How Kenya finally turned the corner on FDI

Abandoned by investors from the late 1980s to the 1990s, the country is set to welcome them back

Is Kenya ready for foreign direct investment? The answer is a cautious yes, and some background is important in backing up this optimism.

Things have well and truly turned around on the foreign direct investment front for many African countries, Kenya included. In the late 1980s and 1990s an utterly unfavorable investment climate saw the flight of investment capital from Kenya while at the same time dissuading potential investors from setting up shop in the region.

Some of the difficulties that made mostly Western investors flee and leave the door wide open for the entrant Chinese capital included time-consuming licensing procedures leading to high startup costs, punitive labor regulations and poor transport and energy infrastructure. To make matters worse, the so-called Western Consensus Structural Adjustment Programs were slapped on Kenya, adding to the evaporation of foreign investment.

As the mostly Western investors were packing their bags and returning to their countries or making beelines for other emerging havens of investment, Chinese investors saw a yawning gap that begged to be filled.

Starting out small, the initial Chinese investment in Kenya in the 1980s, as elsewhere on the continent, were comparatively small. However, the success of some of the ventures coupled with the departure of traditional investors saw to an increase in investment throughout the 1990s, ramping up to a flood in the 2000s and continuing to rise in the 2010s. By last year China had roared past the US, the UK and Japan to become Kenya's biggest FDI source with $474 million.

As fate would have it, the debut of Chinese investors in the Kenyan economy coincided with a new democratic dividend. Kenya held a smooth transition from the leadership of retired president Daniel arap Moi and ushered in the transformative regime of yet another retired president, Mwai Kibaki. The Kibaki administration's first act was to look closely at the policy failures of the past regimes, and the result was an economic recovery strategy that was heavy on attracting foreign investors. Where foreign investors had made do with a risky business environment, the new regime smoothed the way across "doing-business" parameters. To cap it all, Kenyan honchos with the input of the private sector created Vision 2030, aimed at making the country a middle-income state by that date. With the recent rebasing of the economy, Kenya in fact attained middle-income status ahead of time. Its GDP now stands at $53.4 billion.

The importance of Vision 2030 is that Kenya is today seeking investors in just about any sector of the economy. These include infrastructure development, of which the building of a new port in the northern coastal city of Lamu and attendant inland rail and road transport corridors is a signature project. It so happens that the period of Kenya's version of the Chinese opening up coincided with the discovery of a bonanza of natural resources ranging from huge oil deposits in the northwest, coal in the central-east and rare earths in the coastal regions said to be second only to those of China.

All these natural resources require foreign investment, and this has prompted revision of mining laws across the board. According to Business Daily, the Kenyan business and finance newspaper, "capital inflows to gas, oil and manufacturing sectors pushed Kenya's FDI up 98 percent to $514 million (Sh45.7 billion), up from $259 million in 2012". Forecasts by a number of supranational and industry analysts indicate that FDI will continue to rise in the coming years.

Likely buoyed by the recalculation of the economy, the country, under the leadership of President Uhuru Kenyatta, has recently unleashed plans for attracting even more investors. These include the creation of a one-stop shop for investor services under the now revamped Kenya Investment Authority on the basis of a newly minted national investment plan. Under the new investor services regime, investors can fast track entry into the market as formerly disparate laws and regulations have been simplified, cutting back on intricate bureaucratic red tape and piles of regulations that held back investors. In doing this, Kenya may have looked to Rwanda, the next-door neighbor that has long held sway as one of the continent's super performers in attracting investors.

This is no idle supposition, given that Kenya has always sought to maintain its lead as a powerhouse economy in eastern Africa but one that was under threat from emergent economies on the continent. The ambitious benchmark for foreign investor setup times has been earmarked for just one week, down from the current period of one month.

On the negative side, Kenya will have to carefully consider the impact of terrorism in the northeastern and coastal parts of the country, among other challenges.

The author is a PhD candidate at the Communication University of China in Beijing and research associate at the University of Witwatersrand, Johannesburg, South Africa.