Determinant of Foreign Direct Investment Spillovers; Kenya’s Domestic Firms Case

Abstract

Developing countries and emerging economies increasingly see foreign direct investment (FDI) as a catalyst to the development of domestic firms. This development can be through spillover effects whose presence can affect development of business enterprises in the host economy. FDI in developing countries is perceived not only as a source of capital inflow, but also as a vehicle for acquiring modern technology and the necessary managerial know how that these countries require for development. These are some of the reasons why most of the developing countries have continued to pursue domestic policies that encourage more FDI inflows. Many countries have gone further than simply removing barriers to inward foreign investment and have taken a more proactive approach towards attracting FDI through the use of fiscal and financial incentives. It appears therefore, that although the aggressiveness and effectiveness of the government’s policies in prompting FDI growth not been refuted, the effects of FDI on domestic firms and factors that determine spillovers are far from clear. Therefore, this study investigates the main firms’ characteristics that determine FDI spillovers. Firm level primary and secondary panel data were collected for the period 2012 to 2015. A structured questionnaire was administered to both domestic and foreign firms from different sectors. FGLS techniques was used and it was evident that firms that had skilled workers, high technology and research and development expenditure were able to attract horizontal and vertical spillovers.