Investment as the Main Driver of Kenyan Economic Growth

THE EXTENT TO WHICH INVESTMENT IS THE MAIN DRIVER OF ECONOMIC GROWTH IN KENYA
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The Extent to Which Investment is The Main Driver of Economic Growth in Kenya
As a developing nation and a former British colony, coupled with its solid international ties both in the Western and Eastern spheres, Kenya's economic growth has benefited extensively from investment, be it local or foreign. The country is ranked 56th in the World Bank ease of making business rating, an improvement from 2019's 61 ratings (MEAC, 2020). With an estimated GDP of $95 billion, the country attained the lower-middle-income status and has successfully established a dynamic and diverse economy (DOS, 2021). Prior to the Covid-19 pandemic, the country had an annual average growth rate of 5.9%, making it one of the fastest-growing economies in Africa, with a Gross Fixed Capital Formation (GFCF) of $19.538 billion. Based on this figure in comparison with the GDP, investment is the country's main economic driver because it expands the means of production and improves job opportunities.
Theory – The Electric Paradigm of Dunning
On the other hand, economic growth increases the number of goods and services produced per head of the population within a given time frame. Thus, investment is when an entity in one country has or controls business in the same country or another country (Sloman & Garratt, 2016, p. 212). While many researchers have tried to explain the investment phenomenon, especially from a foreign point of view, there is no general theory that is widely accepted because of the complex and, sometimes, the conflicting relationship between economic growth and investment. In the case of Kenya, however, according to the US Department of State (DOS, 2020), the country has a favorable investment climate that has made it attractive to international & local firms seeking a niche for regional or pan-African business operations. Further, as highlighted by the Central Bank of Kenya (CBK, 2020), multinational private organizations form the backbone of investment in the country. Thus, with MNEs largely dominating Kenya’s foreign status, The Electric Paradigm Theory (see figure 1) can best explain the preference of Kenya as an investment destination because of the country’s ability to attract investment.


Figure  SEQ Figure \* ARABIC 1: The Electric Paradigm - OLI Framework Courtesy of (Simplify, 2019)
The Electric Paradigm Theory (EPT) was developed by Professor Dunning and comprises the three different theories of investment (O-L-I): ownership advantage, location, and internationalization (Cantwell, 2015, p. 12). According to DOS (2020), investors seeking to establish operations in Kenya generally receive the same treatment as local investors, with multinational companies making up the country's industrial sector. Under the first dimension of EPT, the ownership advantage, most international organizations have the characteristics that triumph over operating costs in the Kenyan market. Kenya is also an important transportation hub because of its coastal line along the Indian Ocean and its international airports. Through its Mombasa and Lamu ports, the country connects to major transportation hubs like China and India, two of the most populated nations (Wilson & Baack, 2012, p. 104). As a result, it is an ideal location for most organizations, particularly those seeking pan-African operations (Gachunga, 2019). This aspect satisfies the second dimension of ETP; location.
The third dimension of ETP provides a framework for assessing how an organization can exploit its powers from the sales of services and goods. Electric paradigm OLI indicates that OLI parameters are different across companies and depend on the context of or reflect a host nation's economic, social, and political characteristics. In the case of Kenya, Wilson and Baack (2012, p. 98) argued that Kenya's democratic political landscape, the relatively low rates of internal conflict, improved investment framework under the 2010 Constitution, and a social landscape that is friendly to foreign entities makes it an ideal choice of destination for MNEs.
Kenya represents ample opportunities for many organizations, and as captured under the Electric Paradigm Theory, investment is relatively (Wilson & Baack, 2012). The consistency and improvement of these conditions have benefited Kenya from investment since independence. Thus, investment influences both actual economic growth and potential economic growth.
History of CFCF as % of GDP in Kenya
Several studies have attempted to explain whether there is a relationship between investment and economic growth based on GFCF as a % of the GDP. Researchers have established a positive relationship between the two domains in different countries, including Bangladesh (Sarker & Khan, 2020), OECD countries (Raza et al., 2019), and African countries (Younsi et al., 2021, p. 59). In the case of Kenya, Abala (2014, p. 81) and Gachunga (2019) have arrived at the same conclusion: that the country's growth in economy and GDP has benefited significantly from investment. Figure 2 represents the different scenarios experienced in Kenya between 1992 and 2015. Between 1992 and 2000, the country experienced low growth against low investment. Between 2008 and 2012, when the 2010 constitution enhanced the business environment, a high investment resulted in high growth. The decrease in investment from 2013 to 2015, due to political tensions, resulted in low growth in this period. These investments have primarily focused on technological start-ups, financial institutions, innovation, research, & development sectors.
Kenya’s average economic growth of 5.9% annually has seen the country’s GDP growth from $50.41 billion in 2012 to $98.84 billion in 2020 despite the impact of the Covid-19 pandemic. Similarly, the GFCF has increased in Kenya, albeit with different peaks. Between 2010 and 2015, Kenya recorded the highest GFCF as a percentage of the GDP (4.0%) primarily because of the new 2010 Constitutions that allowed investors more freedom. The opposite was experienced between 2007 and 2010, when the GDP struggled while GFCF declined drastically (see figure 1 in Index). According to Gachunga (2019), this resulted from the 2007-8 post-election violence. This was also demonstrated in the 2012-2013 electioneering period in which the political climate threatened business activities.
Thus, GFCF has generally increased in the country partly because of the positive economic impact across history and partly because of the country’s increased internal and foreign relations. Researchers like Meah et al. (2016, p. 306) have demonstrated that investments strengthen institutions and compel a local business to improve quality, beneficial to Kenya's population. Further investment into Kenya should be encouraged because it influences increased employment, inclusivity policies, and environmental considerations. In essence, investment can be the primary driver of economic growth without impeding factors.


Figure  SEQ Figure \* ARABIC 2: Investment Share of the GDP (World_Bank_Group, 2016)
Factors that Impede Investment as the Main Driver of Economic Growth in Kenya
Aside from political stability, some of these factors include corruption and high corporate taxes recently enforced by the current Jubilee administration. These factors form part of the third dimension of ETP because their prevalence prevents the growth of GFCF, causes current organizations to relocate, and therefore, hinders economic growth, with or without investments as a driver of economic growth. Based on these factors, investment cannot be a key driver of growth & development in the country. However, despite these factors, it is vital to reckon that GFCF has never exceeded 4% of Kenya’s GDP.
Corruption
Kenya ranks worse than average in all dimensions of corruption where there is interaction involving business and public officials. According to the 2021 Corruption Perception Index by Transparency International, Kenya ranks 128 out of 180 among the least the most corrupt nations. In a recent speech, the current Kenyan President lamented that the government loses up to $17.2 million daily through corruption (Mathenge, 2021). According to Osweta (2021), the value of graft cases involving government officials registered in court as of 2019 was double the president's budget ($628 million) on the Big Four ag...