Billions in foreign direct investment (FDI) flow into Kenya annually but little is driving the country’s industrial progress as the funds are misdirected, according to a new report
A Kenya Institute for Public Policy Research and Analysis (KIPRRA study says that FDI inflows largely bypass critical industrial sectors such as manufacturing, mining and construction, and is instead channelled into service sectors like retail, finance, ICT and hospitality.
Even when foreign investment enters industrial sectors, the report says it is often in forms—such as greenfield projects, that take too long to become productive or fail to align with local industrial needs.
Crucially, the study established that both FDI and domestic direct investment (DDI) have statistically insignificant effects on industrial output in the four key sectors analysed, pointing to deep-rooted structural issues in how Kenya attracts and manages capital investment.
“FDI brings in capital, yes—but it's not translating into factories, machinery, or value-added exports,” the report warns.
For instance, in the mining and quarrying sector, FDI is mostly limited to brownfield expansions—upgrades of existing operations—while manufacturing remains dominated by greenfield ventures and innovation initiatives that are slow to yield returns.
The study titled Effects of foreign direct investment on industrialisation in Kenya, shows that the electricity, oil and gas sectors show better results, with both FDI and domestic direct investments (DDI) contributing to growth, although local investment remains the stronger driver.
In construction, the study finds that FDI and DDI significantly boost GDP contributions, with local investments proving better aligned with Kenyan infrastructure needs.
“Despite Kenya’s strategic efforts and economic reforms and incentives through EPZs and SEZs to attract and retain FDI, there has been a notable decline in FDI’s GDP contribution,” the report reads in part.
The public policy research institution, says that statistics show that the percentage of FDI inflows to GDP has dropped from 4.77 per cent in 2011 to 0.65 per cent in 2022, making it a policy concern for the country.
“Further, the decline of FDI inflows contribution to GDP poses a policy question on how the declining contribution of FDI to GDP impacts industrialization in the country,” noted KIPPRA.
To reverse the trend the study warns that without immediate policy overhauls, the country risks missing out on the transformative benefits of industrialisation.
The report urges the government to implement targeted reforms to attract high-value investments that build local capacity rather than merely drawing capital.
Among the key recommendations is a shift in mining policy to prioritise brownfield investments through joint ventures between local and foreign firms.
This approach, the study argues, would facilitate technology transfer and strengthen domestic expertise.
Additionally, the report calls for a comprehensive revision of the National Industrial Policy to create a more investor-friendly legal and regulatory environment, particularly for greenfield manufacturers.
“This will encourage greenfield investments in the sector and strengthen local capabilities by encouraging the adoption of 4th industrial revolution technologies to enhance productivity and competitiveness,” reads the report.
To spur investment in energy, the study proposes incentives such as tax holidays and duty waivers on essential infrastructure inputs.
It also emphasises the need for strategic public-private partnerships in construction to ensure FDI aligns with national infrastructure goals and delivers tangible benefits to Kenyan citizens.
Kippra says Kenya’s current policies are failing to harness FDI for long-term industrial growth.
Without decisive action, the report warns, the country will continue to attract capital without building the capacity needed for sustainable economic transformation.
