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FLAVIANUS M. MAHITI A Thesis Submitted to Mzumbe university, Dar es Salaam Campus College in Partial Fulfillment of the requirements for award of the Degree of Master of Science in Accounting and Finance. The thesis is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property.
FLAVIANUS M. MAHITI A Thesis Submitted to Mzumbe university, Dar es Salaam Campus College in Partial Fulfillment of the requirements for award of the Degree of Master of Science in Accounting and Finance. The thesis is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property.
FLAVIANUS M. MAHITI A Thesis Submitted to Mzumbe university, Dar es Salaam Campus College in Partial Fulfillment of the requirements for award of the Degree of Master of Science in Accounting and Finance. The thesis is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property.
KENYA DETERMINANTS OF FOREIGN DIRECT INVESTMENTS (FDIs) IN EAST AFRICA COUNTRIES OF TANZANIA AND KENYA
By FLAVIANUS M. MAHITI
A Thesis Submitted to Mzumbe University, Dar es Salaam Campus College in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Science in Accounting and Finance (MSc-A&F) of Mzumbe University.
2012
(c) Copyright by Flavianus M. Mahiti All Right Reserved
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CERTIFICATION
We, the undersigned certify that we have read and hereby recommend for acceptance by the Mzumbe University, a dissertation entitled: Determinants of Foreign Direct Investment in East Africa Countries of Tanzania and Kenya: The case study of Tanzania and Kenya in fulfilment of the requirements for award of the degree of Masters of Science in Accounting and Finance of Mzumbe university.
________________________ Major Supervisor
________________________ Internal Examiner
Accepted for the Board of
.. PRINCIPAL, CAMPUS BOARD ii
DECLARATION AND COPYRIGHT
I, Flavianus M. Mahiti, declare that this thesis is my own original work and that it has not been presented and will not be presented to any other university for similar or any other degree award.
Signature .
Date ....
2012 This dissertation is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property. It may not be produced by any means in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or discourse with an acknowledgement, without the written permission of Mzumbe University, on behalf of the author. iii
ACKNOLEDGEMENT First and foremost, I wish to express my thanks to Dr. Wilhelm Leornard, my research supervisor, for his views and comments throughout the research process. Many thanks go to Tanzania Investment Centre (TIC) for allowing me to conduct this research at their premises. Thanks are extended to their moral support which made this work possible. In a more special way I would like to thank the TIC Executive Director, Mr. E. Ole Naiko for allowing me to conduct this study at TIC. I also feel obliged to thank Mr Njoki Tibenda (Senior Statistician) and Martin Masalu (Research Officer) for providing me with all relevant information required to fulfill the objectives of this research. Thanks are further extended to the management and staff of Tanzania Investment Centre for their moral and material support during the data collection stage. They were very useful and of great assistance as far as the collection of data are concerned. Many thanks should go to Kenyan Embassy for allowing having access to the relevant data and information at their premises. At this juncture I would like to thank the Kenyan Ambassador to Tanzania, Mr. Mtinda Mutiso for allowing the opportunity to collect data at their embassy. At the embassy I also thank Mr. Boniface Makeni, the whole management and staff for providing me with the relevant information required to accomplish the objective of this research. Finally, I extend my thanks to my fellow students from Msc. Accounting and Finance and MBA programme for the ideas we shared during our stay at Mzumbe University Dar es Salaam Campus College.
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DEDICATION
This work is dedicated to my Wife Elizabeth Salvatory M. Momba for her care and material support. It is also dedicated to my lovely daughter Janice Momba and my son Jayden Momba Junior who missed me a lot during my study absence.
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ABSTRACT This study intended to examine the Determinants of Foreign Direct Investments in East Africa countries of Tanzania and Kenya. The research was carried out at Tanzania Investment Centre (TIC) and the Embassy of Kenya. The study was conducted with the following objectives: To assess the determinants for attracting FDI to East Africa, To assess the difficulties of attracting FDI to East Africa, To determine the efforts done by the selected East African governments in attracting FDI in favour of their countries, To determine the contribution of FDI to the selected countries social economic development. Data were collected through Questionnaires, Interviews and Documentary Review. Questionnaires were open-ended questions, which allowed individuals to express their views concerning FDI in Tanzania and Kenya. Interviews were conducted on the basis of predetermined interview guide. Thus both qualitative and quantitative methods were collectively employed in the process of collecting data and information required in this research. After Analysis of the data, tests of questionnaires were carried and presented in tables for easy interpretation. From findings, a researcher has concluded that Tanzania Investment Centre and Kenya Investment Authority have a lot to do in order to attract more Foreign Direct Investment in Tanzania and Kenya respectively. This study recommends that it is necessary to attract high quality investment. Tanzania and Kenya have been trying to attract FDI through the provision of some incentives to encourage FDI in inflow; however it is doubtful to ascertain the extent to which such initiatives will manage to attract the quality of investment. Also the study notes that such infrastructure as Roads, Airports and Railways need significant improvement for attracting more Foreign Direct Investments in East African Region. Indeed it is important to review incentives granted to Investors from time to time in order to make sure that they serve the intended objectives. Finally to ensure that new technologies are transferred to Tanzania and Kenya so that the two countries become competitive in terms of technologies. vi
TABLE OF CONTENTS
Pages CERTIFICATION ...................................................................................................... i DECLARATION AND COPYRIGHT ..................................................................... ii ACKNOLEDGEMENT ............................................................................................ iii DEDICATION ........................................................................................................... iv ABSTRACT ................................................................................................................ v TABLE OF CONTENTS .......................................................................................... vi LIST OF TABLES .................................................................................................. viii LIST OF FIGURES .................................................................................................. ix
CHAPTER ONE ......................................................................................................... 1 INTRODUCTION AND BACKGROUND INFORMATION ............................... 1 1.1 Overview of the Study ................................................................................. 1 1.2 Background of the Study ............................................................................. 1 1.3 Statement of the Problem ............................................................................. 4 1.4 Objectives of the Study ................................................................................ 5 1.4.1 Main Objective ............................................................................................ 5 1.4.2 Specific Objectives ...................................................................................... 5 1.5 Research Question ....................................................................................... 6 1.5.1 General Research Question .......................................................................... 6 1.5.2 Specific Research Questions ........................................................................ 6 1.6 Limitations of the Study .............................................................................. 6 1.7 Delimitation of Study................................................................................... 7 1.8 Significance of the Study ............................................................................. 7
CHAPTER TWO ........................................................................................................ 8 LITERATURE REVIEW .......................................................................................... 8 2.1 Introduction .................................................................................................. 8 2.2 Theoretical Literature Review ..................................................................... 8 2.2.1 The historical Background of Foreign Direct Investment (FDI) ................. 8 2.2.2 Definition of FDI ......................................................................................... 9 2.3 Foreign Direct Investment (FDI) in Tanzania ............................................. 9 2.3.1 FDI Inflows in Tanzania ............................................................................ 11 2.3.3 Determinants of Foreign Direct Investment (FDI). ................................... 12 2.4 Foreign Direct Investment in Kenya .......................................................... 15 2.4.1 Determinants of Foreign Direct Investment Inflows in Kenya.................. 19 2.5 Empirical Literature of the Past Studies .................................................... 20 2.5.1 Review of the Studies from Africa ............................................................ 20 2.6 Theoretical perspective underpinning the study ........................................ 22
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CHAPTER THREE ................................................................................................. 23 RESEARCH METHODOLOGY ............................................................................ 23 3.1 Introduction ................................................................................................ 23 3.2 The Research Design ................................................................................. 23 3.3 Study Area ................................................................................................. 23 3.4 Types of Data ............................................................................................. 23 3.5 Sampling Procedures ................................................................................. 24 3.6 Research Instruments ................................................................................. 26 3.7 Source of Data ........................................................................................... 27 3.8 Method of Data Analysis ........................................................................... 27
CHAPTER FOUR .................................................................................................... 28 PRESENTATION AND DISCUSSION OF FINDINGS ...................................... 28 4.1 Introduction ................................................................................................ 28 4.2 Determinants of Foreign Direct Investment in Tanzania and Kenya ........ 28 4.3 The efforts done by East African governments to attract FDI to East African countries........................................................................................ 37 4.4 The contributions of FDI to East African countries social economic development ............................................................................................... 44 4.4.1 The contributions of FDI to social economic development in Tanzania ... 44 4.4.2 The contributions of FDI to social economic development in Kenya ....... 44
CHAPTER FIVE ...................................................................................................... 46 CONCLUSION AND RECOMMENDATIONS ................................................... 46 5.1 Introduction ................................................................................................ 46 5.2 Conclusion ................................................................................................. 46 5.4 Recommendations ...................................................................................... 47 5.5 Suggestion on the direction for future study .............................................. 49 REFERENCES ......................................................................................................... 50
APPENDICES .......................................................................................................... 54 Appendix I: Questionnaire for Masters Degree Course Research ..................... 54 Appendix II: Interview Questions to Investors/Others........................................ 57 Appendix III: Kenya Sectors Break down of FDI Projects Registered by IPC, 1997-2004 ...................................................................................... 60 Appendix IV: FDI by Sectors in Tanzania, 1999-2008 ........................................ 61
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LIST OF TABLES
Pages Table 3.1: Categories of Respondents ................................................................. 24 Table 3.2: Regional Distribution of FDI Flows (USD Million), 2005-2008 ....... 25 Table 3.3: Regional Distribution of FDI-Registered Projects, 2005-2008 .......... 25 Table 3.4: Categories of Respondents ................................................................. 26 Table 4.1: Determinants of Foreign Direct Investment and frequency of scores 29 Table 4.2: Determinants of Foreign Direct Investment and frequency of scores 30 Table 4.3: Efforts done by Tanzanian government and frequency scores........... 38 Table 4.4: Efforts done by Kenyan government and frequency scores ............... 41
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LIST OF FIGURES
Pages Figure 2.1: FDI Inflows to the East Africa Region ............................................. 17
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CHAPTER ONE
INTRODUCTION AND BACKGROUND INFORMATION
1.1 Overview of the Study The research intended to investigate the determinants of foreign direct investment in the selected East African countries, namely Tanzania and Kenya. The purpose is to have the broad understanding of the determinants of foreign direct investment in the two countries. This chapter provides the background information which highlights historical background of the problem, statement of the problem which opens up the problem under study, main and specific objectives of the study, Research questions, limitations, Delimitation, and finally significance of the study.
