The Asian economic crisis in the 1990s that saw the hitherto flourishing economies of the “Tigers” crash, and the 'domino effect' on other economies was attributed partly to the quality of economic data used for making business decisions. It was realized that economic data compiled by different countries was not comparable in terms of definitions and compilation methodology. To address this problem, various initiatives aimed at improving the quality of data, were launched and spearheaded by major world bodies. They included, among others, the International Monetary Fund (IMF), the World Bank (WB) and the United Nations Conference on Trade and Development (UNCTAD). The main focus of these initiatives is harmonization of definitions and compilation methods, in line with international standards so that all data covering all economic sectors are comparable. On the regional front, the regional blocs including the East African Community (EAC), Macro-Economic and Financial Management Institute of Eastern and Southern Africa (MEFMI), the Common Market for Eastern and Southern Africa (COMESA) and the African Union (AU) also have programs aimed at harmonizing economic data compilation methods and definitions.
In Kenya, economic analysts have held the view that emerging markets and liberalization of economies prompted large inflows of private capital into the country. These flows have macroeconomic effects that demand urgent policy responses. With limited data on the level and composition of these flows, policy makers are constrained in making timely and appropriate policy responses. This data gap motivated the Kenya National Bureau of Statistics (KNBS) in partnership with other key stakeholders to carry out the survey on foreign investment in Kenya. A sample of 900 enterprises was taken out of an estimated population of 3,500 enterprises with foreign transactions/positions.
The specific objectives of the survey was to collect data necessary to improve the quality of Balance of Payments (BOP) statistics and initiate compilation of International Investment Position (IIP) statistics; collect data necessary for assessment of investors' perceptions of the investment climate in the country, with a view to identifying ways to improve it, and comply with international standards of compilation and reporting of BOP and IIP statistics.
The main analytical tool for Foreign Investment Survey was a questionnaire administered to companies with foreign assets and liabilities. Additional information was sought from banks and other financial institutions to collect data on foreign exchange transactions through the financial institutions. The survey was designed to capture data on foreign capital for the reference period 2007 and 2008 as well as investor perceptions on the business environment in Kenya.
The overall survey implementation was overseen by a National Coordinator assisted by three Regional Coordinators. The data collection exercise was done through face to face interviews and follow ups. The research assistants explained the various aspects of the questionnaire to the person responsible for finance in the target enterprises. In some instances, the research assistants were required to extract information from the enterprises' books of accounts and/or financial statements.
An intensive training of the BOP staff on data editing was conducted which involved reconciliation of reported flows and positions data, as well as extraction of IIP data from submitted balance sheets. BOP data extracted from income and cash flow statements from the surveyed enterprises was used in filling the gaps and validating submitted data.
The major findings from the survey are as follows:
Kenya's stock of Foreign Liabilities increased by 26.3 per cent from KSh 340,128 million in 2007 to KSh 429,585 million in 2008 with FDI accounting for 63.8 per cent of the total liabilities at KSh 274,004 million. The stock of external liabilities analysed by the regional economic blocs reveal that Europe accounted for 69.7 per cent of the total liabilities with the European Union accounting for 67.1 per cent. Asia, America and Africa accounted for 18.5 per cent, 6.2 per cent and 5.6 per cent, respectively. The stock of Foreign Liabilities from India and China more than doubled over the period. In 2008, Manufacturing followed by Information and Communication and Financial and Insurance Sectors had the highest stock of FDI liabilities.
The country's foreign capital inflows in 2008 totaled KSh 92,253 million compared to KSh 110,480 million recorded in 2007. The 16.5 per cent decline in the inflows may be partly attributable to post election violence and the negative effects of global economic and financial crisis in 2008. The inflows were mainly in the form of debt instruments and Foreign Direct Investment which accounted for 51.4 per cent and 26.4 per cent of the total inflows respectively. The findings indicate that United Kingdom, France, Netherlands, Japan and India are the main sources of foreign private capital inflows. Manufacturing, Information and Communication, and Financial and Insurance sectors were the leading beneficiaries of FDI inflows.
Total outflows of foreign liabilities increased by 26.8 per cent from KSh 27,992 million in 2007 to KSh 38,799 million, in 2008, the highest being trade credits. Outflows of Other Investment and Direct Investment accounted for 70.8 per cent and 29.0 per cent respectively, in 2008. The major destination of FDI outflows in 2008 were US, United Kingdom, France and Germany jointly accounting for 72.1 per cent of the total outflows.
The stock of external assets stood at KSh 41,935 million in 2008 compared to KSh 64,555 in 2007 a decline of 35.0 per cent. The reduction in assets was as a result of reductions in loan advances position abroad. The major investment destinations for Kenyan enterprises were Uganda, Tanzania and United Kingdom.
The tax regime, particularly tax administration; insecurity and corruption; cost and efficiency of road and inland transport; cost and supply of electricity had a significant negative effect on business operations. The results of the survey also revealed that interest rates, inflation rate and exchange rate were perceived to have a net negative effect on investment decisions. However, access to international markets; regional finance and internal finance was perceived to have a net positive effect. This suggests that apart from the domestic market, investors still place great importance on international markets. The survey findings indicate that both telecommunication and internet use had a significant impact on investment decisions.
Enterprises reported that they were likely to increase the range of products and services, staff training, recruitment of local staff, investment in technology, export of the products and improvement of existing facilities in the medium term. Those who planned to expand investment in technology comprised 78.1 per cent of the respondents while those intending to improve existing facilities and staff training were 72.9 per cent and 72.8 per cent of the enterprises, respectively. More than half of the enterprises plan to expand their businesses in the next three years.
Conclusion and Recommendations
It is evident from available data that, as a result of increased globalization and liberalization, the size and role of Foreign Private Capital with regard to investment and growth of the economy has gained more significance, and is expected to continue playing an important role in the economy. There is need to consistently carry out similar surveys in future to strengthen the information base on foreign investment while improving on data quality for economic management and planning purposes to achieve Vision 2030 and the Millennium Development Goals (MGDs).
From investors' perspective, corruption led to delays in product registration, port clearance and overall increase in cost of doing business. The survey findings with regard to insecurity and crime suggest that policy measures should be targeted at creating a safe and secure environment for business and investment.
The survey revealed that investors perceived the interest rates to be high and thus the need for the monetary and fiscal policies to address the issues of cost of credit to investors.
The significance of technology on businesses as evidenced by the highest number of investors planning to expand investments in technology is consistent with the historical relationship between technology and business operations.