The Effect of Inflation Rate on Foreign Direct Investments in Kenya

Abstract

The determinants of foreign direct investments have become an important topic not only for the governments, policy makers but also for academic research. Both theory and empirical literatures hold that a country’s growth has a direct link with the economy, which is made of many variables such as the GDP, remittances, foreign direct investment, interest rate, inflation, exchange rate, money supply, and many others. These variables are the backbone of any economy. Foreign direct investment inflows movements into a country are influenced by changes in many economic variables and these fundamentals’ future prospects changes. This study sought to determine the effect of inflation on foreign direct investments inflows in Kenya. The independent variable was inflation as measured by quarterly inflation rate. The control variables were interest rates as measured by central bank lending rate on a quarterly basis, economic growth as measured by quarterly GDP growth rate and exchange rates as measured by quarterly exchange rate between ksh and usd. 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 2008 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 0.650 which means that about 65 percent of the variation in FDI inflows in Kenya can be explained by the four selected independent variables while 35 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 FDI inflows (R=0.806). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 16.260. Therefore, the model was fit to explain FDI inflows in Kenya. The results further revealed that individually interest rates, economic growth and exchange rates are not significant determiners of FDI inflows in Kenya while inflation is a significant determiner. This study recommends that there is need for policy makers to regulate inflation levels prevailing in the country bearing in mind that they significantly influence FDI inflows in the country.