Kenya is losing the battle for foreign direct investments (FDI) to Uganda and Tanzania as heightened political tensions and restrictions on foreign ownership in some sectors turn away multinationals.

The FDI inflows to Kenya dipped from $729 million in 2007 to $141 million last year, according to the United Nations Conference on Trade and Development (UNCTAD).

In a similar period, Uganda's FDI inflows jumped from $733 million to $799 million while Tanzania's held steady at $645 million.

Ms Susan Kikwai, the managing director at Kenya Investment Authority, confirmed that FDI inflows to Kenya have slowed down in recent years but declined to comment on the reasons behind the slide though analysts point at the country's political risk profile as one of the main culprits.

The drop in Kenya's FDI inflows means there will be fewer new jobs as the freeze in corporate hiring continues.

New capital is expected to create new jobs and help the government reverse the high unemployment rate estimated at about 50 per cent, meaning half of the people are unable to find work despite their willingness and ability.

Unemployed youth, for instance, have been blamed for the chaos in 2008 after the disputed elections and are seen as a threat to future social stability.

"Foreign direct investment is critical to country's development, especially in times of economic crisis. It brings new and more committed capital, introduces new technologies and management styles, helps create jobs, and stimulates competition to bring down local prices and improve people's access to goods and services," said Janamitra Devan, Vice President of Financial and Private Sector Development, World Bank Group.

With few people in employment, demand for goods and services also slows down, thus limiting business growth.

Analysts say the situation is still far from improving.

"Political stability is a major factor in attracting FDI and as a country we are not yet out of the woods, seeing that just after the post-election violence in 2008 we are in the middle of a contested referendum over the proposed Constitution and soon after that we will be heading to the 2012 general elections," Prof Joseph Kieyah, an analyst at the Kenya Institute of Economic Policy and Analysis (Kippra), said.

A recent World Bank study also found that Kenya's restriction on foreign ownership is a major barrier for international investors.

"Among the countries in Sub-Saharan Africa covered by the Investing Across Sectors indicators, Kenya restricts foreign ownership in more sectors than most other economies," the report said, citing the telecoms and transport sectors where foreigners are allowed to own up to 70 per cent and 50 per cent respectively.

Individual ownership

Individual ownership of a bank is capped at 25 per cent and at 33 per cent of an investment bank or a stock brokerage firm.

The tourism sector, one of the country's most prosperous industries, is however fully open to foreign companies as well as are other manufacturing and primary sectors.

Analysts say Uganda and Tanzania are likely to continue netting more FDI at the expense of Kenya given their mineral deposits, piling pressure on the country's regional competitiveness as East Africa's economic integration shapes up.

Mr Eric Musau, a financial analyst, said Uganda's newfound oil and Tanzania's gold deposits are set to draw in more investors as mineral exploration is typically capital-intensive in nature.

"Kenya has few sectors capable of attracting major foreign investments," he said, adding that the high FDI levels seen in 2007 can partly be attributed to the liberalisation of the telecoms sector that saw France Telecom pay $26 billion to buy a controlling stake in Telkom Kenya.

If Kenya hits commercial deposits of oil or gas, the situation could change dramatically, raising employment levels and propelling Kenya to a rapid growth phase.

FDI inflows to mineral-rich Angola, for instance, grew from $9.8 billion in 2007 to $13.1 billion last year, shoring up the economy of the country that is emerging from years of a debilitating civil war.

While Kenya's FDI levels have dropped, several home-grown companies are expanding their regional presence.

Part of an average of $42 billion of Kenya's FDI outflow in the past three years is said to be invested in neighbouring countries.

In the coming months, companies like Kenya Commercial Bank and TPS East Africa are expected to invest part of the billions they are raising through rights issues on acquisitions in the East African Region.