The Effect of Foreign Direct Investments on Stock Market Returns at the Nairobi Securities Exchange

Abstract

The study sought to establish the relationship between FDI and stock market returns. The study was grounded on a descriptive research design. The secondary data on FDI, GDP growth, inflation, money supply, and NSE 20 Share Index was obtained from the Nairobi Securities Exchange (NSE), International Monetary Fund (IMF), and Central Bank of Kenya (CBK). The data covered the years 2002 to 2017. The data was analysed using Statistical Packages for Social Sciences (SPSS) (version 24) for descriptive and inferential statistics. Descriptive statistical techniques, measures of central tendency, was used to summarize the data into means and standard deviations. Inferential statistics included correlation and regression analysis. Correlations were used to determine the association between the each of the independent variables, notably, FDI, GDP, money supply, and inflation, the dependent variable, stock market returns. Regressions were used to demonstrate the relationship between FDI inflows and stock market returns, with GDP growth, money supply, and inflation as the control variables. Findings were presented in tables and graphs. The descriptive findings show that FDI inflows have consistently declined since 2011. On the other hand, money supply has consistently increased for all the years covered in the study. On the other hand, inflation has been highly volatile over the 15-year period. GDP growth has averaged between four and six percent over the past 10 years. Finally, NSE 20 Share index analysis indicates fluctuations in stock performance, with volatilities observed annually. Correlation analysis show that FDI has a weak but positive association with stock market returns. There was a strong and significant association between money supply and stock market returns as well as GDP and stock market returns. Inflation was negatively associated with stock returns. Regression coefficients indicate a positive and insignificant link between FDI net inflows and NSE 20 share index growth. R Square value shows that FDI is a weak predictor of stock market returns. Taking the money supply, inflation, and GDP as control variables, FDI has a positive effect on stock market returns; however, it is not statistically significant. The study recommends adoption of strong monetary and fiscal policies governing money supply and inflation. Further, the study also recommends the development of tailored policies that have the potential of overcoming market imperfections and promoting the integration of domestic and foreign firms into global networks hence increasing their ability to attract foreign capital.