The Effect of Foreign Direct Investment on Stock Market Development in Kenya

Abstract

The equity market around the world has been expanding and integrating leading to developing countries changing the makeup of the capital flows in their economy. Therefore, this paper tried to examine the effect of FDI on the development of stock market in Kenya for the period 1982 to 2016 using annual secondary data. The independent variable was FDI as measured by FDI net inflows as a percentage of GDP. The control variables were macroeconomic stability (inflation rate), real interest rate and GNP/GNI per capita growth as a proxy for economic growth. The dependent variable the study sought to explain was the stock market development, whose operationalization was market capitalization as a percentage of GDP. The factors were analyzed to determine a connection with stock market developments based on a descriptive research design and a multiple linear regression model. From the analysis, only 28.5% of the variations of stock market development were explained by the selected independent variables while 71.5% of the variations were from other factors not covered in this study. The study results also posited a statistically strong and positive relationship between the independent variables and the stock market development (R=0.534). Individually, GNP per capita was found to be statistically significant in influencing stock market developments as opposed to the other determinants (FDI, inflation and interest rate) which were found to be non-significant. Therefore, the government and the regulators should ensure more FDI inflows as well as regulate the inflation and interest rate levels prevailing in the country having in mind their influence in stock market development and generally the economy.