The impact of institutional factors and liberalization policies on private investment in Kenya (1965-2007)

Abstract

Private investment is an important strategy of achieving economic growth, through its ability to stimulate economic activity by expanding the capacity for production of goods and services, and creation of employment opportunities. To increase private investment, bi-lateral organizations have emphasized the need to liberate the economy in most developing countries. However, even with liberalization policies, the trend in private investment in these developing Countries, Kenya included has not been very encouraging as had been envisaged. Given the poor performance of private investment in Kenya, it is questionable whether liberalization policies advocated by the IMF have had any significant effects. It could be the case that proper institutional base was not laid down for the liberalization policies to have any meaningful results. Using Structural Vector Autoregression (SVAR) and data from 1965 -2007, this study analyzed the extent to which institutional factors impacted on private investment in Kenya and attempts to filter out the relative impact of liberalization measures against institutional factors in increasing private investment flows in Kenya. This study found out that tax administration had a negative impact on private investment and that Investment promotion impacted negatively on private investment in Kenya. The impact of shocks due to tax administration were found to be dominant compared to those of liberalization policies, while the impact of investment promotion shocks was lesser, compared to that of liberalization of the Kenyan Economy. This study concluded that among the institutional factors that were considered for analysis, tax administration was of a greater importance to private investors and should have been put in place and properly enhanced before liberalization of the economy, if the latter was to achieve its objective of enhancing economic growth through increased private investment.