The impact of FDI on firm-level productivity in Kenya.
The relationship between FDI and firm-level productivity has not been extensively reviewed and established in the context of Kenya. Although previous studies have examined this relationship in the context of Kenya to some degree, many of them have either based their studies on data that is not current or have studied the relationship in an abstract manner such as through cross-country analyses, which have not been able to specifically isolate the relationship that is currently existent between FDI and productivity in Kenya. Hence this study aims to determine the effect of FDI on the productivity of firms within Kenya’s manufacturing sector using fairly recent firm-level panel data covering the periods 2007 and 2013 respectively. The two stage least squares (2SLS) instrumental variable estimation technique is applied to establish the relationship between FDI and firm-level productivity in Kenya’s manufacturing sector for the periods under study. Furthermore, the study makes use of similar approaches used in studies such as Zhou, et.al (2002) and Banga (2004) where two models are estimated; one calculating total factor productivity (TFP) and the other using TFP as the response variable in the equation estimating the relationship between FDI and firm-level productivity. The results obtained thereof show that the relationship between FDI and firm-level productivity within Kenya’s manufacturing sector for the periods under study was positive and significant both in the cases where TFP and labour productivity were used as measures of productivity. Moreover, the study established that in terms of TFP, FDI in the manufacturing sector did yield positive productivity spillovers for domestic and other firms but in terms of labour productivity, FDI had no effect on the productivity of domestic and other firms in Kenya’s manufacturing sector during 2007 and 2013.