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.