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

Abstract

The Capital Market Authority has approved various reforms on the Nairobi Stock Exchange such; as the approval for demutualization of the stock exchange, self-listing of the NSE and the soon to be launched derivatives exchange. These reforms were done to improve the corporate governance of the NSE and to enable it handle different types of securities. This would have the catalytic effect of attracting foreign and local investors to the stock market, new listings for equities, and bonds. This research examines the effect of FDI on the Nairobi Stock Exchange. These inflows are as result of these new laws and regulations by CMA and the government of Kenya. The annual data range for the study was from 1980 to 2017.The response variable was the stock market performance which was assessed by the NSE 20 share index and the independent variables were GNP per capita, the rate of inflation, GNS as proportion of GDP and FDI as a proportion of GDP. The data was analyzed based on a descriptive case study and using regression analysis. Diagnostic tests were done on the data to check that the assumptions of the Ordinary Least Squares Method are not violated. From the regression analysis only 31.5% of the variations in the performance of the stock market were explained by the selected independent variables while 68.5% were from other factors not covered in the study. The model was statistically significant in predicting the stock market performance as indicated by the F statistic. GNP per capita was observed to have a positive and significant relationship with stock market performance it made a significant contribution to the model while inflation rate was not significant, negatively correlated with stock market performance and didn’t make a significant contribution to the model. Savings and FDI had a positive and insignificant relationship with stock market performance.