Harnessing Foreign Direct Investment Is Key for Kenya’s Prosperity
FDI into Kenya
When examining specific economies in Africa, Kenya stands out for being the largest in East Africa and also within the top ten largest on the continent. Moreover, several foreign direct investment (FDI) attractiveness indices rank Kenya highly.
Table 1: Kenya’s FDI Attractiveness Ranking
The Africa Investment Index, published by Quantum Global Research Lab, examines six clusters of factors that cumulatively determine a county’s attractiveness to foreign investors. The index considers a country’s growth, liquidity, risk, business environment, demographics, and social capital.
Ernst Young’s Africa Attractiveness uses a similar top-down methodology utilizing secondary data. It comprises six pillars that measure a country’s economic resilience, market size, business enablement, investment in infrastructure and logistics, economic diversification, and governance and human development.
While the methodology of FDI attractiveness indices looks intuitive and sound, the indices are typically not good predictors of actual FDI inflows, as exemplified in Kenya’s example (Figure 1). In other words, a high FDI attractiveness rating does not correlate with actual FDI inflows. Although this appears counterintuitive to the whole concept of measuring FDI attractiveness, the finding seems to apply to Kenya and other markets. The lack of any correlation persists even when performing a time-series analysis.
Kenya’s relative inability to attract FDI is further demonstrated by Table 1 that compares FDI as a percentage to gross domestic product (GDP) for Africa’s top economies. Over a ten-year period, Kenya has attracted FDI equivalent to just over one percent of its GDP which places it well below its peer group.
Table 1: FDI into select African economies (Net inflows as a % of GDP, ranked by median)
This finding is confirmed even when using data provided by the Kenya National Bureau of Statistics (KNBS) (Table 2). Although the KNBS calculates much higher levels of FDI inflows on an absolute basis, the net inflows relative to the size of Kenya’s economy are similarly low as shown previously. Moreover, KNBS figures show FDI outflows from Kenya steadily increasing since 2007 and reaching Sh. 103 billion in 2015. Also, The Africa Investment Report 2016 published by fDi Intelligence ranked Kenya as a top investor in Africa by number of investment projects.
Table 2: FDI into Kenya (Net inflows as a % of GDP)
Kenya’s underperformance vis-à-vis other top African economies is somewhat startling, given that it has created a supportive domestic policy environment and requires huge amounts of capital for its development agenda, not least for President Kenyatta’s ‘Big Four’ agenda.
It is therefore not surprising that the Kenyan and international media have reported, on balance, more negatively about FDI into Kenya. While a Financial Times article from January 2018 admits that Kenya’s two elections last year were bad for business, the headline proclaims “Kenyan setbacks fail to dent investor optimism.”In general, however, most articles paint a gloomier picture noting that the number of foreign businesses registered in the country has fallen sharply and that FDI inflows to Kenya have reached a 6-year low.
FDI into Africa
In March 2018, the leaders of 44 African countries signed an agreement to create The African Continental Free Trade Area that encompasses 1.2 billion people. The agreement aims to boost intra-African trade within the single market that has an accumulated GDP of more than $3.4 trillion.
Despite this positive development and a generally positive outlook for Africa’s economic growth, the continent is routinely ranked as the least attractive region for FDI. The 2018 A.T. Kearney Foreign Direct Investment Index asked more than 500 senior executives of the world’s leading corporations about their preferred destinations for FDI and not a single African country features in the current top 25 list. Additionally, the executives surveyed by A.T. Kearney continued their pessimistic outlook of Sub-Saharan Africa from previous years.
FDI inflows into Africa mirror the pessimism noted above and they have not exceeded the $100 billion mark in recent years, according to data from the United Nations Conference on Trade and Development (Figure 2). Even the existence of The Africa Investment Promotion Agency Network(AfrIPANet), drawn from 38 African countries and initiated by the United Nations Industrial Development Organization in 2001, has apparently been unable to champion Africa as a desirable investment destination.
Policy Recommendations for Kenya
Kenya has recorded impressive economic growth rates in the last few years though it’s performance was overshadowed last year by the protracted election season and adverse weather. The World Bank predicts the possibility of an economic recovery in 2018 with GDP growing by 5.5%, but Kenya is still plagued by widespread poverty and high unemployment rates, particularly among its youth population. Hence it should consider several recommendations to assure that FDI can positively contribute towards Kenya’s prosperity:
1. Strengthen the inward FDI promotion program: Kenya needs a more pro-active communications program to market itself as an attractive investment destination. Many larger African economies such as Egypt, South Africa and Morocco attract a much higher share of FDI. Kenya needs to compete more aggressively with the aforementioned countries as well as with its neighbors, Ethiopia and Tanzania. It must realize that even smaller countries such as Rwanda are effectively competing for the attention of foreign investors. At the Annual Investment Meeting held in Dubai this year, Rwanda’s investment promotion agency won second prize in the East African region for attracting transformational projects.
2. Build out high performing sectors: According to a recent article by the Business Daily on March 5, The World Bank’s private sector lending arm, the International Finance Corporation (IFC), invested Sh. 17.7 billion in two Kenyan companies earlier this year. Although the companies are not named, the article mentions other IFC investments into Kenyan firms such as Co-op Bank, Britam, KCB, Goodlife Pharmacy, KTDA and an unnamed hospital in Nairobi. The IFC states that the cumulative value of its commitment to Kenya totals Sh. 194.6 billion ($1.9 billion). In comparison, the mobile tech company Africa’s Talking recently received a Sh. 260 million investment from Orange Digital Ventures. Kenya’s infrastructure and service sectors undoubtedly need upgrading, and the ‘Big Four’ agenda will contribute towards that goal, but the traditional path of industrialization will not produce sustainable economic growth. Instead, Kenya’s economy needs to focus on sectors that tie into the global value chain, generate jobs and promote structural transformation. These include sectors such as information and communications technology, agro-industry, and tradeable services, to name a few.
3. Identify new funding sources:Kenya has seen inward FDI from its traditional top performers, the UK and the USA, eclipsed by China recently. While China pledged support for President Kenyatta’s ‘Big Four’ agenda and has implemented numerous development projects across Kenya, Chinese investment is not without controversy. Nevertheless, the scale of FDI from China can be increased as long as funds flow into growth inducing sectors such as manufacturing or agriculture. Kenya might also consider investors from the Middle East who have historical ties to Eastern Africa.
