Effect of Gross Domestic Investment on Economic Growth in Kenya

Abstract

Since independence, achieving and maintaining rapid economic growth has been the top priority for policymakers as seen in a number of government development programs and sessional papers. Attaining high levels of investment at 30 per cent of GDP is a key driver to achievement of the growth target of Kenya Vision 2030. While a total investment target of 25 per cent of GDP should have been invested in MTP I, only 20.4 per cent of it was actually invested. The investment-to-GDP ratio for MTP II was 20.1 per cent, below the target of 28.0 per cent for the session. Although the economy remained resilient within a stable macroeconomic environment, a growth rate of 4.8 per cent was achieved in 2022 down from 7.6 per cent in 2021 which was lower than the MTP III target of 10 per cent. Continuous efforts to improving the growth rate are therefore important because it is the means through which the quality of living standards can be enhanced. The objective of this study was to examine the effect of gross domestic investment on economic growth in Kenya. The study sought to further establish short and long run as well as causal relationships between the variables. It examined three theoretical models, including the Investment multiplier model by Keynes (1936), the Harrod-Domar model of the 1940s and the Solow economic growth model of 1956. The study employed a descriptive research design and used STATA 15.0 software to analyze secondary time series data for the years 1983-2022. The study also incorporated other variables like exports, imports and inflation. The findings of the study revealed that gross domestic investment, as measured by gross capital formation significantly affect economic growth in Kenya. Other variables like inflation and exports were also found to significantly influence economic growth in Kenya. However, imports was found not to influence growth. The Granger-causality test revealed that gross domestic investment causes economic growth and not vice versa. Stationarity tests established that both gross domestic investment and economic growth are stationary at levels implying that there exist short and long run relationship between the two variables. This study is crucial for policymakers, investors, and researchers seeking to understand and enhance the country's economic prospects. It will inform targeted policies and strategies to foster sustainable economic growth, job creation and improved living standards for the populace.