Mediating Role of Absorptive Capacity on the Relationship between Foreign Direct Investment and Local Firm’s Performance

There is little documentation on the role of absorptive capacity on the relationship between FDI and performance of firms. This paper investigates the mediating role of absorptive capacity on the relationship between FDI and performance of manufacturing firms in Kenya. The population of study comprised 100 companies registered with Kenya Association of Manufacturers that had over 10 percent foreign ownership as at the time of data collection in 2019. The respondents were the CEOs of organization or their designated officers. The study used a structured questionnaire to collect primary data. The respondent were required to indicate how the introduction of FDI impacted on organizations capital flow, advanced production technology, marketing expertise and management knowhow. They were also to indicate the extent their Organisation had invested in absorptive capacity and the effect absorptive capacity had on the relationship between FDI and local firm performance. Descriptive and inferential statistics were both used to analyze the data. The results revealed that absorptive capacity has statistically significant mediating effect on the relationship between FDI and firm performance. This imply that an incremental change in the absorptive capacity would generate growth in company’s performance. As such Kenyan and other sub-Sahara African countries government need to come up with polices geared to supporting improvement of firms absorptive capacities so as to spur the growth of their key sectors of the economy.