Impact of Tax Incentives on Foreign Direct Investment Inflow in Kenya

Abstract

Foreign Direct Investment inflow plays a crucial role in fostering and maintaining economic growth in both the recipient country and the investor or the country investing. The significance of tax incentives in attracting Foreign Direct Investment (FDI) has been hotly debated, especially in least-developed and developing countries looking to boost economic growth. Tax incentives, such as corporate tax expenditures, tax holidays, and exemptions, are frequently utilised to boost a country's investment climate. However, the effectiveness of these incentives varies according to factors including political stability, regulatory measures, and overall economic conditions. The study's main objective was to assess the impact of tax incentives on foreign direct investment inflow in Kenya from 2002-2021. The Q-Theory of Investment and tax competition theory guided the study. Descriptive, correlation, and causal research designs were used for the study employing time series data. The data for the trend in FDI inflow was derived from World Investment Reports, World Bank, and IMF. The results showed that tax incentives (t=4.811738, p<0.05) and government recurrent expenditure (t=2.402518, p<0.05) had a positive significant effect on FDI Inflow while government external debt (t=-3154145, p<0.05) had a negative effect on FDI inflow in Kenya. To enhance the inflow of Foreign Direct Investment (FDI), the research suggested that policymakers should strategically optimize tax incentives, including Corporate Income Tax (CIT).