GSBS6003: Individual Case Study - FDI and Political Economy in Kenya

This case study examines Foreign Direct Investment (FDI) in Kenya, focusing on the interplay between political economy and investment. It analyzes the impact of elections, government policies, and taxation on investor confidence and capital flows. The study highlights how political instability, particularly during election periods, can negatively affect FDI. It also explores how government policies, such as those related to Special Economic Zones (SEZs) and Export Processing Zones (EPZs), are designed to attract and retain foreign investment by offering incentives like tax breaks and exemptions. The analysis underscores the importance of a stable political environment and favorable legal and economic frameworks in fostering a positive investment climate, and the overall attractiveness of Kenya for foreign investors. The study also provides insights into the key role of the tourism sector in contributing to the country's balance of payment deficit.

Running Head: Foreign Direct Investment in Kenya
Political Economy and Foreign Direct Investments (FDI) in Kenya
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Foreign Direct Investment in Kenya 1
Table of Contents
Introduction......................................................................................................................................3
Elections..........................................................................................................................................3
Policies on Foreign Direct Investments...........................................................................................5
Taxation...........................................................................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

Foreign Direct Investment in Kenya 2
Political Economy and Foreign Direct Investments (FDI) in Kenya
Introduction
According to a report ("Kenya", 2017) on 2017 Investments Climate Statements,
published on 29th June 2017 by the Bureau of Economic and Business Affairs, Kenya has
maintained a general bullish trend in business returns, making it appealing to multinational
organisations to set up their headquarters for the African region. The state keeps improving its
attractiveness as a destination for foreign direct investments by making improvements to her
regulatory blueprint. Kenya has a robust telecommunication base, and a strong fiscal system, and
wide air connection with the rest of Africa and to Asia and Europe. In July, Kenya’s airline –
Kenya Airways – launched direct flights from Nairobi to New York, USA; opening up the
country and the East Africa region at large to America ("Daily Nation", 2017). Port of Mombasa
is the largest entry point for goods in and out of Eastern Africa and Central Africa (Cia.gov,
2018); which gives Kenya a strategic geographical advantage over her neighbors in competition
for foreign direct investments.
Political economy is a branch of social science which studies the relationships among
individuals, the society, the markets and the state, using a wide range set of tools and methods
derived more from economics and politics, (Veseth & Balaam, 2018). In simpler terms, political
economy is concerned with the link between politics and economics in a selected sector of an
economy. In particular, for this study, we are concerned with the link between political systems
and foreign direct investments (FDI) in Kenya in relation to elections, policies on foreign direct
investments, and taxation as a legal context.
Elections
Until December 2007, Kenya was considered among the most stable and peaceful
countries in Africa (Hanson, 2008). Analysts stood in favour of her continued success and
economic expansion under retired President Mwai Kibaki. Yet, general elections in late
December 2007 which were disputed resulted to fierceness in most parts of the country, living in
excess of six-hundred people dead. That caused fear that Kenya would divide along their
different tribes and result to protests in the country. It led to economic sluggish in the country.

Foreign Direct Investment in Kenya 3
This was highly reflected in 2008 as foreign direct investments fell to US$ 96 million from US$
729 million in 2007 (Ceicdata.com, 2018).
The issue of disputed general elections in Kenya since 2007 has resulted to loss of
investor confidence in the country during the electioneering periods. For instance, during the
passage of the new Kenyan constitution in 2010, FDI dropped to US$ 1198 million from an all-
time high of US$ 1491 million in 2009 (Ceicdata.com, 2018). The record FDI value was
attributed to the formation of a grand coalition government between President Mwai Kibaki and
Prime Minister Raila Amolo Odinga, which had calmed political tension in the country.
The most recent case was the nullification of President Uhuru Muigai Kenyatta’s re-
election by the Supreme Court of Kenya. This ruling made Kenya the first African country and
the fourth country in the world to nullify presidential results of a sitting president. The ruling
made Kenya stand out as being one of the most Democratic countries in Africa. It was evident on
social media how citizens of other African countries admired the Kenyan Supreme Court’s
decision and called for their countries to emulate the same. However, the ruling sent mixed
reactions to international investors and the international community as a whole as to whether
there was going to be violence in the country or not, especially those who had investments in the
country.
There was a great drop of shares in the Kenyan foreign exchange market on the day the
presidential results were nullified. Shares had fallen by the 10 percent limit, which requires an
abrupt stop. Kenya lost KES 50billion in just 10 minutes (Kenyans.co.ke, 2018). The shilling
weakened by 0.4 percent immediately after the court’s ruling to 103.20/40 against the USA
dollar according to Kenyans.co.ke data. This was because of the fact that investors did not pump
in more money and at some point, the economy was at a not moving towards any direction. For
instance, the Kenya Power and Lightning Company (KPLC) share price fell by 9.73% alongside
many major banks and companies such as Equity Bank Group, Safaricom LTD, CIC Insurance
and many more. A total of 17 stocks that compose the NSE 20 share index declined, which has a
majority volume of foreign investments, resulting in the huge drop (Kenyans.co.ke, 2018).

