Determinants of foreign direct investment in Kenya

Abstract

The objective of this study was to analyze the relationship between capital flows and Foreign Direct Investment (FDI) in Kenya.The study establishes the primary factors responsible for affecting capital flow in Kenya in relation to Foreign Direct Investment (FDI) in Kenya. Furthermore this paper attempts to investigate the relative influence of these factors to FDI. With the help of multiple regression model and Factor analysis the primary factors are traced out. In thestudy, the determinants of foreign direct investmentwere established and estimated. Multicollinearity problem is taken into consideration among different independent variables and there is an attemptto eliminate them. Statistical methods were used to do the analysis based on yearly basis database of different economic factors. Finally some relationships of those factors with FDI inflow were found. In the context of Kenyan economy, decrease of external debt and inflation will bring in more foreign exchange reserve which will act as stimulant to foster growth. One of the recommendations wasgovernment policies should be directed towards improving the fundamentals of the economy, such as Gross Domestic Product and total external debts, if the intention is to attract capital inflows.Also, monetary policy should be managed accordingly so as to control inflation rates. Finally,contractionary measures should be adopted in the fiscal policy so as lower real interest rates. As for recommendations to academia, it was established that Current account is irrelevant in determining the FDI inflows in Kenya. Also, the study recommends multiple x regression analysis and factor analysis as statistical methods of choice when analyzing capital flow determinants.