Devolution and its Effects on Foreign Direct Investment in Kenya

Abstract

Over time globalization has created investment opportunities for enterprise worldwide and as a result today foreign direct investment is regarded as the major source of foreign capital for developing countries. There are numerous benefits of foreign direct investment for emerging economies which include technology spillovers, enables human capital formation, improvement of international trade integration, helps create a more competitive business environment and improves enterprise development. All of these result in higher economic growth, which is a crucial tool for alleviating poverty in developing countries. Following the passing of the new constitution in 2010 Kenya adopted a new system of governance that devolves major responsibilities to the counties aiming at better management and control of the countries resources. The main objective of the study was to investigate the effects of devolution on Foreign Direct Investment in Kenya. The specific objective of this study were to: find out the effect of decentralization of resources on FDI; to establish the effect of decentralization of authority and responsibility; to determine the effect of decentralizing legislative powers on FDI, to assess the effect of decentralized institutional reforms on FDI; to determine the effect of having many autonomous financial units in the country and to evaluate the effects of FDI on the economy. Descriptive survey study design was used to conduct this study. The study targeted Kenya Investment Authority Officials, Investors, Foreign Embassy Officials, and County Public Service Board Officials in Nairobi county Kenya. Purposive sampling technique was used in respondent selected. The total sample size was 42 respondents. The data was collected using questionnaires with both open and closed ended questions. The collected data was analyzed to give percentages and frequencies as well as inferential statistics. The Statistical Package for Social Sciences (SPSS) software version 21 was used in the analysis. The analyzed data was presented using tables generated through SPSS and figures generated through Microsoft excel 2010. Analyzed data was thematically arranged based on the research objectives. All ethical and logical considerations pertaining to research were observed throughout the study. The study found out that decentralization of resources contributed highly to foreign direct investments. Majority of the respondents indicated that decentralization of legislative powers affected foreign direct investment in the Country; the power to raise revenue in the Counties also enhanced developments; hence increasing FDI. The study concludes that there is a positive and significant relationship between decentralization of resources and FDI in Counties in Kenya. The study also concludes that decentralization of legislative powers significantly enhances FDI in Counties. Through devolution, the County Assembly members have legislative powers, through which they make regulations aimed at improving investments in their region. Decentralization of autonomous financial units have enhanced independent revenue collection; and enhanced the ability by county governments to allocate funds for infrastructural development; and also enhanced their own marketing activities, which have attracted more foreign investments. The study recommends that the national government should channel more resources to the Counties so as to enhance developments; for instance, of improving the quality of infrastructure, especially in marginalized regions of the country, so as to attract FDI. The County governments should develop foreign investment policies, which will act as a supplemental part of the domestic development policy. The policies should guide the Counties on how to engage with foreign investors.