dc.description.abstract | The main objective of this research paper is to
analyze
empirically the impact of foreign capital inflow on domestic
savings. This is necessitated by lack of detailed study on the
effect of foreign capital inflow on domestic savings. Past studies
have treated foreign capital inflows as one homogeneous element,
but in this study, foreign capital inflow is disaggregated into net
long run private and public foreign capital
inflows.
The
methodology used by past studies has only enabled them to capture
direct effects of foreign capital inflows on domestic savings.This
is because they used ordinary least squares as the estimation
method. The present study uses two stage least squares which
captures both the direct and indirect effects at the same time.
Kenyan data on the relevant variables for the period 1970-1990
is used. The independent variable used is domestic savings rate and
the regressors are real growth rate of gross national product, real
per capita gross national product, ratio of net long run public
foreign capital inflow to grossational product, ratio of net long
run private foreign capital inflow to national product, and
ratio of exports of goods and services to gross national product.
Regression results show real per capital
gross national
product to have a negative impact on domestic savings rate. This is
a surprising result because it was not expected and does not also
agree with economic theory.
Real growth rate of gross national product is found to have
positive relationship with domestic savings rate. This concurs with
results of past studies done using Kenyan data.
Ratio of net long run private foreign capital inflow to gross
national product is found to have a negative impact on domestic
savings rate. This is a surprising finding because the opposite was
expected. strong policy recommendations could therefore not be
suggested.
Ratio of public foreign capital inflow to gross national
product is found to have a negative impact on domestic savings
rate. Although
the sign of the coefficient is as expected, the
coefficient is statistically insignificant when current values of
public foreign capital inflows are considered. Lagging public
foreign capital inflows makes the coefficient statistically
significant but the effect is still negative. This verifies that,
the time lag between when the inflows are received and when
their returns are realized. The set null hypothesis could therefore
be rejected when lagged values are considered. From this finding,
we could conclude that,
the psychological
hypothesis
is applicable in Kenya. The Government therefore relaxes domestic
savings as foreign capital inflation are available. In other words,
public foreign capital inflows substitute domestic savings. | en |