Impact of export processing zones foreign direct investments on economic growth in Kenya
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Date
2022-04
Authors
kemboi, Gladys Jelagat
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Export Processing Zones (EPZs) have emerged to be a crucial policy tool among developing countries as a way of capitalizing on the advantages of globalization in the form of trade which follow the inadequacies in import-substitution program. The acceptance of EPZs as a policy tool has been on an enormous rise for a long time even though many EPZs have failed to meet their primary objectives. Nevertheless, numerous EPZs still contribute significantly to the economic growth through exports and foreign direct investment (FDI) as observed in East Asian countries. From literature, many EPZs activities have failed to impact significantly the economic growth despite high investment and tax foregone by governments. In Kenya, only one known study on assessment of whether EPZs help promote economic growth has been undertaken. However, the study was based on limited scope and was carried out when the program was relatively new under implementation. Thus, the general objective of this research was to assess impacts of EPZs foreign direct investments on economic growth in Kenya. The specific objectives were to measure effects of EPZs foreign direct investments (FDI) on economic growth in Kenya and determine the factors that attracts EPZs foreign direct investment. The study used quarterly secondary data spanning 1993 to 2019. The data was sourced from KEPZA, KNBS, CBK and UNCTAD websites. The autoregressive distributed lag (ARDL) model was employed to achieve the first research objective and to determine the strength of the long run relationship among the variables of interests. The short run dynamics were analyzed using the error correction model (ECM)sincethevariablesinthestudywerecointegrated.TheresultsshowthatFDIwithinEPZs in Kenya have a significant negative association with economic growth. This is because of high turnoverofinvestorwithinthezonesafterexpiryoftaxholidaysandincentivesaccordedtothem. Thus, depriving government its resources that could have otherwise been invested in other productive sectors. On the other hand, the second objective of the study was achieved using the ordinary least squares (OLS) estimation. The OLS results found that inflation coefficient has a negative statistically significant relationship with EPZs foreign direct investment. Gross Domestic Product and real exchange rate coefficients had a positive association with EPZs foreign direct investment. External debt was found to be insignificant in determining the FDI within EPZs in Kenya. From results of data analysis, this study found that EPZs foreign direct investments have a significant negative impact on economic growth which is attributed to generous incentives and tax holiday accorded to the zones which in turn generally benefits the investors and not the host country. EPZs output have a significant positive impact on economic growth in the long run in Kenya. While low inflation, depreciation in exchange rate, low economic growth and high GDP significantly play a positive role in attracting FDI within EPZs. Thus, it can be concluded that despite generous incentives accorded to EPZs in Kenya, FDI within the zones do not translate to economic growth in the long run. This can be attribute to high turnover of investors within the zones after expiry of tax holidays and incentives accorded to them, high rate of inflation, appreciation of exchange rate, low production capacity as well as growth in GDP in Kenya. From the findings, the study recommends that the Kenya government should regulate the incentives and tax holidays given to EPZs such that no investor should withdraw at the expiry of tax holidays. This will reduce high turnover of investors at expiry of tax holidays and retain revenue forgone within the economy. Efforts should also be made to allow local firms into the zones since they invariably retain all their profits in the Kenya economy rather than just benefitting foreign investors. This is because over-reliance on foreign investors will not maximize the full benefits from the operation of EPZs.
Description
A research thesis submitted to the department of econometrics and statistics in the school of business, economics and tourism in partial fulfilment of the requirements for the award of master of economics (econometrics) of Kenyatta University
Keywords
export processing zones, foreign direct investments, economic growth, Kenya