1.2 Background of the Study In the early 1960s the two East African countries attained their independences from colonial rules at different levels of economic developments. Where Kenya economically is believed that was well developed compared to Tanzania (by then Tanganyika). This research work intended to investigate the main drivers of Foreign Direct Investments (FDIs) in the two countries. At the moment it is widely acknowledged that FDI has significance contributions that foster the economical development of developing countries (Ngowi, 2000).
Moreover; in the period late 1980s and 1990s there was of great economic change in East Africa due to the adoption of the economic liberalization policies whereby these countries and their government intended to use the private sector as the main engine of economic development. To realize this changed focus of the governments there were a need of capital, new technology and skills needed to be injected to the private sector to enable the sector manage to attract Foreign Direct Investments (FDIs).
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For attracting Foreign Direct Investments inflows in East Africa, East African countries set out Investments Authorities in their countries. For the case of Tanzania in 1990, the government set out an Investment Promotion Centre (IPC) to help attract FDIs in Tanzania. And later after seven years not much of FDIs attraction and private sector development were achieved. The level of annual FDIs value attraction was about USD 148.64 millions. With such minor achievement called for a need to transform IPC into a more aggressive institution on attracting more FDI in Tanzania. Later Tanzania Investment Centre (TIC) was established in 1997 by the Tanzania Investment Act No.26 of 1997 to be the primary agency of Government to coordinate, encourage, promote and facilitate investments and to advise the government on investment related matters (TIC Investment Report, 2009).
TIC is the focal point for investors and first point of call for potential investors. It is also an efficient and effective investment promotion agency, a One Stop Facilitative Centre for all investors, engaging in the business of marketing Tanzania as an investment destination. As agency of the Government in all investment matters, TIC is charge with the following roles:- Assisting in the establishment of enterprises; obtain necessary licenses, work permits, visas, approvals, facilities or services; Sort out any administrative barriers confronting both local and foreign investments; Promote both foreign and local investment activities; Secure investment sites and assist investors to establish Export Processing Zones (EPZ) Projects; Grant certificates of incentives, investments guarantees and register technology agreements for all investments, which are over and above US$ 300,000 and US$ 100,000 for foreign and local investments respectively; Provide and disseminate up to date information on existing investment opportunities, benefits or incentives available to investors; and assist all investors whether or not registered by TIC (TIC Investment Report, 2009).
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In order to strengthen and expedite facilitation services, senior officers from Government or its Executive Agencies have been permanently stationed at TIC to serve investors under the general direction of the TIC Executive Director. Presently these officers are drawn from Lands Department; Land Division; Directorate of Trade and Business Registration and Licensing Agency (BRELA) (Tanzania Investment Act, 1997).
The priority sectors for investment, as identified by TIC, are: Tourism, infrastructure development, aviation, agriculture, construction, manufacturing and financial services. However, investment is not restricted in other sectors. Moreover, there is no limit on foreign ownership or control, though land ownership remains restricted. TIC services are provided to local and foreign investors without discrimination, though a variety of regulatory fees are higher for foreign firms than for local firms. Remaining obstacles to foreign investment include bureaucratic intransigence, corruption and poor infrastructure. And for the case of Zanzibar, there is Zanzibar Investment Promotion Agency (ZIPA). Like Tanzania mainland, Zanzibar aims to create a welcoming environment for foreign investors and provides similar incentives.
For the case of Kenya, Kenya Investment Authority was set out in 2004 by the government to help attract investments in Kenya. Kenya Investment Authority (Ken Invest) is a statutory body established in 2004 through an Act of parliament. It is responsible for promoting investment, facilitate the implementation of new projects, providing after care services for existing investments in Kenya, as well as organizing investment promotion activities both locally and internationally. Kenya has had a long history with foreign companies. In the 1970s it was one of most favored destinations for FDI in East Africa. However over the years, Kenya lost its appeal to foreign firms a phenomenon that has continued to the present. This forced Kenya in 2008 to launch vision 2030 where it hopes to achieve global competitiveness and 4
prosperity of the nation. This initiative has seen as a renewed commitment to attract FDI and assist in the industrialization process (Kinyanjui, Kinuthia, 2010).
This study is worth conducting simply because enable East African countries to determine the Determinants of Foreign Direct Investment in East Africa, difficulties faced by countries to attract more FDI in their countries, efforts done by countries and the solution to address the issue and achieve intended objectives.
1.3 Statement of the Problem Foreign Direct Investments (FDIs) have grown and continue to grow as well as playing significant roles in growth and development of many economies in the world by contributing to the Gross Domestic Products (GDP). However; In Tanzania and Kenya FDIs have performed below expectations due to the combination of various factors which attract Foreign Direct Investments (FDIs). The determinants of foreign direct investments have become an important topic not only for the governments, policy makers but also for academic research. Moreover; the importance of foreign direct investments to both countries arises in view of dismal performance of previous policies that emphasized more attraction of foreign direct investments in their countries.
Despite of the extensive efforts done to attract FDIs in Kenya and Tanzania, it seems very little attention has been paid to help to attract more FDIs in East Africa. Although many relevant investment authorities have targeted many developed countries, by extending their services, their coverage has remained minimal and much effort is needed to attract Foreign Direct Investments which at the end will contribute to sustainable development in two countries. One of the serious impediments is the limited capacity of many investment authorities to cover many countries which can come and invest in Kenya and Tanzania, Policy framework for FDI and Economic determinants for Foreign Direct Investments. The institutions and 5
investment authorities supporting Foreign Direct Investments are weak, fragmented and uncoordinated. Their services are quite basic; mainly focusing on short term basis. There are hardly any initiatives for targeted, comprehensive and sustained support specifically to facilitate upward mobility of Foreign Direct Investment in Kenya and Tanzania.
As a result of the above situation, determinants of Foreign Direct Investment might permanently remain micro and informal, limiting more foreign direct investments and some support services. This situation is likely to worsen as competition intensifies with ongoing globalization. It is in the line of the above argument that this study intends to identify and understand more on the determinants of foreign direct investment in the selected countries of East Africa, namely Kenya and Tanzania.
1.4 Objectives of the Study
1.4.1 Main Objective The objective of the study was to identify and understand more on the determinants of Foreign Direct Investment (FDI) in East Africa.
1.4.2 Specific Objectives The study was guided by the following specific objectives:- (i) To identify and assess the determinants of attracting FDI to East Africa. (ii) To identify and assess the difficulties of attracting FDI to East Africa. (iii) To determine the effort done by East African governments to attract FDI to East African countries. (iv) To determine the contribution of FDI to countries social economic development.
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1.5 Research Question The study was guided by the following general and specific research questions:-
1.5.1 General Research Question The primary research question was; what are the determinants of Foreign Direct Investments (FDIs) in East Africa?
1.5.2 Specific Research Questions To Operationalize the main research question, the following specific research questions were used: (i) What are the determinants of FDI in attracting FDIs in Tanzania and Kenya? (ii) What is the effort done by East African governments to attract more FDI in their countries through various relevant authorities? (iii) What are the contributions of FDI in economic development in East Africa?
1.6 Limitations of the Study The study constrained by financial, and confidentiality. The financial resource was not sufficient enough to pay a visit to Kenya Investment Authority in Nairobi to collect more primary data rather than relying on secondary data available. However, I managed to collect the data effectively to the selected samples to come up with this dissertation.
Moreover confidentiality was another research constraint since some respondents rejected to answer questionnaires, a good example was at Kenyan Embassy where only ten questionnaires out of thirty were answered, and some of Embassy officials interviewed did not even respond to the questions by saying that they are not embassy spokes persons.
