Discussion Paper No. 202 of 2018 on Foreign Direct Investment, Spillover Effects and Innovation: Experience from the Kenya Enterprise Sector

Abstract

Globally, the role of Foreign Direct Investment (FDI) in promoting innovation in the host economies has not been certain. Various studies have established that the impact varies across countries depending on economical, technological and institutional arrangement. Therefore, this study seeks to establish whether spillovers effects from FDI inflows influence innovation among Kenyan enterprises. Using the World Bank Enterprise Survey data of 2013 and the Crepon, Duguet and Mairesse (CDM) model of 1998 in the empirical analysis, the study findings provide evidence that FDIs influence process and market innovation among Kenyan enterprises through forward spillovers and horizontal slipover effects, but there is no evidences of backward spillovers. The study further establishes that innovation expenditure from foreign firms, exporting activities, sourcing international quality certification and use of ICT positively influence product, process and market innovation in Kenya.