Kenyan Exports: Tax Incentives, Firm Traits, Firm-Level, and Macroeconomic Determinants

Abstract

This study sought to understand the traits of the Kenyan exporter, what drives exports performance, and how the exporter responds to targeted policy measures. A two-stage approach to modelling was used. In the first stage, the firm’s decision to export was done in a panel logistic model. In stage two, the drivers of export volumes at the macro-level were estimated using a Vector Autoregressive (VAR) model. The panel econometric modelling method was applied to 118,380 firm-level data spanning 2014 to 2019. While firm-specific characteristics (age, size, access to credit, labour intensity, and labour quality) affect exports, government policy informs of tax incentives may not create a substantial difference in the decision and volume of exports at the firm level. Exporting firms are labour intensive. The results of a VAR model using time series data from 1960 to 2020 confirm the firm-level analysis. Kenya exports are more driven by local production capacity than world demand. Secondly, exports are more labour responsive than capital responsive at a macro level. Local productivity capacity is significantly labour-driven than capital-driven. Therefore, labour-targeted policies would be more impactful. Exports response to local production capacity is instantaneous while a period of 3.5 years lapses before exports respond significantly to world-changing demand.