Effect of corporate taxation on investor attraction of listed manufacturing firms in Kenya
Date
2023
Authors
Kariuki, C.
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Publisher
Strathmore University
Abstract
The manufacturing sector in Kenya has been a key component to the robust growth in the country’s total productivity. According to the vision 2030, the ambition of the Big Four Agenda is to raise the sector’s contribution to 15 per cent of GDP by 2022. However, in recent years the contribution of the sector has been declining and the performance of the listed manufacturing companies has been volatile. The sector has been experiencing a falling GDP share in recent years from 9.3 per cent in 2016 to 7.2 per cent in 2020. The share of formal employment in manufacturing sector has also largely remained stagnant in the same period at 11 per cent to the total formal sector employment. Despite manufacturing being a key pillar in the development agenda, the country generally lacks a predictable and stable tax policy that gives manufacturers a long-term view to enable them to make appropriate growth plans. This study therefore utilised Kenyan listed manufacturing firm-level panel data set over the period 2009 - 2021 to investigate the nexus between corporate taxation and investor attraction in the manufacturing sector in Kenya. The research adopted the neoclassical investment theory and the Q theory of investment in guiding the study. The study used a panel data regression model which allowed for the handling of not only the dynamic structure of the model and of the predetermined or endogenous explanatory variables, but also firm-specific factors, macroeconomic effects, heteroskedasticity, and autocorrelation of individual observations. The study revealed that corporate taxation held a significant effect on investor attraction of listed manufacturing companies in Kenya. In terms of the individual proxies for corporate taxation; tax incentives did not have a significant effect on investor attraction. However, effective tax rate and tax progressivity had a significant effect on investor attraction. Given the significance of taxation on investor attraction, the study recommends the need for policy makers to create a more effective and pro-industry national taxation structure that carefully considers the impact of the mutual effect of tax incentives, effective tax rate and tax progressivity on investment attraction of firms in the country. By addressing issues related to clear tax policy objectives, frequent changes in the tax code and multiple taxation, the government can improve the economy’s competitiveness and value proposition to attract investors.
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Citation
Kariuki, C. (2023). Effect of corporate taxation on investor attraction of listed manufacturing firms in Kenya [Strathmore University]. http://hdl.handle.net/11071/13383