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1.7 Delimitation of Study The study focused on the determinants of Foreign Direct Investment (FDI) in East Africa, particularly in Tanzania and Kenya. Questionnaires and Interview were employed in the collection of the primary information used in the study. Secondary data were obtained from Kenya Embassy, TIC, BOT, Kenya Investment Act (2004). Tanzania Investment Act, (1997) and its regulations
1.8 Significance of the Study The study increases the knowledge of users on the determinants of Foreign Direct Investment (FDI) in East Africa, since the study gives highlight on the determinants on FDI in both Kenya and Tanzania. Moreover the study shows where each country should put effort to attract more FDI in the country. Indeed this study is useful for a country to determine which sector attracts more FDI in country.
Furthermore; practically the study helps investment authorities (Tanzania Investment Authority and Kenya Investment Authority) to review their laws and regulations basing on the study in order to cope with the reality, for example the authorities are in a position to identify which part of sectors should be given incentives to attract more Foreign Direct Investments. On top of that the study opens up a way for others to conduct further studies on the issues related to the determinants of Foreign Direct Investment in East Africa. On the other hand the study enables the researcher to meet one of a necessary condition of being awarded a degree of Masters of Science in Accounting and Finance.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction In this chapter a detailed literature review on Foreign Direct Investment is given. The chapter is divided into two parts, theoretical Literature Review and Empirical Literature.
This chapter presents theoretical and empirical literature that aims at developing an understanding of the determinants of Foreign Direct Investments in the selected East African Countries of Tanzania and Kenya.
2.2 Theoretical Literature Review
2.2.1 The historical Background of Foreign Direct Investment (FDI) FDI is believed to begin in the late nineteenth century. The Victorian and Edwardian eras saw the creation of many of the great vertically integrated multinationals that would be recognized today as colonial plantation companies such as Lever Brothers (now Unilever) investing in West African vegetable Oil plantations, Cadburys in Cocoa, Dunlop in rubber. The UK as the great imperial power of the time, dominated world international business with over 45% of the worlds total stock of the FDI in 1914. Following the World II, the FDI leadership passed over to the US, with companies such as General Motors, Ford Chrysler, and IBM, developing manufacturing bases around the world. By 1960, US counted over 48% of the world investment. However; the significant entrant in international scene has been Japan. In 1960, Japanese firms accounted for less than 1% of the world accumulated FDI. By 1989, the Japanese share was over 12%, against 29.5% for the US and 15% for the UK. 9
In 1990s there was a significant change in the trend of FDI. This is because FDI started flowing to the developing countries surged to 30%-40% compared with just15% and 18% in 1980s. However, the majority of the FDI went to countries of the Asia- Pacific region. Major countries namely the US, UK, and Japan, accounted for this bulk outward investment (Buckley, 2000:356).
2.2.2 Definition of FDI Buckley (2000) defines foreign direct investment (FDI) as a term used to denote the acquisition abroad of physical assets, such as plant and equipment, with operational control ultimately residing with the parent company in the home country. FDI may take different forms such as the establishment of new enterprises in an overseas country either as a subsidiary or branch, the expansion of overseas branch or subsidiary and the acquisition of overseas business enterprise or its assets. FDI differs from foreign portfolio investment where a stake is taken in an overseas business without operational control, but with the view to acquiring an investment income stream through dividends, capital gains and so on. FDI is furthermore, defined as a situation where a foreign company create a subsidiary to provide goods and services. Thus a firm undertakes FDI in a foreign market if it possessed an ownership advantage over the local competitors. The ownership of the foreign investment usually remains in the investing (home) country. FDI represents the primary means of transfer of private capital (i.e. physical or financial), technology personnel and access to the brand names and marketing advantage (Makola, 2003).
2.3 Foreign Direct Investment (FDI) in Tanzania FDI is still in its infancy in Tanzania. It is still a relative new Concept in this country which had a socialist orientation until in recent past years. Efforts in the past have been made by the Tanzanian government to attract more investments from abroad. The early intention of the government was shown in 1963. Foreign Investment Act 10
was passed in order to attract FDI in the new independent Tanganyika, then name of mainland Tanzania before the 1964 union with the Island of Zanzibar (Green, 1982). Such efforts were somewhat unsuccessful since the government opted for socialist path of economic development in 1967 following the Arusha Declaration (Ngowi, 2002).
The Arusha Declaration pronounced a socialist policy that was to be followed by the country. The ministerial order under the industrial (Acquisition) Act Number 5 of 1967 required all MNEs operating in the country as well as big private businesses owned by Tanzanians in Mainland Tanzania to make the government of Tanzania majority shareholder of such companies. The majority of the MNEs and big local companies operating in Tanzania were nationalized. The public corporation Act 17 of 1969 was created to put all nationalized companies under the government control and management (Ngowi, 2002). The revival of the foreign direct investment attraction came in 1985 when among other things; Tanzania found that it could not cope with the ailing and ill-managed public enterprises and companies. Deliberate economic liberalization policies were initiated and implemented. Reforms in the financial institutions, public sector, civil service and other areas were made and are still under way to fine-tune the attraction of FDIs in the country. The National Investment Act of 1997 was passed in order to promote local and foreign investments in the country (Ngowi, 2002).
According to The World Economic Forums Africa Competitiveness Report 2000- 2001, published in conjunction with the Harvard Institute for International Development has top-ranked Tanzania, in a survey of African nations efforts to improve economic and investment conditions, out of twenty-four countries on its index for the correction of initial economic conditions in recent years. The report also ranked Tanzania number two after Nigeria in the African continent for optimism for future growth. It is however important to note that despite the progress made in 11
improving the initial conditions, investment effort in Tanzania is still too low and a lot of improvements are still needed to make investment work for its development (Investment policy in Tanzania, 1997).
2.3.1 FDI Inflows in Tanzania FDI in East Africa have been increasing over time. BOT et al (2001:9) point out that monetary value of the FDI inflow into Tanzania increased sixteen-fold from US$ 47 million in 1990 to US$ 768 million by 2000. This is an increase by 15.3% over a decade or an average of 1.53% annual increase. There has been an increase in FDI stocks in Tanzania from 1985 to 1990. Then there was a dramatic decline in 1995, before peaking up in 1998 and 1999. FDI in flows into Tanzania have been increasing over time. The increase from 1996 is both in absolute terms and in relation to other countries, including Kenya. The increased inflows can be attributed to, inter alia, the far reaching reforms that Tanzania has been undertaking and still at the midst of mainly from the mid-1980s (Ngowi, 2002). Tanzania under Julius Nyerere attempted a socialist transformation that saw widespread nationalization of property, including the seizure of foreign assets. Foreign investment was legally and effectively banned. This was widened in the 1970s to include most Asian-owned businesses and an (unevenly enforced) expropriation of any property valued at greater than $15,000. Capitalism and foreign capital in particular were considered UN African, whereas ujamaa was considered more authentic and appropriate. More recently the climate has changed considerably. Economic reforms began slowly in 1986, and accelerated after an economic crisis in the mid 1990s, substantially altering the governments stance on foreign investment.
The privatization program, which included many nationalized firms previously owned by foreign companies, facilitated the return of foreign firms back into the country. Mining reforms in the early 1990s allowed major new investment by foreign firms, especially Ghanas Ashanti Goldfields and South Africas AngloGold. Foreign 12
banks were allowed entry after 1993 and several large South African and British banks began operations soon thereafter. Legal changes in 1997 lifted most of the remaining sectoral restrictions on foreign investment on the mainland (although many regulations remain in place in semi-autonomous Zanzibar). Previous demands of government equity have also been lifted for all sectors, except for petroleum (UNCTAD, 2002).
Otherwise, foreign investors are mostly afforded national treatment, including protection of fiscal incentives, guarantee of repatriation, and importation of expatriate staff.
2.3.3 Determinants of Foreign Direct Investment (FDI). These are some of the factors that determine FDI inflows into a given geographical region, or country. They give investors the confidence needed to invest in foreign markets. The list of these determinants may be very long, but not all determinants are equally important to every investor in every location at all times. Some determinants may be more important to a given investor in a given location at a given time than to another investor (UNCTAD World Investment Report, 1998).
A given determinant may be a necessary and satisfactory factor by itself for FDI inflow in one location but not in another. For the most part, they form a complementary set. It is difficult to determine the exact quantity and quality of FDI determinants that should be present in a location for it to attract a given level of FDI inflows. What is clear is that every location must possess a certain critical minimum of these determinants before FDI inflows begin to take place. UNCTADs 1998 World Report presents some host country determinants of FDI. These include the following: (i) Policy framework for FDI: This include economic, political and social stability; rules other regulating entry and operations of FDIs; standard of treatment of foreign affiliates; policies on functioning and structure of the market; international 13
agreement on FDIs; privatization policy; trade policy (tariffs and non-tariff barriers and coherence of FDI and trade policy; and tax policy ( UNCTAD World Investment Report, 1998).
(ii) Economic determinants: These include business facilitation; investment promotion (including image-building and investment-generating activities and investment-facilitating services); investment incentives; hassle costs (related to corruption and administrative efficiency); social amenities (for example quality of life); and after investment services (UNCTAD World Investment Report, 1998). UNCTAD (1998) lists the principal economic determinants in the host countries. It matches types of FDI by motives of the firms with those principal economic determinants. Where we have a market- seeking type of FDI, it looks for criteria concerning market size and per capital income; market growth; access to regional and global and global markets; country specific consumer preferences and; structure of the markets. In case of FDI of a resource/asset seeking type, the focus would turn on raw materials, low cost unskilled labor as well as skilled labor, technological, innovative and other created assets (like brand names), and physical infrastructure (roads, ports, telecommunications and power).
