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.