International Journal of Economics and Finance; Vol. 9, No. 10; 2017 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 179 The Intensity of Knowledge Capital Investment in Kenya: Evidence from Manufacturing and Service Sectors Simon Ndicu 1 & Lucy Wacuka 2 1 School of Business and Management, Kiriri Women‟s University of Science and Technology, Kenya 2 School of Computer and Information Technology, Kiriri Women‟s University of Science and Technology, Kenya Correspondence: Simon Ndicu, School of Business and Management, Kiriri Women‟s University of Science and Technology, P. O. Box 49274, 00100 Nairobi, Kenya. Tel: 254-726-457-302. E-mail: Simonndicu8@gmail.com Received: July 29, 2017 Accepted: August 23, 2017 Online Published: September 10, 2017 doi:10.5539/ijef.v9n10p179 URL: https://doi.org/10.5539/ijef.v9n10p179 Abstract The study investigates the extent to which firms in Kenya manufacturing and service sectors invest in knowledge capital leading to innovations. 534 firms were included in the analysis. This was the combined data from the first Kenya innovation survey data of 2012, which covered 158 firms, (2008-2011) and the second Kenya innovation survey of 2015 which covered 376 firms (2012-2014). The Crépon, Duguet, and Mairessec (CDM) (1998) model, which considers a system of four equations: innovation propensity, innovation investment, innovation output and performance equations, was used as the estimation technique. The results revealed that, a firm‟s decision to spend on R&D was significantly influenced by firm ownership, financial turnover and product innovativeness. A firm‟s R&D intensity was significantly determined by its financial turnover and ownership. A firm‟s activity and financial turnover were also significant in determining whether it introduced a new product in the market or not. The results of this paper suggest that a firm‟s financial turnover was significant in R&D decisions but R&D intensity did not significantly matter to a firm‟s product innovativeness. Further, a firm‟s level of innovativeness was a significant determinant of its productivity. In addition, the results suggest that, innovations among the Kenyan firms in the manufacturing and service sectors were heavily reliant on financial capital and were struggling to convert knowledge inputs into product output. This study thus recommends a policy that incorporates the academia and firm level innovation with national innovation systems to enhance knowledge and skill intensive innovations that are new to the world. Keywords: innovation, R&D intensity, knowledge capital, selectivity bias, Gross domestic expenditure on research and development (GERD) 1. Introduction Investment in knowledge capital leads to improved state of science technology and innovation of a country (Lundavall et al., 2011). Science, technology and innovation are crucial in the transformation of Kenya‟s economy from a factor driven economy to an innovation driven economy (MoEST & KNBS, 2012). Vivarelli (2014) asserts that achieving industrial production excellence is seen as essential to survival and economic growth of any country in this age of globalization. To meet the needs of the ever changing customer and market demands, escalating competition and the necessity to control and reduce rising costs; firms in the manufacturing and service sectors are forced to increase their innovation by adoption of new products, new marketing strategies, new process and new organizational types (Günday et al., 2011). Kenya has incorporated investment in knowledge, innovation, research and development with its development strategy. It has done this mainly through the national policy frameworks like the industrialization policy and the Kenya Vision 2030. The Kenyan government has made attempts to improve on science, technology and innovation-related institutional framework, in a bid to complement the policy goals of Vision 2030. The government has done this through legislations, such as the National Science, Technology and Innovations Act of 2013 (MoEST & KNBS, 2012). The Science, Technology and Innovations Act of 2013 is an institutional framework comprised of three main elements. First, the National Commission for Science, Technology and Innovation (NACOSTI) which is an