The Effect of Cost of Labour on Foreign Direct Investments in Kenya

Abstract

The causal nexus between cost of labour and Foreign Direct Investments have been subject for debate over the years. The labour cost is very vital when it comes to position deliberation, but mostly when the savings is targeting foreign markets. A lower cost of labour decreases the firm’s sunk cost, when other features are kept constant. In some cases, this cheap man power translates a new move of business or part of it in overseas countries. According to the current researchers, as FDI moves to technology, cheap labour will be out of fashion. However, a high need have informed man power will rise. This study sought to determine the effect of cost of labour on foreign direct investments inflows in Kenya. The independent variable was cost of labour as measured by hourly wage on a quarterly basis. The control variables were economic growth as measured by quarterly GDP, exchange rates as measured by quarterly exchange rate between KSH/USD and inflation rates as measured by quarterly CPI. FDI inflows in Kenya were the dependent variable which the study sought to explain and it was measured by FDI inflows in the country on a quarterly basis. Secondary data was collected for a period of 10 years (January 2007 to December 2016) on a quarterly basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the relationship between the variables. The results revealed that individually, cost of labour, economic growth, are not significant determiners of FDI inflows while exchange rates and inflation rates were found to be statistically significant determiners of FDI inflows in Kenya. This study recommends that there is need for policy makers to regulate the hourly wage prevailing in the country bearing in mind that they influence FDI inflows in the country.