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A new report by the Kenya Bureau of Statistics (KNBS) has revealed that foreign investors are drawn to Kenya by the country's skilled human capital and market access, acting as major attractions.
However, these investors also face significant challenges, including substantial operational costs and governance issues.
According to the recently released Foreign Investment Survey Report, investors cited the availability of a highly skilled and productive labour force (22.9%), market access (17.1%), and the ease of doing business (17.1%) as some of the key factors that influenced their decision to invest in Kenya.
However, a staggering 70.0% of respondents identified the electricity supply as the most expensive business-enabling service.
Photo from the Foreign Investment Survey Report
Financial services, immigration services, and single business permits were also rated as having high costs by 58.5%, 55.8%, and 51.8% of respondents, respectively.
Furthermore, tax administration, corruption, the political environment, and the cost of electricity were identified as high-priority areas of concern that require improvement.
Despite the challenges, optimism remains strong. 39.5% of respondents plan to reinvest and expand over the next three years, 25.0% intend to diversify, while 30.3% aim to maintain their current investment levels."
This mixed outlook is also seen in the country’s capital flows. According to the report by KNBS, CBK, and KenInvest, Kenya’s total foreign investment rose by 3.4% to Sh2.34 trillion in 2023, even as the year recorded a net outflow of Sh27.5 billion.
This means more foreign investors pulled money out than those who put new money in.
This marks a sharp reversal from 2022, which saw a net inflow of Sh43.6 billion.
Photo from the Foreign Investment Survey Report
Shifting Sources of Capital
The report also highlights a significant realignment in the geographic sources of investment.
Europe has solidified its position as the largest source of foreign capital, increasing its share of total foreign liabilities to 35.0% by the end of 2023. The United Kingdom and the Netherlands are the primary drivers of this trend.
In contrast, investment from Asia saw a notable decline, with the total stock dropping from Sh231.8 billion in 2022 to Sh217.9 billion in 2023.
Meanwhile, Africa has emerged as the second-largest source of foreign investment, with major contributions from South Africa, the Democratic Republic of Congo, and Mauritius.
Where the Money is Going
Despite the challenges, Foreign Direct Investment (FDI) continues to flow into key sectors of the Kenyan economy.
The Finance and Insurance sector remains the top destination for FDI, attracting 28.1% of the total stock and growing by 9.6% to Sh409.7 billion in 2023.
It is followed by the manufacturing sector, which holds the second-largest share of FDI at 14.8%, with its stock increasing by 6.3% to Sh216.2 billion.
The Information and Communication sector also posted strong growth, with its FDI stock rising 8.1% to Sh186.6 billion.
President William Ruto and Trade CS Lee Kinyanjui during the Presidential Private Sector Roundtable, Nairobi County.
Boost for Local Employment
A major positive takeaway from the report is the clear benefit to the local job market. Total employment in the surveyed firms rose by 3.3% in 2023, a growth driven almost entirely by a 3.6% increase in the hiring of local employees.
In a significant shift, the number of foreign employees on short-term contracts fell sharply by 22.4%, while those on long-term contracts decreased by 3.0%.
As a result, local Kenyans now constitute 98.4% of the total workforce in these foreign-invested firms, underscoring the success of prioritising local talent.
The report also noted an improvement in gender balance, with the proportion of female employees rising to 39.1%.