Effect of Interest Rates on Foreign Direct Investments Inflows in the Energy and Petroleum Industry in Kenya

Abstract

Both theory and empirical literatures hold that the growth of a country is directly related to the economy, which consists of various variables like GDP, Foreign Direct Investment, Remittances, Inflation, Interest rate, Money supply, Exchange rate and many others. The economic theory which expounds on how capital moves a worldwide economy insist on the fact that capital tends to flow to states which have a return on investment that is higher as compared to countries with higher interest rates. Consequently, investment is high in states that offer better investment returns as well as security in the form of lower interest rates and a better business environment. Capital therefore tends to more from states with low-level rate return to countries with high rate of return. This study sought to determine the effect of interest rates on foreign direct investments inflows in the energy and petroleum industry in Kenya. The independent variable was interest rates as measured by quarterly CBK lending rate. The control variables were economic growth as measured by quarterly GDP, inflation rates as measured by quarterly CPI and exchange rates as measured by quarterly exchange rate between ksh and usd. FDI inflows into the energy and petroleum industry in Kenya were the dependent variable which the study sought to explain and it was measured by FDI inflows in the energy and petroleum industry on a quarterly basis. Secondary data was collected for a period of 10 years (January 2007 to December 2017) 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. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.264 which means that about 26.4 percent of the variation in FDI inflows into the energy xii and petroleum industry in Kenya can be explained by the four selected independent variables while 73.6 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with stock market returns (R=0.514). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 3.139. Therefore the model was fit to explain FDI inflows into the energy and petroleum industry in Kenya. The results further revealed that individually, interest rate, exchange rates, economic growth and inflation rates are not significant determiners of FDI inflows into the energy and petroleum industry in Kenya. This study recommends that there is need for central bank to regulate the interest rate levels prevailing in the country bearing in mind that they influence FDI inflows in the energy and petroleum industry.