According to Ngowi (2000) FDI inflows to a country depend largely on the presence in that country, of a certain critical minimum of FDI determinants. The determinants are among the factors that give MNEs the confidence and interest to invest their massive and expensive capital in foreign markets. Among the FDI determinants that MNEs look for are the presence of economic, political and social stability; and rules regulating entry and operations of businesses. Others are standards of treatment of the foreign affiliates; business facilitation (including, inter-alia, investment incentives; market size, growth, structure and accessibility; raw materials, low cost but efficient labor force and physical infrastructure in form of ports, roads, power and telecommunication. 14
John H. Dunning (1995), for example, suggested that one of the dominant influences on foreign direct investment was the growth and size of the host country market in terms of population growth.
Holland and others (2000) reviewed several studies for Eastern and Central Europe, producing evidence of the importance of the market size and growth potential as determinants of FDI. Loree and Guisinger (1995) studying the determinants of foreign direct investment by United States in 1977 and 1982 (both towards developed countries as well as developing countries), concluded that variables related to host country policy were significant in the developed countries on when infrastructure was an important determinant in all regions.
Root and Ahmed and Schneider and Frey found statistically significant relation between foreign direct investment and market demand (as measured by per capital GDP or GNP) and market growth (as measured by the growth rate of GDP or GNP). Evaluating the investment Promotion function, they also included measures of market demand in this study.
Following Schneider and Frey; our hypothesis was that the higher per the per capital income, the greater the investment inflow. Accordingly, expected sign of this variable is positive. Our hypothesis with respect to the growth rate of the market was that the higher the rate of economic growth, the greater the investment inflows. In this as in other variables, causality could, of course, run in either or both directions. They conclude that, foreign investors could be attracted by high growth rates, and high growth rates could be the results of foreign direct investment.
Thunnell (1977) tested the hypotheses that foreign investment in a country decreased when it was politically unstable and increased when it was stable. He found that political events were not directly associated with short- term fluctuations, but only 15
with trend changes in foreign investment flows. He also concluded that the relationship was asymmetric in that investing companies reacted differently to a change in which a country becomes more stable and change in which a country becomes unstable.
Green (1972) tried to find out whether political instability had a deterrent effect in influencing FDI in flows. He found that the allocation of FDI in United States of America was not affected by political instability in recipient countries. He concluded that there was even a positive relationship between investment flow and instability in the recipient countries.
2.4 Foreign Direct Investment in Kenya Kenya is a relatively big country with a total land area of 580.4km square. Its location is strategic within East Africa and has a population of approximately 40 million people. The country is well endowed with a broad range of natural resources, flora and fauna and arable land. Kenya highlands comprise of the most successful agricultural production regions in East Africa. Foreign investment has been of considerable significance in financing development in Kenya not only in the manufacturing but also in the primary and tertiary sectors.
Rweyemamu (1987) before independence in 1963, bulk of it went to primary production and plantations. The few manufacturing industries established up to World War II were mainly for basic processing of agricultural exports and the processing of food for the local market. After the war British manufacturing firms begun to invest directly in the manufacturing, in part, because of the competition from non British trading firms, which threatened Britain's share in the Kenyan market.
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According to Rweyemamu (1987) and Gachino (2006); after land resettlement between 1962 and 1964, the Kenyan government prevented foreign firms from purchasing more land and as a result foreign ownership in agriculture was greatly reduced. In commerce and industry by contrast, virtually all the expansion which took place, that is a 50 percent increase in output between 1964 and 1970 and 100 percent increase in the annual level of investment, was foreign owned. At first much of it involved capital transfer out of agriculture, especially following the introduction of exchange controls in 1965. But two years later after the initial period of uncertainty as to the government development strategy, a substantial inflow of foreign direct investment and its diversification to other sectors occurred. In addition the government set up institutions which would assist in the development of the manufacturing sector. During this period Kenya had pursued import substitution from as early as 1950s. This industrial policy advocated for a large role of the public sector participation and protection of the infant manufacturing industries.
The government used a combination of tariffs and quotas supplemented by foreign allocation measures including overvaluing exchange rates to maintain import costs low, favorable credit and interest rate policies intended to subsidize the manufacturing consumer goods.
During this period FDI levels were reasonably high in comparison to other East African countries (see graph 1). This was partly attributed to the fact that Kenya had maintained a favourable investment climate. Obrien and Ryan (2002) note that Kenya was for many years a relatively attractive location for foreign investment. However, Bradshaw (1988) observes that although that was the case, there were already concerns by both scholars and government planners that, because of Kenya's liberal repatriation policies, more international investment income left Kenya in the form of profit remittances than flows into the country. As a result the government instituted measures to encourage reinvestment of their profits in the country. From 1974, firms 17
with high repatriation rate had their local borrowing rights restricted by the Central Bank. The government also attempted to cut down on the level of management remittances and technical fees by imposing a 14 percent withholding tax. These efforts discouraged foreign investors
Figure 2.1: FDI Inflows to the East Africa Region Graph 1: FDI inflows to the East Africa Region - 100 - 100 200 300 400 500 600 700 800 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 Years M
U S D Kenya Uganda Tanzania
Source: UNCTAD 2008
FDI in Kenya has not only been volatile but also low since the 1970s. This led to the stagnation of the manufacturing sector which was largely been dominated by the foreign firms. This decline was blamed on the inward oriented strategy as well as the collapse of the East Africa Community in 1977. Ensuing economic distortions resulted in severe structural constraints and macro economic imbalances and firms failed to develop competitive capabilities to penetrate the international markets. The inward looking policies pursued at the time under import substitution made it difficult to effectively participate and compete keenly in the export markets. As a result the manufacturing industry failed to play a more dynamic role enough to function as an engine of country's growth and did not contribute significantly to foreign exchange (Kenya Government 1994).
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Further, the economic stagnation in the mid 1980s and 1990s affected Kenyas industrialization with consequent effects on labor productivity (Gachino and Rasiah, 2003). Political instability in neighbouring countries particularly Uganda also drew away markets and investment in Kenya.
Macro economic constraints arising from a collapse in the IMFs Structural Adjustment Program (SAPs) in 1986(Mwega and Ndungu, 2002), massive destruction of infrastructure due to El Nino rains and weak institutions had all contributed to economic stagnation (Phillip and Obwana, 2000; Todaro, 2000; Rasiah and Gachino 2005). Hence, although Kenya introduced a number of instruments to promote FDI and export oriented industrialization during this period, these efforts did not yield much.
After the disappointing period of the 1990s, Kenya resumed the path to rapid economic growth in 2002 through the implementation of the Economic Recovery Strategy paper which was replaced by vision 2030 after it expired in 2007. During this period the government embarked on establishment of free trade zones, improvement of business climate, infrastructure, and development of incentives among initiatives. These efforts are aimed at building a momentum that can sustain economic growth and promote development. At the centre of these efforts is a commitment to attract foreign direct investment which was hoped would assist in the industrialization process.
Foreign firms in Kenya since the 1970s have invested in a wide range of sectors. Most notably they played a major role in floriculture and horticulture, with close to 90 percent of flowers being controlled by foreign affiliates. In the Manufacturing sector FDI has concentrated on the consumer goods sector, such as food and beverage industries. This has changed in the recent years with the growth of the garment sector because of African Growth and Opportunities Act (AGOA). Of the 34 companies 19
involved in AGOA 28 are foreign most of them concentrated in the Export Processing Zones (EPZs). FDI is also distributed to other sectors including services, telecommunication among others. 55 percent of the foreign firms are concentrated in Nairobi while Mombasa accounts for about 23 percent, thus Nairobi and Mombasa account for over 78 percent of FDI in Kenya. The main form of FDI establishment has been through the form of green fields establishments and Kenya has in total more than 200 multinational corporations. The main traditional sources of foreign investments are Britain, US and Germany, South Africa, Netherlands, Switzerland and of late China and India (UNCTAD, 2005).
2.4.1 Determinants of Foreign Direct Investment Inflows in Kenya. While it is difficult to determine the exact quality and quantity of FDI determinants that should be present in a particular location, its never the less clear that a critical minimum of these determinants must be present before FDI inflows begun to occur (Ngowi, 2001). One would rationally expect that investors would choose a location in accordance to its profitability. In an extensive literature review on the determinants of FDI, Ajayi (2007) has identified the following factors as determinants: market size and growth, costs and the skills of workers, availability of goods infrastructure, country risk openness, institution environment, natural resources, agglomeration affects, returns on investment, macroeconomic policies among others.
More recently Faeth (2009) presents a more elaborate work and observes that R&D and advertising expenditure, skills and technology intensity, the existence of multi plant enterprises and firm size are important ownership advantages in a number of studies, while in other studies aggregate variables such as market size, growth, and trade barriers have an effect on FDI.
