Moderating Role of Interest Rate on the Relationship Between Tax Incentives and Foreign Direct Investment Inflows in Athi River Export Processing Zone, Kenya

Abstract

This study examined the moderating role of interest rates on the relationship between tax incentives and foreign direct investment (FDI) inflows in Kenya’s Athi River Export Processing Zone (EPZ). Using secondary data from 2014–2023 sourced from EPZA, the Central Bank of Kenya, and international databases, the study applied hierarchical multiple regression to test both direct and interaction effects. Diagnostic tests confirmed that assumptions of ordinary least squares regression were satisfied (Durbin–Watson = 1.83; VIF < 2.5; Breusch–Pagan p = .218). Descriptive statistics revealed that tax holidays averaged KES 2.13 billion annually, making them the most utilized incentive, while investment allowances averaged KES 832.6 million. Correlation analysis indicated that FDI inflows were positively associated with duty exemptions (r = .612, p < .01) but negatively correlated with tax holidays (r = –.482, p < .05) and interest rates (r = –.539, p < .05). Regression results confirmed that duty exemptions significantly increased FDI (B = 9.12m, p = .014), while tax holidays significantly reduced inflows (B = –19.92m, p = .018). Introducing interaction terms improved explanatory power markedly (ΔR² = .367), with interest rates significantly moderating the effects of both duty exemptions and tax holidays (p < .05). Findings underscore that fiscal incentives alone are insufficient to attract sustainable FDI; their effectiveness is conditional on supportive monetary policy and stable interest rates.