Determinants of Foreign Direct Investment in Kenya

Abstract

FDI contributes enormously to the receiving nation through introduction of new technology, addressing the problem of savings deficiency, foreign exchange inadequacy, revenue gap, and issues relating to management etc. Due to these benefits, it is essential to understand the factors that affect the flow of FDI to be able to formulate and implement appropriate foreign investment policies. This study sought to investigate the role of real interest rate, trade openness, real effective exchange rate, rural population, urbanization and economic performance of neighbouring countries in EAC. The second objective of the study was to find out the nature of relationship that exists between the independent variables and FDI .Further, this study set out to shed light on the contested role of GDP, inflation and real exchange rate. Using Cointegration test the dependent and independent variables were found to have a long-run relationship. The OLS results found that economic performance of the neighbouring countries, real interest rates and urbanization were found to positively influence the flow of FDI to Kenya though they were insignificant. Urbanization and economic performance of neighbouring nations positively influenced the flow of FDI while rural population had a negative effect on the flow of FDI. Moreover, GDP was found to negatively and significantly affecting the flow of FDI to Kenya contrast to some previous studies. The study recommended that government should take actions in urbanizing small towns to cities, ensuring it remains in the trading blocs with other trading partners in the region and ensuring trade openness and measures to increase returns on capital investment to increase flow of FDI to Kenya.