar industries and with similar levels of foreign direct investment.