The Effect of Foreign Direct Investment on Economic Growth in Kenya

Abstract

Foreign direct investment has drawn significant attention in many research endevours since it is an instrument for knowledge and technology transfers between nations, a catalyst for economic growth, a means of promoting trade, and a means of international economic integration between economies. The government of Kenya has consciously endeavoured to boost FDI inflows and their impact on the economy through programmes like the Kenya Vision 2030. However, previous research into the real effect of FDI on economic growth have generated inconsistent findings. Using data series from 1981 to 2021, this study aimed to shed more light on how FDI and economic growth are related in Kenya. Alongside FDI, other independent variables like foreign exchange rate, interest rate, inflation rate, and trade openness were also taken into account. The data was analysed using STATA, and the relationships between the variables were examined through descriptive, correlation and inferential analysis. Our analysis of the multiple linear regression model demonstrated that FDI positively affects economic growth. At a 5% level of significance, FDI inflows boost the economy by 0.1278289%. Despite this being a positive influence, the result was statistically insignificant. Therefore, the study proposes that the Kenyan government ought to implement more policies that not only increase the FDI inflows but also better harness FDI-induced growth. Moreover, future researchers may further examine the effects of variables that were excluded to find out their actual influence on FDI inflows and real GDP, such as the influence of institutional integrity and graft on Kenya’s economic growth.