Foreign Direct Investment, Firm-Level Capabilities and Human Capital Development: Evidence from Kenyan Manufacturing Industry

This paper uses firm-level survey data of Kenyan manufacturing industry to examine the significance of FDI and firm-level capabilities in human capital development. It undertakes a detailed descriptive comparison of human capital and other firm-level capabilities generated by both foreign and locally owned firms. The analysis shows that foreign firms generally enjoyed high human capital development and firm-level capabilities than locally owned firms. Empirical evaluation of human capital determinants revealed a statistically significant role played by FDI in determining human capital development in all the firms. Other factors which demonstrated an equally significant role included specific firm level capabilities; process, product, marketing and export performance. Interestingly, basic infrastructure, systemic embeddedness, firm size, labour market conditions and the role of government were not statistically significant, implying their weak role in human capital stimulation. The choice of Kenyan manufacturing industry presents an ideal case to evaluate FDI, firm-level capabilities and human capital development for two main reasons. First, the Kenyan economy has continued to witness low levels of economic growth despite having literally lifted most industrial controls and protections since introduction of structural adjustment programme from mid 1980s. Second, although Kenya has low levels of FDI in general terms it has high levels of foreign presence in selected industries. The Kenyan case is therefore expected to offer important policy ramifications for other countries in the sub Saharan region.