Foreign direct investment (FDI) can play a significant role in the industrialisation process of a host economy. This study examined whether presence of MNCs stimulates spillover occurrence to indigenous firms in the Kenyan manufacturing industry. Mechanisms and conditions necessary for spillover occurrence were also examined as well as spillovers' influence on innovation. Results based on traditional neo-classical approach remained largely inconclusive about spillover occurrence. Hence, a new framework was developed reconceptualising spillovers in terms of learning and capability building. On the basis of this framework, the research showed an average spillover occurrence based on food processing and machine engineering; the two industries studied. Products and process spillovers occurred most while competition and demonstration effects were the main mechanisms of spillover occurrence. Spillovers had a positive influence on innovation. These findings showed that FDI plays an important role in Kenya's industrial development. Key words: FDI, Spillovers, Learning, Capability building and Innovation.
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