Foreign Direct Investment in Kenya 4
Policies on Foreign Direct Investments
The U.S. Department of State reported that Kenya has benefited from a bullish trend in
foreign direct investment (FDI). Alien companies considering to invest in Kenya are treated
similarly to domestic companies. A majority of Kenya’s industries are made of multinationals.
The state's promotional facilities on exports do not discriminate between products from domestic
companies and foreign companies.
The Government of Kenya gives priority to retaining investments and keeps continuous
negotiation with the local and foreign investor. All bills in Kenya must go through a stage of
public participation before being signed into law (Kenyalaw.org, 2018). In this platform,
investors – both local and foreign – have an opportunity to give feedback on the practicability of
the bill. According to the new constitution, a private sector representative can now sit as a
directorate member on government parastatals. From 2013, when Kenyatta was elected
president, Kenya Private Sector Alliance (KEPSA), the top private sector representative
organisation in Kenya, has had negotiation discussions semi-annually with President Uhuru
Kenyatta with his ministers. In the process of drafting the budget, KEPSA always presents
recommendations to the finance minister about investor’s desires.
The Government of Kenya does not have policies to spearhead investments to all parts of
the country. Consequently, it incentivises investments in areas which create foreign currency and
promote employment. For instance, Kenya has put commendable progress in ensuring that its
tourism sector is growing healthy. The sector is a key factor in correcting Kenya’s balance of
payment deficit. According to Tourism and Wildlife Cabinet Secretary Najib Balala, Kenya’s
tourism industry generated KES 120 million in 2017(Kamau, 2018). That was a 20% growth
from KES 100 billion that was generated in 2016.
Taxation
Special Economic Zones (SEZ) and Export Processing Zones (EPZ) in Kenya are
designed to incentivise firms operating within the boundaries of the law. Below are the taxation
rewards enjoyed by firms doing business in EPZs:
- Corporate tax and withholding tax holiday for ten years; 25 percent tax thereafter, instead
of 30 or 37.5% according to residency of the company

Foreign Direct Investment in Kenya 5
- 100% capital allowance on new and initial investment, carried forward for twenty years
- Exempted from input value added tax, and
- Exempted from stamp duty
Close to 50% of EPZ in Kenya are owned by foreigners completely (Epzakenya.com, 2018). The
other 50% is owned by local investors and joint ventures with foreigners. EPZ employ more than
55,000 people in Kenya, according to Epzakenya.com. There’s minimal cost to the government
in terms of tax lost because of the number of people employed in EPZ; where foreign investors
have dominated.
Conclusion
From the findings of this paper, elections in Kenya, policies on FDI and taxation are key
aspects of foreign investor confidence. Every time there’s an election in Kenya, investors will
reduce their volume of investment due to uncertainties, and past poor performance of the
economy during electioneering periods. The Government of Kenya also aligns investor
expectations with its objective of raising revenue for a win-win situation when it comes to
creating policies which affect FDI. On the subject of legal systems in terms of taxation, the
Government of Kenya has incentivised EPZ to attract and retain foreign investments; which has
proved to be a success. Kenya has put in place competitive measures to attract FDI, making her
very suitable and attractive to foreign investors.

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References
Ceicdata.com. (2018). Kenya Foreign Direct Investment (FDI) | Indicators & Data. Retrieved
from https://www.ceicdata.com/en/indicator/kenya/foreign-direct-investment.
Cia.gov. (2018). The World Factbook – Central Intelligence Agency. [online] Available at:
https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html
Daily Nation. (2018). KQ direct flights to US elicit cheers. (2018). Retrieved from
https://www.nation.co.ke/news/Kenyans-Praise--Kenya-Airways-US-Direct-Flights/
1056-4259408-y792rwz/index.html.
Epzakenya.com, S. (2018). Incentives. Retrieved from
http://www.epzakenya.com/index.php/investment-information/incentives.html.
Hanson, S. (2008). Understanding Kenya’s Politics. Retrieved from
https://www.cfr.org/backgrounder/understanding-kenyas-politics.
Kamau, M. (2018). Tourism industry earnings grow to Sh120 billion in 2017. Retrieved from
https://www.standardmedia.co.ke/business/article/2001269014/tourism-earnings-in-2017-
fall-short-of-expectations.
Kenya. (2017). Retrieved from https://www.state.gov/e/eb/rls/othr/ics/2017/af/269745.htm.
Kenyalaw.org. (2018). Kenya Law: The Constitution of Kenya. Retrieved from
http://kenyalaw.org/kl/index.php?id=398.
Kenyans.co.ke. (2018). Sh50 Billion Lost Minutes After Supreme Court Ruling on NASA
Petition. Retrieved from https://www.kenyans.co.ke/news/22291-kenyan-stock-market-
crashes-after-supreme-court-nullifies-presidential-election.
Veseth, M., & Balaam, D. (2018). Political economy. Retrieved from
https://www.britannica.com/topic/political-economy.