Kenya firms double investments abroad

The bump in outward FDIs reflects heightened investments in foreign subsidiaries, signalling an expansion of offshore operations.

“From the look of things it [rise in outward FDIs] could be largely because of mergers and acquisitions. We have seen quite a number at least on the regional front in East Africa, including on the private equity side, which has been picked up as FDI outflows,” Churchill Ogutu, a Nairobi-based economist at IC Group, told the Business Daily.

“It could also be a question of diversification because of the uncertain economic environment last year which could have made firms look outward to see areas of opportunity and expand their businesses and that leads to FDI outflows,” he added.

An outward direct investment is a business strategy in which a domestic firm expands its operations to a foreign country. This is common among firms that feel their respective domestic markets are saturated and better high-growth business opportunities are available abroad.

Such outflows often boost a firm’s investment competitiveness and buttress long-term sustainable growth.

Large companies that have made significant investments through acquisitions in regional markets in recent years include lenders KCB and Equity in DR Congo and Rwanda and Safaricom in Ethiopia.

The UNCTAD annual World Investment Report estimates FDI outflows were equivalent to 87.16 percent of investments made by foreign firms in Kenya.

FDI flows into Kenya — through either setting up of Greenfield projects or mergers and acquisitions — was largely flat in 2024 compared with the year before, according to UNCTAD’s annual World Investment Report published Thursday.

The report estimates FDI inflows at $1.503 billion (Sh194.31 billion), a marginal 0.07 percent drop compared with $1.504 billion (Sh194.44 billion) in 2023.

This means annual foreign investment flows into Kenya have declined for two consecutive years when the economic setting was characterised by increased taxation and reduced incentives amidst heightened uncertainty that followed deadly anti-government protests in mid-2024.

The UNCTAD FDIs data – which largely focuses on greenfield investment in selected industries, project finance in infrastructure, and the largest multinationals' production activities – usually differs from findings of state-funded biennial Foreign Investment Survey (FIS).

The report names Kenya among countries that have either “implemented additional taxation measures affecting foreign investors or have withdrawn previously established incentives”.

“For instance, in 2024 Kenya introduced a 10-year cap on incentives for SEZ [special economic zones] developers,” UNCTAD analysts wrote in the report published Thursday, adding that the introduction of “significant economic presence rule” also impacted FDI flows into the digital economy.

Kenya, through the Business Laws (Amendment) Act, capped the period for which enterprises in the SEZ can get the tax benefits to 10 years. Previously, the SEZ enterprises were allowed to pay corporate income tax at 10 percent for 10 years, rising to 15 percent for the next 15 years.

Although the law was enforced in late December, it had been a subject of debate since May 2024 because it was part of the contentious Finance Bill 2024 which was withdrawn after deadly youth-led opposition.

The SEZ operators get a raft of exemptions from tax laws at national and county levels, special access to work permits or visas for foreign nationals up to 20 percent of full-time employees, easier repatriation of profits, faster project approval and licensing as well as exemption from rent and tenancy controls.

The Ruto administration also replaced the digital service tax of 1.5 percent of gross sales with a significant economic presence (SEP) tax at the rate of three percent for foreign firms operating in the digital marketplace.

Foreign firms that are part of a multinational group with a consolidated annual turnover of upwards of €750 million (about Sh111.16 billion) are also required to pay minimum top-up tax at the rate of at least 15 percent of their net income to the Kenya Revenue Authority.

The taxation measures are aimed at ensuring multinationals doing business in Kenya contribute to the domestic tax base even without a physical presence, given the rising shift to the digital economy, e-commerce, and cross-border services which are hard to tax.

“The intangible nature of digital services and the absence of physical presence in a jurisdiction makes the attribution of value creation and oversight of transactions difficult,” the UNCTAD says. “Without specific rules to govern this type of income, it may also lead to market distortions between digital and non-digital companies and to profit shifting by MNEs [multinationals].”

The stagnant inflows into Kenya bucked a trend where all major countries in the region recorded a growth in investments from foreign firms.

Ethiopia continued to control FDIs in the East Africa region with inflows of $3.984 billion (Sh515.05 billion), a growth of 21.87 percent over $3.268 billion (Sh422.49 billion).

Inflows into Uganda rose 10.39 percent to $3.305 billion (Sh427.27 billion) from $2.994 billion (Sh387.06 billion), while Tanzania’s grew at a faster pace of 28.30 percent to $1.718 billion (Sh222.10 billion) from $1.339 billion (Sh173.10 billion).