Effect of tax incentives on foreign direct Investments inflows in Kenya

Abstract

The study sought to determine the effect of tax incentives on foreign direct investments inflows in Kenya. The objectives were: to determine the effect of farm work deductions, Industrial building allowances, investment deductions and wear and tear allowances on foreign direct investment inflows in Kenya. The study was conducted at the macro level and therefore was looking at tax incentives and foreign direct investment inflows for the country annually. Secondary data was collected for a period of 10 years (2008 to 2017) on an annual basis. The study employed an explanatory research design. The researcher also conducted inferential statistics specifically correlation and regression analysis. A multiple linear regression model was used to analyze the relationship between tax incentives and foreign direct investment inflows. Statistical package for social sciences version 22 was used for data analysis purposes. F test and t test were applied to test the significance of the overall model and individual parameters respectively. Diagnostic tests were carried out on the collected data to ensure it is reliable and stable for the analyses. From the results, the R-square value was 0.633 which can be translated to mean that 63.3% of the variations in foreign direct investment inflows in Kenya are attributable to the four selected independent variables and the 36.7 percent remainder are attributable to other factors beyond the scope of this research. The study also revealed a strong connection of predictor variables and foreign direct investment inflows (R=0.796). Analysis of variance (ANOVA) results at 5% significance level show an F statistic of 2.160 which was less than the critical value and hence the model was found not statistically significant. Additionally, the results showed that, industrial building allowances and investment deductions are statistically significant factors affecting foreign direct investment inflows while farm works deductions and wear and tear allowances do not substantially determine foreign direct investment inflows in Kenya. The recommendation made by the study was that more focus should be placed by policy makers to the current levels of industrial building allowances and investment deductions since they have a significant influence on foreign direct investments inflows in the Kenya. The study recommends the need for further studies to focus on the other variables that determine foreign direct investment inflows in Kenya.