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In Kenya few studies have been conducted on FDI determinants. Kinaro (200.) using time series analysis finds that FDI in Kenya is determined by economic openness, human capital, real exchange, inflation, and FDI in the previous periods. Opolot et al (2008) find using panel data for Sub Saharan African countries, Kenqa included that market potential, openness to trade, infrastructure, urbanization, and rate of return on investment positively affect foreign direct investment inflows to Sub-Saharan Africa, while macroeconomic instability is a disincentive to foreign direct investment. Other variables such as government consumption, financial development, natural resources, wage and political rights are found to be insignificant.
Mwega and Rose (2007) using panel data of 43 countries with a Kenyan dummy find that Kenya is not different from other countries and that FDI is determined by growth rates, terms of trade shocks, external debt ratio and quality of institutions. UNCTAD (2005) argue that Kenya's inability to attract FDI is due to growing problems of corruption and governance, inconsistencies in economic policies and structural reforms, deteriorating public service and poor infrastructure.
Todd et al (2005) argues that Kenya officially encourages and grants national treatment to foreigners but that the problem is Kenya's political elites who resent FDI perceiving it to lead to dependency. Himbara (1994) shares similar sentiments. Kareithi (1991) concerned with the impact of foreign-owned media upon the body politic of Kenya argues that foreign ownership undermines both national sovereignty and even the rudiments of political freedom.
2.5 Empirical Literature of the Past Studies
2.5.1 Review of the Studies from Africa Developing countries are increasingly aware of the role of foreign direct investment as an engine of growth in their economies. Foreign investors can contribute to growth 21
by providing much needed capital and skills, by sharing risks in large projects and by serving as a vehicle for technology transfer. For many developing countries, FDI is a mechanism by which to promote industries in which they have a potential comparative advantage that cannot otherwise be exploited.
The globalization of economic activity has been marked by a surge in FDI flows. Over the decade, global FDI flows have increased at large percentage. Unfortunately, these trends have largely bypassed sub-Saharan Africa. In 1997, Sub-Saharan Africa received less than 1 percent of world FDI inflows, or 1.7 percent of total FDI flows to developing countries. These statistics, moreover, conceal large disparities in the distribution of FDI among host African countries. For example, 55 percent of FDI flows to Africa in 1997 went to the three traditionally biggest recipients Nigeria, South Africa and Egypt. There are also worrying signs that the whole of the African continent is being marginalized in the global competition for FDI. FDI flows to Africa have decreased 6.1 percent annually between 1994 and 1997. Since the recent years have seen significant improvements in the conditions governing FDI including, but not limited to, economic reform, democratization, privatization, greater peace and political stability, these trends raise important questions about foreign investors' attitude towards Africa.
Moreover; the literature on the empirical determinants of FDI in developing countries is wide and varied. Schneider and Frey (1986) have made important contributions in determinants of foreign direct investments as well as UNCTAD (1992) survey the empirical literature on FDIs. However, the empirical work has not directly and fully addressed the question of determinants of FDI in sub-Saharan Africa.
Further; there is no unified theory of determinants of FDI. Instead, the theoretical literature is choked with an array of hypotheses drawing heavily on theories of imperfect competition and market failure to explain the determinants of FDI 22
phenomenon. An alternative and perhaps more practical classification of the host- country determinants of FDI distinguish between business facilitation measures, the policy framework for FDI, and economic determinants. Business facilitation measures include investment incentives, measures directed at reducing the hassle costs related to corruption and administrative inefficiency, and social amenities. Policy determinants of FDI comprise policy and political stability, rules relating to FDI, international agreements on FDI, and privatization, trade and tax policies. The economic determinants are further categorized into market-seeking (market size and growth, market structure, access to regional markets), resource-seeking (availability of raw materials, labour, physical infrastructure) and efficiency-seeking (cost of resources, labour productivity).
2.6 Theoretical perspective underpinning the study The theoretical perspective that guides this study is motivation theory. This is because the study is on the determinants of Foreign Direct Investment (FDI) in East Africa, with an intention of identifying drive forces for FDI and what should be done to attract or motivate more FDI in Tanzania and Kenya as part of East African countries. Motivation theory looks on the environment that influence the occurrence of good performance, motivation is categorised into macro motivation and micro motivation. Macro motivation is affected by environmental conditions lying outside organisation, while micro motivation is affected by environmental conditions lying within the organisation. Moreover; this study aimed at identifying determinants of Foreign Direct Investment (FDI). These determinants are influenced by both external and internal environments which are in line with motivation theory to attract more Foreign Direct Investment in East Africa. With this, the theoretical modal for this study is motivation theory as the basis for analysis and development of the arguments in the study.
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CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction Research methodology is the systematic way to solve the research problem. It may be understood as a science of studying how research is done scientifically. This chapter presents the methodology and procedures used in the study, which include research design, types of data, and methods of data collection, analysis and presentation.
3.2 The Research Design This is a plan that specifies how data from the study was collected and analyzed. For the proposed study, a case study designed was applied to get the necessary required information. The case study design was chosen due to its ability to provide in-depth of the case to be studied. It is appropriate for gathering data from various sources including documentary reading, questionnaires and interviews. It is also useful in studying a particular social unit and it guarantees a particular freedom and flexibility in the actual process of data collection in the area of study.
3.3 Study Area The United Republic of Tanzania and Republic of Kenya through their Investment Authorities like Tanzania Investment Centre (TIC), Kenya Investment Authority (Ken Invest), Kenyan Embassy in Tanzania, Bank of Tanzania and foreign investors used as the universe to obtain the sample.
3.4 Types of Data Quantitative and qualitative data was used by the researcher to collect data.
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3.5 Sampling Procedures Simple random sampling was employed to obtain respondents to the study; where by the appropriate sample size were 45 respondents who are investors and employees of various investments authorities in Kenya and Tanzania.
Numbers of respondents were 39 out of 45. The table below shows the categories of respondents.
Table 3.1: Categories of Respondents Organization TIC Kenyan Embassy Investors BOT Number 21 10 6 2 Source: Analyzed data, 2012
From table 3.3: 39 Questionnaire were distributed; 21 Questionnaires were distributed to Tanzania Investment Centre (TIC), 10 were distributed to Kenyan Embassy officials, 6 were distributed to investors and 2 were distributed to Bank of Tanzania (BOT).
Table 3.3: Regional Distribution of FDI-Registered Projects, 2005-2008 (Percentage of total) Region Percentage Nairobi 55.5% Mombasa 17.9% Kisumu 16.6% Kilifi 1.4% Malindi 2.3% Migori 0.3% Others 6% Source: Promotion centre
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3.6 Research Instruments Due to the design chosen, the following instructions were employed. (a) Interview Interview was conducted to collect qualitative information such as opinions and views of the study. Interviews were guided by interview guide questions (see appendix ii). Kenyan Embassy, TIC and BOT officials were interviewed during data collection; they were able to come up with the answers on interview questions. The advantages of using interview was quick method of gathering information, the researcher would know whether the respondents understands the questions and the method was not restricted to educated class alone. This means that the questionnaires were not given and answered by employees of the above mentioned institution but also investors who are not belonging to above mentioned institutions.
(b) Questionnaire Is a pre-formulated written set of questions to which respondents record their answers, usually within rather closely defined alternatives (Kothari, 2001). Questionnaires were open-ended questions, which allowed individuals to express their views concerning FDI in Tanzania (see appendix I). The questionnaires were distributed to respondents aimed at getting information regarding the Determinants of Foreign Direct in East Africa particularly Kenya and Tanzania. One of the set of questionnaires was designed for various Investment Authorities and other relevant authorities. Numbers of respondents were 39 out of 45. The table below shows the categories of respondents.
From table 3.3: 39 Questionnaire were distributed; 21 Questionnaires were distributed to Tanzania Investment Centre (TIC), 10 were distributed to Kenyan Embassy officials, 6 were distributed to investors and 2 were distributed to Bank of Tanzania (BOT).
3.7 Source of Data Both secondary and primary data were employed. Questionnaires and interviews were employed in the collection of primary information. Secondary data obtained from Kenyan Embassy in Tanzania, TIC, BOT, Kenya Investment Centre, and from various Investors. These include Tanzania Investment Acts 1997, Kenya Investment Act 2004, Tanzania Investment Report 2009 and Kenya Investment Report 2009.
3.8 Method of Data Analysis Findings have been presented by using statistical procedure/models such as tables and percentages, which were used to summarize the results in order to draw conclusion the Determinants of Foreign Direct Investment (FDI) in East Africa particularly Tanzania and Kenya. The study applied both qualitative and quantitative analysis techniques. The researcher used Microsoft word and Excel in analyzing both primary and secondary data. With the use of Microsoft word and Excel the researcher was able to analyze the information from the findings quickly. The analysis was guided by research objectives and research questions.
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CHAPTER FOUR
PRESENTATION AND DISCUSSION OF FINDINGS
4.1 Introduction In this chapter the analysis and discussion of the findings are presented. The analysis and discussion in this chapter is based on the responses from research questionnaires, interview questions and secondary data information. The research intended to find out the determinants of Foreign Direct Investments in Tanzania and Kenya. Main areas of concern in the research are the identification of the determinants for attracting FDI in Tanzania and Kenya, the difficulties of attracting FDI, efforts done by East African governments to attract FDI to East African countries, and the contributions of FDI to East African countries social economic development and this was according to the research objectives. The study was guided by the following specific objectives:- (i) To identify and assess the determinants of attracting FDI to East Africa (ii) To identify and assess the difficulties of attracting FDI to East Africa (iii) To determine the effort done by East African governments to attract FDI to East African countries.
