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Challenges of Increasing Domestic Investments in Kenya By Jimnah Mbaru Introduction All over the world it is now appreciated that all new investments are undertaken either by entrepreneurs, governments or corporations. Individuals tend to invest mainly in household items or their own dwelling houses. In fact, to an individual a house is the greatest or major investment. Otherwise when they invest in business they do so as entrepreneurs or businessmen. Generally, most of the major investments are undertaken by big companies or corporations. They invest either in new enterprises, modernization of existing ones or acquisition of other enterprises through takeovers. It is also acknowledged worldwide that the principal sources of funds or savings for investments come from either corporations or the governments. Individual savings are not that very significant, as individuals tend to consume most of their earnings, and most governments tend to run a budget deficit. Kenyan Situation In Kenya, the principal sources of savings come from corporations or companies. This is because the government tends to run a budget deficit and is, therefore, not a major saver. Individuals also tend to consume most of their earnings due to rampant poverty. The extended family system also tends to take a major portion of ones potential savings. The wealthier tend to engage in conspicuous consumption. This is why only the major corporations tend to be the principal savers. The principal corporations operating in Kenya are subsidiaries of multinational corporations. The savings from these corporations come from retained earnings after payment of dividends. Depreciation expenses also are a form of savings. When these corporations earn profits they tend to declare hefty dividends averaging over 60% of their earnings. These are then repatriated out of Kenya to their shareholders who often are the parent companies. Other non-Kenyan individual investors also tend to repatriate their profits to their original home. Non-Kenyan individuals also tend to send out of Kenya a lot of funds to educate their children overseas. The net implication of this situation obtaining in Kenya is that the private sector which is dominated by foreign owned corporations is not only a major source of de-savings but also a net exporter of capital from Kenya. So long as these corporations are not re-investing in Kenya their surplus profits, Kenya will continue to have a low investment rate. The major arguments for this behaviour by corporations is that there are not profitable ventures in Kenya or they have to focus on their core business which means they cannot diversity too much. So how then do we increase our level of investments in Kenya? Experiences from Japan, Germany, South Korea, East Asia, etc In the above countries which have developed very fast after the Second World War, their economies witnessed heavy and increasing investments. But the principal and common factor among these countries is that their economies are dominated by domestically owned and controlled corporations. In Japan, such companies as Mitsubishi, Sony, Mitsui, Nissan, etc dominate the economy. In South Korea, you have Hyundai Corporation, Daewoo, KIA motors, etc. In India, Tata group is one of them and in Malaysia, you have Sim Daie, etc. The story is the same in Germany with their Daimler Benz, BMW, Siemens, etc. All these domestic corporations in these countries are the principal sources of new investment. The profits made are re-invested in the country. Where governments have surplus in their budgets these are also invested in the country unless there is a time lag when the funds are held temporarily in foreign reserves. Where these corporations have invested offshore, when they make profits the same is repatriated back home in form of dividends where it is then re-invested. Kenya does not have offshore investments and with its economy controlled by foreign owned corporations, is a net loser of savings. And this explains the ever-continuing declining level of investments in the country. What can Kenya do to increase its level of investments? There are two ways of addressing this challenge of increasing this level of investments. Firstly, is to draw from our own experience. Between 1963 and 1978, the Kenya Government invested heavily in the private sector. In fact, under the Sessional Paper No. 10 of 1965, it was declared that Kenya would have a dual investment strategy. It would encourage the Government to invest where local entrepreneurs did not have enough capital to invest. This is how companies such as Kenya Commercial Bank, National Bank of Kenya, ICDC, DFCK,Uchumi, HFCK, Kenya National Assurance, Kenya Reinsurance Corporation, Kenya Airways, Kenya Power & Lighting, etc came into existence. In their hey day they were a major source of investments from their retained profits (when they were profitable). As domestic companies all their profits were retained in Kenya. In many ways it is these profits which contributed to the high investment rates of the 1960's and 1970's which then contributed to the high growth rate of about 7% per annum. The Government then as a major entrepreneur contributed to the increased level of investments. The continued role of government as a major player in the private sector cannot be gainsaid. Even in the South East Asian countries including Japan, Singapore, Malaysia, etc., the government is still a major investor in the private sector. Kenya should rethink this strategy. The second way of promoting increased investment, development and economic growth is to support indigenous institutions on a massive scale. Every country has a programme to support its people particularly if they are disadvantaged. In South Africa, they have the Black Empowerment programme to support the black Africans. In Malaysia, they have Bumiputra programmes to support the indigenous Malays; in USA they have Affirmative Action programmes to support the minorities, etc. In Japan, the government literally closed their market to foreign owned corporations in order to support their domestic corporations. It is only now they are being urged to open their market through pressure from the USA government and World Trade Organization (WTO). They closed their markets through introduction of non-quantitative restrictions or non-tariff measures. The profits from these indigenous institutions contributed and continue to contribute to the high investment rates in these countries. The Kenya Government was doing very well in this respect until mid 1980's before the then Government deliberately decided to destroy certain indigenous institutions and corporations for political reasons. One remembers such institutions as Continental Bank, Kenya Finance Corporation, Rural Urban Finance Corporation, Union Bank, Madhupaper industries, J.K. Industries, etc. There were also active and prosperous cooperative societies such as coffee and tea growing corporations, milk processing companies, among others. The destruction of all these institutions is the genesis of the present predicament in our economy. The closure of the indigenous financial institutions in particular made access to credit by local people extremely difficult. The growth of such sectors as housing, construction, transport sector with matatus as a backbone all were supported by these local institutions. The creation and support of local institutions is, therefore, central to the revival of the economy as well as increased investments in this country. Conclusion In order, therefore, to encourage more investments in this country, the government must firstly spend more time, may be 90% of its time creating and improving an enabling environment for domestic businesses to expand, grow or emerge. After all, it is not easy to attract new foreign investments in this country at the moment - given the better opportunities in other countries. Secondly, it should come up with appropriate policies such as tax and other incentives to encourage foreign owned corporation to reinvest more of their profits in the country. Thirdly, Kenya should strive to develop the country as a base for doing business within the region and the continent. The writer is the Chairman of Dyer and
Blair Ltd., a stock broking company, a member of the Nairobi Stock
Exchange. E-mail address: mbaru@dyer.africaonline.co.ke
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