Investment Decisions and Profitability of Manufacturing and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

The current economic environment in Kenya presents a number of challenges, such as rising production costs, fluctuating exchange rates, high taxation, a decline in profitability, inflationary pressures, and increased competition both locally and globally, that necessitate sound decision-making for optimal performance by most firms. Companies in the country have undertaken the task of evaluating and reorganizing their investment strategies with the aim of enhancing growth and profitability. Manufacturing is one of the sectors being confronted by this scenario. This sector is important in Kenya as it contributes significantly to the country's social and economic development. Since 2010, Kenya's manufacturing sector has contributed around 15 percent to the GDP in the economy and nearly 300,000 employees, accounting for 13 percent of total national employment. However, there has been noted a decline in the performance of the manufacturing sector. Between the year 2016 and 2024, the sector has experienced an average fall of 0.2 percent in the Return on Assets.  The sector has also reported a decline in revenue earnings in relative to their total assets over the same period. However, as this is being observed, the sector has also reported expansions and replacements whose main goal is to improve profitability. Therefore, this study investigated the investment decisions based on expansions and renewals, and profitability of manufacturing and allied firms listed at the NSE. Specific objectives included the effect of expansion, replacement, and renewal decisions, on the profitability of manufacturing and allied firms listed at the Nairobi Stock Exchange. The study was grounded on profit maximization theory, agency and signaling theory to adopt the profit maximization model. Panel secondary data was used in the analysis of the audited financial statements of all the nine listed enterprises covering the period 2016 to 2024 to enhance a comprehensive analysis of the entire population. Data was analyzed using panel regression with model selection guided by the Haussmann test, alongside diagnostic checks to ensure robustness. The study generated empirical evidence on investment decisions and profitability, hence offering insights for managers and policy implications for sectoral growth. The study reveals that replacement and expansion investments negatively and significantly affect profitability, while renewal investments has a positive but insignificant effect. This points to the need of these firms consolidating their productions while developing distribution points to improve on their profitability. In addition, the firms may consider replacing the investments with more advanced technology to save on cost that affects performance negatively. 

Keywords: Performance, Replacement, Renewal, Expansion