4.2 Determinants of Foreign Direct Investment in Tanzania and Kenya According to primary and secondary data the following are some of the determinants in East Africa (Tanzania and Kenya) countries respectively;- Questionnaires were distributed to 45 people of various categories as mentioned in Table 3.3, 39 (86.7%) of 45 responded, 3 (6.7%) respondents out of 45 did not respond and 3 people were contacted for interview, 3 (100%) people responded. The following is the table showing the determinants of foreign direct in East indicated by various respondents and their percentage scores as indicated in table 3.4 & 3.5
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IN TANZANIA
Table 4.1: Determinants of Foreign Direct Investment and frequency of scores Determinants No. of respondents Actual No. of respondents % of scores Total percentage (%) Natural resources 39 39 100% 100% Investment policies 32 39 82% 100% Investment opportunities 27 39 69% 100% Incentives 36 39 92% 100% Taxation system 37 39 94% 100% Promotion centre 24 39 61% 100% Political climate 33 39 85% 100% Cost of doing business 19 39 49% 100% Source: Analyzed data, 2012
According to the table above Tanzania is performing very well almost in every determinant of Foreign Direct Investment mentioned by respondents in the questionnaires and during the interview. Therefore Tanzania should put many efforts on the above mentioned determinants to attract more Foreign Direct Investment (FDI) in Tanzania and East Africa in general.
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IN KENYA
Table 4.2: Determinants of Foreign Direct Investment and frequency of scores Determinants No. of respondents Actual No. of respondents % of scores Total percentage (%) Natural resources 12 39 31% 100% Investment policies 38 39 97% 100% Investment opportunities 21 39 54% 100% Incentives 29 39 74% 100% Taxation system 26 39 67% 100% Promotion centre campaign 39 39 100% 100% Political climate 14 39 36% 100% Cost of doing business 23 39 59% 100% Source: Analyzed data, 2012
According to the table above Kenya should put more efforts on promotion activities, provision of investment incentives, and make reforms on investment policies to attract more Foreign Direct Investment in the country and East Africa in general.
Moreover; the data collected through documentary review which included; Tanzania Investment Act (1997), Tanzania Investment Report (2009), Kenya Investment Act (2004), Kenya Economic Report (2009), Kenya Investment Policy Review (2005), and Kenya Investment Authority Report (2010) revealed the following as some of the determinants of Foreign Direct Investments in Kenya and Tanzania:-
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i. Availability of abundant natural resources like minerals The availability of natural resource has been shown by Tanzania Investment Report (2009) and Kenya Investment Authority Report (2010) as the significant determinant of Foreign Direct Investment in any country. According to the first mentioned report Tanzania is attracting more FDI than Kenya due to abundant natural resources like gold, Tanzanite and platinum. Indeed this match with the opinion from various respondents as indicated by table 3.4 & 3.5 above.
ii. Availability of marketing campaigns to attract FDIs Availability of serious marketing campaign has been highlighted by Kenya Investment Authority Report (2010) as one of factors that attract FDI in Kenya compared to other East African countries like Tanzania. Moreover this match with table 3.5 above where the determinant scored 100% as per respondents
iii. Availability of investments opportunities Indeed the study shows that availability of investment opportunities has been one of the determinants of Foreign Direct Investment in both countries. However Tanzania has more investment opportunities compared to other East African Countries like Kenya (UN World Investment Report, 2011).
iv. Availability of good investments policies According to Tanzania Investment Report (2010) and Kenya Investment Authority Report (2010) indicate that both Tanzania and Kenya attract FDI because of their investment policies being favorable to foreign investors. This has been further supported by analyzed date as indicated above in table 3.4 &3.5.
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v. Availability of incentives for investments According to Tanzania Investment Act (1997) and Kenya Investment Act (2004) both countries are attracting Foreign Direct Investment (FDI) due to availability of investment incentives. However Tanzania has more investment incentives compared to Kenya.
Moreover the following are the investment incentives offered by both countries according to Tanzania Investment Act (1997) and Kenya Investment Act (2004) respectively;-
IN TANZANIA The incentives available to holders of TIC certificates of incentives The following are some of the incentives offered by Tanzania in mining industry as an effort to promote FDI in East Africa as per Tanzania Investment Act, 1997:- (i) Exemption from corporate Income tax for up to five years (ii) Ten percent (10%) import duty for semi-processed inputs and spare parts other than motor vehicles. (iii) Exemption from pre-shipment inspection requirements (iv) Zero percent (0%) import duty on project capital goods, Computers, husbandry and fishing , human and livestock pharmaceutical products and medicaments, Computer accessories, Raw materials and Replacement parts for agriculture, Animal Motor vehicle in completely knocked down form and inputs for manufacturing pharmaceutical products. (v) Recognition of private property and protections against any non-commercial risks (vi) Twenty five percent (25%)-import Duty for final consumer goods. (vii) Fifteen percent (15%)-Import Duty for fully processed input and motor vehicles spares. 33
(viii) Introduction of pay and refund scheme for excise duty paid on fuel purchased by eligible companies. (ix) 50% expensing of capital expenditure for all classes os assets. In subsequent years implement Wear and Tear allowance as classified below: (x) Class I-37.5% per annum a.-eg Computers, Heavy Industrial Machinery, Tractors, Combine Harvesters, Heavy moving Equipment etc. (xi) Class III-12.5% per annum eg. Other Machinery including ships (xii) VAT exception on ground transport run by Tour Operators, milk packaging Materials, Computers, Printers, and Accessories, Hospitals equipments and Drug used by victims of HIV, Malaria and TB and locally produced Yarm. (xiii) Import Duty drawback on Raw materials used to produce goods for Exports and Deemed exports (xiv) Deemed of VAT payment on Project Capital Assets (xv) Zero-rated VAT on Exports (xvi) Straight line Depreciation Allowance on Capital Goods (xvii) Indefinite carry forward of losses against future profits. (xviii) Corporate Tax Rate of 30% and withholding Tax Rates on dividends (10%) and (0%) on loan interest in both priority and lead sectors. (xix) The right to transfer outside the country 100% of foreign exchange earned profits and capital. (xx) The ease of obtaining other permits such as Residency/work permits, industrial license, trading etc. (xxi) Land Rent on commercial agriculture Farms, Livestock Ranches and Forests Tshs.200/= per annum.
Special Incentives offered in Mining Industry in Tanzania The following are some of the incentives offered by Tanzania in mining industry as an effort to promote FDI in East Africa as per Tanzania Investment Act, 1997:- 34
Examples of special incentives offered in mining industry include; Duty and VAT on all Capital Goods, Spare-parts, fuel and Oils, Explosive and Other supplies. Corporate Tax 30%, Zero percent (0%) Import Duty on Capital Goods, Capital allowance 50% on the first year of income and in subsequent years:- Class I: 37.5% of the balance per annum Class II: 25% of the balance per annum Class III: 12.5% of the balance per annum Addition 15% Capital allowance on un-redeemed qualifying Capital Expenditure as set out in the Mining Act No. 5 of 1998 for those who had invested as of July 2001. Existing investors allowed deferring payment of royalty or getting the royalty refunded when cash flow is below zero. Royalty 3% except diamonds which is 5% No capital gains tax No Tax, duty free or other fiscal import on dividends Indefinite carryover of losses against future profits After first 5 years of commercial production the company will be charged 5% Duty and VAT.
Special incentives offered in Petroleum exploration and Production in Tanzania Below are some of the incentives offered to companies investing in oil Exploration:- (i) Relatively large exploration areas. Normally, a license consists of 60 blocks, however each PSA can consist more than one exploration license. (ii) Long exploration periods of 4 (Initials) 4(first Extension and 3 (second extension) years, Totaling 11 years (iii) Maximum TPDC participation is capped at 20% from former 50% (iv) No signature or production bonus payment (v) Income Tax and Royalty paid for by TPDC on behalf of the concessionary company. 35
(vi) Full allowance for un-recovered exploration costs incurred under earlier PSA's in any contract area by the same companies that make a discovery in a subsequent PSA (No ring-fencing) (vii) No import Taxes on all equipment used in petroleum exploration. (viii) No foreign exchange restrictions (ix) Economic basement interpretation allowed for determination of exploration of well total depth.
IN KENYA The following are incentives available for investors in Kenya (i) 10 year tax holiday and thereafter a flat 25 per cent tax for 10 years; (ii) Exemption from all withholding taxes on dividends and other payments to non-residents during the first 10 years; (iii) Exemption from import duties on, raw materials and intermediate inputs; (iv) No restrictions on management or technical arrangements; (v) Exemption from Stamp Duty; (vi) Exemption from VAT; (vii) and Operate on one license only.
