Effect of tax incentives on the performance of manufacturing firms in Nairobi County, Kenya

Abstract

This study investigated the effect of tax incentives on the performance of manufacturing firms in Nairobi County, Kenya, addressing the critical challenge of declining manufacturing sector contribution to GDP, which has stagnated at 8% over the past six years despite various tax incentive implementations. The study examined three specific objectives: to determine the effect of investment allowances, excise duty incentives, and customs incentives on manufacturing firms' performance. Anchored in Optimal Tax Theory, Political System Theory, and Resource-Based View Theory, the study employed an explanatory research design using both primary and secondary data. From a target population of 150 large manufacturing firms in Nairobi County, a sample size of 109 firms was selected using Yamane's formula, with data collected through structured questionnaires administered to general managers. The study utilized descriptive statistics and multiple regression analysis to test hypotheses, with results indicating that investment allowances (β = 0.280, p < 0.05), excise duty incentives (β = 0.314, p < 0.05), and customs incentives (β = 0.101, p < 0.05) all have positive and significant relationships with manufacturing firms' performance. This study contributes to existing literature by establishing empirical evidence of the relationship between specific tax incentives and manufacturing firm performance in Kenya, leading to recommendations for policymakers to enhance and streamline these incentives while ensuring their accessibility. Future research should explore the long-term sustainability of these tax incentives and their comparative effectiveness across different industrial sectors.