Tax incentives, firm size, and investment decision of Manufacturing firms listed at the Nairobi securities exchange In Kenya

Abstract

Tax incentives, such as municipal bonds in the USA and Individual Savings Accounts in the UK, have historically provided opportunities for firms and households to channel resources into productive ventures. In Kenya, the Nairobi Chamber of Commerce and Industry (2024) reported that 68% of manufacturing enterprises faced challenges in understanding and utilizing tax incentives, particularly in compliance and interpretation. This study examined the effect of tax incentives, firm size, and investment decisions of manufacturing firms listed on the Nairobi Securities Exchange (NSE) in Kenya. The study was guided by the Neoclassical Theory of Investment, the Investment Tax Credit (ITC) Theory, the Agency Theory, and the Resource-Based View Theory. A correlational research design was adopted, using panel data from five manufacturing firms listed on the NSE: British American Tobacco Ltd, East African Breweries Ltd, Unga Group Ltd, Bamburi Cement Plc, and Carbacid Investments Plc. Secondary data covering 1995–2024 were extracted from audited financial statements and NSE reports and analyzed using STATA Version 12. Diagnostic tests, including the Shapiro–Wilk test for normality, White’s test for heteroskedasticity, Breusch–Pagan LM test for autocorrelation, and Hausman test for model specification, confirmed data reliability. Correlation results showed strong positive relationships between tax credit incentives (r = 0.9317), tax exemption incentives (r = 0.9378), and tax deferral incentives (r = 0.9339) with investment decisions. Firm size exhibited a moderate positive correlation (r = 0.5853) with investment decisions. Panel regression results revealed that tax credits and tax deferrals incentives had positive and statistically significant effects on investment decisions (p < 0.05), while tax exemption incentives were insignificant (p > 0.05). Firm size significantly moderated the relationship between tax incentives and investment decisions (p < 0.05). The study recommended that policymakers enhance the design and administration of tax incentives and align them with firm size differences. The study contributes valuable empirical evidence to fiscal policy and expands theoretical understanding of how firm characteristics influence investment outcomes within fiscal policy environments.