The following are the special incentives available for investors in Kenya Tax Incentives Investment allowance is provided as an incentive for investment in the manufacturing and hotel sectors at the rate of 100% countrywide. For Manufacturers under Bond, the applicable rate is 100%. In addition, eligible capital expenditures have been expanded to include certain infrastructure and environmental protection equipment related to the manufacturing activity (Kenya Investment Act, 2004)
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Export Promotion Programmes Duty Remission Facility Materials imported for use in manufacturing for export; the production of raw materials for export; or the production of duty free items for sale domestically are eligible for duty remission. Applications for this facility should be made to the Tax remission for export office (TREO) at the Ministry of Finance (Kenya Investment Act, 2004).
Manufacture under Bond To encourage manufacturing in Kenya for export to the world market, the Government has established the Manufacture under Bond programme that is open to both local and foreign investors. Enterprises operating under the programme are offered the following incentives:
Exemption from duty and VAT on imported raw materials and other imported inputs; and, 100 per cent investment allowance on plant, machinery, equipment and buildings.
Bonded manufacturing enterprises can be licensed to operate within a 30 km radius of a Customs Office. This programme is facilitated by the Investment Promotion Centre and administered by the Kenya Investment Authority (Kenya Investment Act, 2004).
Export Processing Zones Programme (According to Kenya Investment Act, 2004) The Export Processing Zones Authority (EPZA) coordinates operations of Export Processing Zones (EPZs). The Government encourages the development of private EPZs, and a number of them have already been established.
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Enterprises operating in these zones in Kenya enjoy the following benefits: (i) 10 year tax holiday and thereafter a flat 25 per cent tax for 10 years; (ii) Exemption from all withholding taxes on dividends and other payments to non-residents during the first 10 years; (iii) Exemption from import duties on, raw materials and intermediate inputs; (iv) No restrictions on management or technical arrangements; (v) Exemption from Stamp Duty; (vi) Exemption from VAT; (vii) and Operate on one license only.
4.3 The efforts done by East African governments to attract FDI to East African countries
TANZANIAN GOVERNMENT The following are some of the efforts done by Tanzanian Government to attract FDIs in the country as mentioned by various categories of respondents:-
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Table 4.3: Efforts done by Tanzanian government and frequency scores Efforts No. of respondents No. of actual respondents % of scores Total percentage % Establishment of good investment policy 35 39 89% 100% Provision of investment guarantees
33 39 85% 100% Reduction of licensing bureaucracy 11 39 28% 100% Giving incentives to investors like tax holidays 39 39 100% 100% Application of fiscal policies which attract foreign investors 20 39 51% 100% Improve investment facilitating infrastructures 22 39 56% 100% Reduction of cost of doing business 23 39 59% 100% Source: Analyzed data, 2012
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According to the interview and questionnaires respondents Tanzanian government has done many efforts to attract FDI in the country by making reforms on investment policy reforms which achieves 89% out of actual No. of respondents, provision of investment guarantees (85%), and provision of incentives to foreign investors like tax holidays (100%). However need to strengthen her efforts more on reduction of cost of doing business (59%), Reduction of licensing bureaucracy (28%) and improve investment facilitating infrastructures (56%) since these efforts have achieved fewer score to attract more FDI in the country and East Africa in general.
Special Incentives offered in Mining Industry in Tanzania according to Tanzania Investment Act, 1997 The following are some of the incentives offered by Tanzania in mining industry as an effort to promote FDI in East Africa as per Tanzania Investment Act, 1997:- Examples of special incentives offered in mining industry include; Duty and VAT on all Capital Goods, Spare-parts, fuel and Oils, Explosive and Other supplies. Corporate Tax 30%, Zero percent (0%) Import Duty on Capital Goods, Capital allowance 50% on the first year of income and in subsequent years:- Class I: 37.5% of the balance per annum Class II: 25% of the balance per annum Class III: 12.5% of the balance per annum Addition 15% Capital allowance on un-redeemed qualifying Capital Expenditure as set out in the Mining Act No. 5 of 1998 for those who had invested as of July 2001. Existing investors allowed deferring payment of royalty or getting the royalty refunded when cash flow is below zero. Royalty 3% except diamonds which is 5% No capital gains tax No Tax, duty free or other fiscal import on dividends Indefinite carryover of losses against future profits 40
After first 5 years of commercial production the company will be charged 5% Duty and VAT.
Special incentives offered in Petroleum exploration and Production in Tanzania Below are some of the incentives offered to companies investing in oil Exploration:- (i) Relatively large exploration areas. Normally, a license consists of 60 blocks, however each PSA can consist more than one exploration license. (ii) Long exploration periods of 4 (Initials) 4(first Extension and 3 (second extension) years, Totaling 11 years (iii) Maximum TPDC participation is capped at 20% from former 50% (iv) No signature or production bonus payment (v) Income Tax and Royalty paid for by TPDC on behalf of the concessionary company. (vi) Full allowance for un-recovered exploration costs incurred under earlier PSA's in any contract area by the same companies that make a discovery in a subsequent PSA (No ring-fencing) (vii) No import Taxes on all equipment used in petroleum exploration. (viii) No foreign exchange restrictions (ix) Economic basement interpretation allowed for determination of exploration of well total depth.
KENYAN GOVERNMENT The following are some of the efforts done by Kenyan Government to attract FDIs in the country as mentioned by various categories of respondents in the questionnaires and interview:-
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Table 4.4: Efforts done by Kenyan government and frequency scores Efforts No. of respondents No. of actual respondents % of scores Total percentage % Establishment of good investment policy 27 39 69% 100% Provision of investment guarantees
14 39 36% 100% Reduction of licensing bureaucracy 36 39 92% 100% Giving incentives to investors like tax holidays 17 39 44% 100% Application of fiscal policies which attract foreign investors 24 39 62% 100% Improve investment facilitating infrastructures 39 39 100% 100% Reduction of cost of doing business 12 39 31% 100% Source: Analyzed data, 2012
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According to the interview and questionnaires respondents Kenyan government has done many efforts to attract FDI in the country by making reforms on investment policy reforms which achieves 69% out of actual No. of respondents, Reduction of licensing bureaucracy (92%) and provision investment facilitating infrastructures (100%). However need to strengthen her efforts more on reduction of cost of doing business (31%), Giving incentives to investors like tax holidays (44%), s Provision of investment guarantee (36%), since these efforts have achieved fewer score to attract more FDI in the country and East Africa in general.
The following are the special incentives available for investors in Kenya (According to Kenya Investment Act, 2004) Tax Incentives Investment allowance is provided as an incentive for investment in the manufacturing and hotel sectors at the rate of 100% countrywide. For Manufacturers under Bond, the applicable rate is 100%. In addition, eligible capital expenditures have been expanded to include certain infrastructure and environmental protection equipment related to the manufacturing activity (Kenya Investment Act, 2004)
Export Promotion Programmes Duty Remission Facility Materials imported for use in manufacturing for export; the production of raw materials for export; or the production of duty free items for sale domestically are eligible for duty remission. Applications for this facility should be made to the Tax remission for export office (TREO) at the Ministry of Finance (Kenya Investment Act, 2004).
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Manufacture under Bond To encourage manufacturing in Kenya for export to the world market, the Government has established the Manufacture under Bond programme that is open to both local and foreign investors. Enterprises operating under the programme are offered the following incentives:
Exemption from duty and VAT on imported raw materials and other imported inputs; and, 100 per cent investment allowance on plant, machinery, equipment and buildings.
Bonded manufacturing enterprises can be licensed to operate within a 30 km radius of a Customs Office. This programme is facilitated by the Investment Promotion Centre and administered by the Kenya Investment Authority (Kenya Investment Act, 2004).
Export Processing Zones Programme (According to Kenya Investment Act, 2004) The Export Processing Zones Authority (EPZA) coordinates operations of Export Processing Zones (EPZs). The Government encourages the development of private EPZs, and a number of them have already been established. Enterprises operating in these zones in Kenya enjoy the following benefits: (i) 10 year tax holiday and thereafter a flat 25 per cent tax for 10 years; (ii) Exemption from all withholding taxes on dividends and other payments to non-residents during the first 10 years; (iii) Exemption from import duties on, raw materials and intermediate inputs; (iv) No restrictions on management or technical arrangements; (v) Exemption from Stamp Duty; (vi) Exemption from VAT; (vii) and Operate on one license only. 44
4.4 The contributions of FDI to East African countries social economic development
4.4.1 The contributions of FDI to social economic development in Tanzania The following are some of the contribution of FDI to the country social economic development in Tanzania. (i) The technologies and skills of computer use, Mobile phones use, Security Systems use, etc. have been transferred to Tanzania. (ii) Increasing government Revenue: FDIs have contributed to the government revenue in various ways, which include tax payment, payment of royalty, payment for licenses and fees and payments in the acquisition process of the for state owned enterprises in the divestiture exercise (iii) Capital formation: FDIs contributed to the capital formation in the country. It is also a means of transferring Production Technology, Skills, Innovative Capacity, and Organizational and Managerial practices between locations, as well as of accessing International Marketing Networks. In addition, the Foreign Direct Investment could improve overall growth by promoting competition in the domestic input market. (iv) Infrastructure: This is yet another area which had benefited from FDI. Some progress had been made in Telecommunications and Transport although the high cost and unavailability of power are major impediments. (v) About 2,288,978 direct jobs have been created in Tanzania. (vi) Projects with the value of USD 4,357.6 million capital has been invested in Tanzania in 2008
4.4.2 The contributions of FDI to social economic development in Kenya (i) The technologies and skills of computer use, Mobile phones use, Security Systems use, etc. have been transferred to Kenya. 45
(ii) Increasing government Revenue: FDIs have contributed to the government revenue in various ways, which include tax payment, payment of royalty, payment for licenses and fees and payments in the acquisition process of the for state owned enterprises in the divestiture exercise (iii) Capital formation: FDIs contributed to the capital formation in the country. It is also a means of transferring Production Technology, Skills, Innovative Capacity, and Organizational and Managerial practices between locations, as well as of accessing International Marketing Networks. In addition, the Foreign Direct Investment could improve overall growth by promoting competition in the domestic input market. (iv) Infrastructure: This is yet another area which had benefited from FDI. Some progress had been made in Telecommunications and Transport although the high cost and unavailability of power are major impediment.
