Foreign Direct Investment Spillovers And Productivity Of Domestic Firms In Kenya

ABSTRACT

During the recent years, it has been observed that countries compete with each other to attract foreign investment. Countries have gone further than simply removing barriers to inward foreign investment and have taken a more pro active approach towards attracting FDI through the use of fiscal and financial incentives. This has been done owing to the notion that when foreign companies invest in a host country, productivity gains are assumed to accrue to domestic producers from spillovers generated by foreign affiliates. Despite this being hugely important to public policy choices, there is no conclusive evidence that domestic firms benefit from foreign firms. Empirical studies have shown that spillovers from foreign to domestic firms depend mainly on the country and host firms characteristics. Therefore, this study attempted to empirically examine if in Kenya, domestic firms have benefited from foreign firms using a panel data for the period 2009 to 2011. The study looked at the transmission mechanism, that is, both horizontal and vertical linkages. The study has gone beyond the existing studies in Kenya by capturing firm’s characteristics that determine the spillovers from foreign to domestic firms. To achieve these objectives primary data was collected from various firms in Kenya; this was from a sample of 204 firms from Nairobi, Nakuru, Mombasa and Kisumu cities. The data was captured using a structured questionnaire which was administered to various firms. A fact sheet was used to summarize the data collected before it was cleaned, coded and edited for completeness and accuracy. Thereafter analysis was done using Feasible Generalized Least Square method (FGLS).The study found that foreign firms influenced domestic firm’s productivity through both vertical and horizontal spillovers. Foreign firms were found to channel horizontal spillovers through competition effect, demonstration effect and labour turnover effects. On vertical spillovers small firms were found to benefit most from selling of goods and services to foreign firms. Skills, Gender and size of firms were some of the variables that were found to have a major influence on firms’ productivity in Kenya. Additionally, other variables like technological gap, research and development had an influence on firms’ productivity. The study also found that firms’ ownership characteristics were a major determinant of productivity whereby foreign firms were found to be more productive than domestic firms in the two sectors; manufacturing and agriculture but productivity in the service sector was the same. Finally skills, technological gap, size, research and development were major factors that determined horizontal and vertical spillovers from foreign to domestic firms, other factors like ethnicity and gender were insignificant.