The effect of stock market development on the level of foreign direct investment in Kenya.
Abstract
This study concentrated on exploring the association amongst the stock market
development and foreign direct investments. The key emphasis was majorly on the
impact or influence in which the advancement of the stock market has on the inflows
of foreign direct investments in Kenya. According to Adam and Tweneboah (2009)
they cited the stock market development has a crucial role in attracting direct foreign
investments. In asserting this relationship, the study incorporated other economic
variables to model a multiple linear regression. This model had foreign direct
investment as the output variable with the independent variable being the stock market
development. Control variables in the study were Real exchange rate which is measured
as a comparison of the KES to the USD, the inflation rate measured in relation to the
commodity price, the applicable tax rates and the country’s economy size expressed by
the GDP growth rate. The study assumed a descriptive research design approach.
Secondary data from the past historical years was embraced in order to run the multiple
linear regression analysis using the STATA statistical software. The analysis also
included Vector Auto regression model (VAR) and Vector Error Correction Model
(VECM). The inquiry findings were presented in form of both descriptive and
inferential statistics. The results showed R squared value of 0.2705 which illustrates
that 27.05 percent of the deviance in FDI was determined by selected variables in the
model while 72.95 percent was determined by variables not contained within the model.
Consequently, the model was statistically significant in determining how stock market
expansion, size of the economy, rate of exchange, inflation rate and taxation rate affect
direct foreign investment inflows at 95 percent confidence level. Using VECM the
study revealed existence of insignificant long standing linkage among the variables.
Stock market development had an adverse though insignificant sway on foreign direct
investments while economic growth and inflation rate possess a positive implication on
the direct foreign investments which was significant. Exchange rate and tax rate had a
negative influence on foreign direct investments which was significant. Testing for
causality using granger causality test revealed that foreign direct investment inflows
had a unidirectional association with stock market development were stock market
development significantly caused on foreign direct investments.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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