The impact of foreign direct investment on domestic capital formation: an empirical investigation for Kenya:1970-2009

Abstract

This study looks at the relationship between Foreign Direct Investment (FDI) and Gross Fixed Capital Formation (GFCF) which is a measure of a country's level of investment. The study uses time series data for Kenya for the period of 1970 to 2009. Investment in an economy can originate from domestic savings or from capital flows. FDI which is a major component of capital flows is an important source of capital for African economies where massive capital amounts are needed to finance development. Kenya has in the last decade lost as a destination for FDI flows to its neighbouring countries. Following the country's poor performance in attracting FDI, there have been a lot of initiatives by the Government towards making Kenya an investment destination. The question is, what is the significance of FDI to Kenya?

Results from this study show that Kenya needs to increase her domestic savings and to open and encourage international trade through removal of tariff and non tariff barriers. Growth of the economy is a crucial factor to promoting investment since investors need to be sure that they wi II get the proceeds from their foreign ventures. The Government should put a lot of measures in place to moderate the exchange rate in order to gain substantially in growth of domestic investment. Rather than having crowding out effects to domestic investment, FDI and domestic investment are complements. Therefore, FDI acts as a stimulant of economic growth through complementing domestic investment in Kenya.