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CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.1 Introduction In this chapter, summary of the study, conclusions, recommendations and need for further research are presented. The main objective of the study was to examine the determinants of Foreign Direct Investments in East Africa.
The study was conducted through questionnaires and interviews to the selected sample and data were collected and analyzed. Three important areas of the study concern were the determinants of foreign direct investments in Tanzania and Kenya, efforts done by East African governments (Kenya and Tanzania) to attract FDI to East African countries and the contributions of FDI to East African countries social economic development.
5.2 Conclusion The objective of this study was to examine the determinants of foreign direct investments in East Africa particularly in Tanzania and Kenya. Data were collected and analyzed. The study revealed the following on each country basing on the purpose of the study.
For Tanzania The study revealed that most of the investors attracted to invest in Tanzania than Kenya because abundant determinants of FDIs available in Tanzania than Kenya. Moreover; availability of natural resources, Taxation system, investment policies, political climate, and cheap cost of doing business are key determinants of Foreign Direct Investment in East Africa.
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The study further revealed that FDIs contributed to job creations, Technological transfer, Skills development, Capital formation, Improvement of living standards of citizens, and an increase of government source of revenue.
Furthermore; the study reveals that FDIs has been faced by various challenges which include bad impression on investors developed by local people due to lack of knowledge on FDIs, Poor linkage between major investors and other suppliers, and Bureaucratic licensing.
For Kenya The study revealed that most of the investors attracted to invest in Kenya because of promotion activities, provision of investment incentives, and reforms on investment policies. The study further revealed that FDIs contributed to job creations, Technological transfer, Skills development, Capital formation, Improvement of living standards of citizens, and an increase of government source of revenue.
Furthermore; the study reveals that FDIs has been faced by various challenges which include bad impression on investors developed by local people due to lack of knowledge on FDIs, Poor linkage between major investors and other suppliers, and poor political climate in Kenya.
5.4 Recommendations
For Tanzania Tanzania should improve their economies in order to attract more FDI in East Africa, by doing these major companies will be attracted to operate in East Africa.
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The East African countries should harmonize their investment policies to attract more foreign direct investments and indeed to combine their efforts in forming one promotion centre since they have one community as Eat African Community.
Infrastructure example Railways, Roads and Airports should be improved to attract FDI in various parts of East Africa rather than concentrating in accessible regions. Indeed infrastructure is a very determinant in attracting Foreign Direct Investment (FDI).
To ensure that the new technologies transferred to Kenya and Tanzania is wise used and spread in order to promote more production output in East African Region.
For Kenya FDIs should create jobs in Kenya which means alleviating income poverty to most of Kenyans and East Africa region in general.
Kenya should maintain political stability in the region since is one of the determinants of Foreign Direct Investment (FDI) in every country in the world. Indeed foreign investors before making investment decision they do consider political stability because of political risk.
Kenya should ensure that FDIs build a linkage with the rest of the economy ( a need to review profit repatriation incentive so that FDI investor re-invest profits in Kenya but give them guarantees against imports for creating long-term export capacity). This would ensure that both Kenya and investors enjoy a fair return of FDI inflows.
Kenya Investment Authority should enhance Investment Promotion Activities. This will ensure Kenya attract high quality of Foreign Direct Investment that would lead to meaningful Economic and Social Development in the country. 49
5.5 Suggestion on the direction for future study The study was only conducted in Tanzania and Kenya because of lack of sufficient resources in terms of finance. A cross-country study could be done covering all East African countries could add more value in the findings.
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Tanzania Investment report (2009), Report on Foreign Private Investment in Tanzania
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APPENDICES
Appendix I: Questionnaire for Masters Degree Course Research
To TIC/Investors/Others Dear Respondent The following is the questionnaire intending to collect data basing on the following topic: The determinants of Foreign Direct Investments (FDIs) in East Africa countries of Tanzania and Kenya. You are requested to assist in responding questions as you know them. The information contained in the questionnaire will be confidential, and only for research purposes I anticipate my gratitude to your assistance
PART A: GENERAL INFORMATION RESPONDENTS SHOULD COMPLETE THIS PART (a) Name... (b) Company (c) Name and position of a person completing this questionnaire
(d) Company Address: P.O. Box.. RegionDistrict. Telephone Number.Fax... Web site..Email... (e) Date of establishment.. (f) Date of commencement..
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PART B: QUESTIONS
1. What are the determinants of Foreign Direct Investments (FDIs) in Tanzania? (i) (ii) (iii) (iv) (v) (vi)
2. What are the determinants of Foreign Direct Investment in Kenya? (i) . (ii) . (iii) . (iv) . (v) . (vi) .
3. Which Country (Tanzania/ Kenya) has more FDI determinants than the other? ................................................................................................................
4. What are the contributions of Kenyan/Tanzanian government on creating more FDI determinants? (i) (ii) (iii) (iv) (v) 56
5. What should be done by the Kenyan and Tanzanian governments to create more determinants of FDIs? (i) ... (ii) ... (iii) ...
6. What are the contributions of FDIs to East African Countries economies? (i) ............... (ii) ............... (iii) ...............
7. What are the key sectors attracting FDIs in East Africa? (i) ................................. (ii) ..................................... (iii) ..................................... (iv) ......................................... (v) .....................................
8. What are the challenges facing foreign direct investment in East Africa? (i) ................................................................................................................. (ii) ................................................................................................................. (iii) .................................................................................................................
9. Any Observations/Suggestions? (i) (ii)
Thank you in Advance for your Cooperation 57
Appendix II: Interview Questions to Investors/Others
Dear Respondent The following Interview intended to collect data basing on the following topic; the determinants of Foreign Direct Investment in East Africa case of Tanzania and Kenya. You are requested to assist in responding questions as you know them. The research is for academic purposes and the report will be submitted at Mzumbe University as part of the requirements for Msc. Accounting and Finance degree. I anticipate my gratitude to your assistance General information Name of Interviewee...Phone number Company NameFax..Email
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Questions 1) To what extent do the following Investment Determinants attract FDI in Tanzania and Kenya? Determinants of FDI Strong Positive Effect Positive Effect No Effect Negative Effect Strong negative Effect Abundant natural resources e.g. minerals
Political climate One stop centre for investment facilitation and promotion e.g. TIC and Ken Investment
Incentives for investment
Investment policies Cost of doing business Investment facilities e.g. Telecommunication & Roads
Investment opportunities
Licensing bureaucracy Investment guarantees
2) Do you think Tanzania has more FDI determinants than Kenya?
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3) Do you think Kenyan and Tanzanian governments are taking proper efforts to attract more FDIs in East Africa?
4) Do you think FDI is contributing to East African Countries economies?
5) Do you think TIC and Ken Investment have played their roles to attract FDI in their respective countries?
Thank you in Advance for your Cooperation
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Appendix III: Kenya Sectors Break down of FDI Projects Registered by IPC, 1997-2004 (Percentage of foreign capital value) Sectors Percentage Tourism 10.7 Power 15.4 Agro 9.9 Petrol services 4.4 Pharma 3.0 Mining 2.5 Garments 2.2 Other Manufacturing 27.6 Others 24.2 Total 100 Source: Investment Promotion Centre
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Appendix IV: FDI by Sectors in Tanzania, 1999-2008 (Percentage of foreign capital value) Sectors Percentage Mining 26.99 Manufacturing 22.95 Wholesale and retail trade 15.29 Finance 13.07 Communication 8.35 Utilities 6.80 Construction 3.80 Agriculture 2.25 Community and social services 0.49 Total 100.00 Source: PCF survey
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TANZANIA INVESTMENT CENTRE PROJECTS REGISTRATION AND FOR TEN LEADING COUNTRIES Leading countries 1990-2007 Descending by Value Country Projects Jobs Value (Mln.USD) UK 554 234,115 1,267.58 India 166 20,685 1,022.27 Kenya 274 40,515 976.62 USA 130 37,974 565.02 SA 130 14,600 480.77 Netherlands 100 10,392 480.08 China 174 50,666 449.27 Germany 119 12,207 266.71 Italy 76 5,820 84.26 Swiss 38 4,492 67.60