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An Assessment of the Investment Climate in Kenya (Directions in Development)

An Assessment of the Investment Climate in Kenya (Directions in Development)

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Although Kenya has recorded some improvements in the last four years, including an increase in productivity, Kenyan firms still face an adverse business environment. The central objective of this book is to identify the main impediments to productivity growth faced by Kenyan firms. The top constraints identified by the Kenyan managers were tax rates, access to finance, corruption, security, infrastructure services (electricity and transportation), and business licensing. Kenya has reduced the corporate tax rates in recent years. Nevertheless, objective indicators suggest that the tax burden in Kenya remains higher than in most comparator countries. Although a more detailed analysis of the tax burden in Kenya is recommended, one potential impact of a high tax regime is higher evasion, as well as the presence of a larger informal sector. Notwithstanding a favorable lending regime with low real costs of debt and a high proportion of firms with good quality information, 90 percent of microenterprises and 60 percent of small firms in Kenya declare they need loans, compared to 40 percent of medium and large firms. Although its ranking has improved over the last four years, corruption remains one of the top bottlenecks for firms in Kenya. In general, 75 percent of firms in Kenya reported having to make informal payments to get things done with rules and regulations. Corruption costs Kenyan firms approximately 4 percent of annual sales. Finally in 2007 approximately one-third of Kenyan managers rated crime as a major constraint and close to 80 percent of firms in Kenya experience losses because of power interruptions. As a consequence, almost 70 percent of firms have generators, which are costly to obtain and operate. Similarly, Kenyan companies lose 2.6 percent of their sales because of spoilage and theft during transportation.