A. Sanghi and D. Johnson <!-- Start of picture text --> 80<br>200<br>60 Business Services<br>150 Construction<br>Business Services Design, Development & Testing<br>Design, Development & Testing Electricity<br>40 Education & Training Extraction<br>Headquarters 100 Headquarters<br>Manufacturing ICT & Internet Infrastructure<br>Sales, Marketing & Support Logistics, Distribution & Transportation<br>20 50 ManufacturingSales, Marketing & Support<br>0 0<br>Industry Activity Industry Activity<br>Average Capital Investment (USD Millions) Average Capital Investment (USD Millions)<br><!-- End of picture text --> (a) Average Chinese FDI by industry activity (b) Average FDI by industry activity Figure 25: Chinese investment per project highest in headquarters creation and manufacturing (2003-2015) Source: fDi Intelligence from The Financial Times Ltd 2015

# **3.2.2 Corruption is the biggest obstacle for Chinese firms**

Chinese companies identified corruption as the most significant obstacle to doing business in Kenya: 53 percent of respondents said corruption was a “very significant obstacle” and 15 percent mentioned corruption as a “significant obstacle” (SACE 2014). Crime, theft, and personal safety was the second most significant obstacle: 37 percent said it was “very significant” and 25 percent responded “significant” (SACE 2014). 32.3 percent of foreign companies in the World Bank Enterprise Survey (2013) said corruption was a major constraint. According to a Kenya National Bureau of Statistics (KNBS) survey, 76.4 percent of respondents said corruption hurt their business. The negative perception of corruption was consistent across all sectors: manufacturing, transportation, financial services, and wholesale and retail trade (KNBS 2013).

The BPI also finds that the Kenya Revenue Authority (KRA) is more likely to visit Chinese companies. The KRA visited Chinese companies 3.1 times on average during 2013 compared to only 2.2 times for all companies (SACE 2014). In addition, 60 percent of Chinese companies report that KRA officials asked for informal payments and gifts during their visit. Because of KRA corruption, Chinese companies see the tax system as a burden; 85 percent of Chinese companies surveyed have at least one Kenyan accountant to handle external audits and authorities, and 63 percent of companies have a Chinese accountant for internal audits (SACE 2014). 59.2 percent of foreign companies view the corporate tax, value-added tax (VAT), and the custom and excise duty as obstacles to business (KNBS 2013).

# **3.2.3**

Chinese companies import 59 percent of goods from China and an additional seven percent indirectly from Kenyan suppliers. Chinese goods are much cheaper than the local equivalents, and firms simply find it more profitable to import inputs from China. Companies in the sample target the domestic market with 96 percent of sales occurring in Kenya during 2013; the other four percent of sales were for Tanzania and Uganda (SACE 2014). Chinese companies also report a shorter time for customs clearance than other companies. The majority, however, report having a professional clearance agent, where corruption is rampant (SACE 2014).

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