The Role of Foreign Direct Investment in Economic Growth in Kenya: 1979-2008

Abstract

The main purpose of this research paper was to investigate the contribution of foreign Direct ' Investment to Kenya's economic growths-Over a 30 year period (1979-2008). The reason for selection of this period is because data pertaining to FDI is available. There was a challenge in getting data for the early independence years (1963-75). This dissertation has borrowed literature from earlier contributions from other economists and researchers. In particular the paper borrows from classical economists such as Irvin Fisher (1930), John Maynard Keynes (1936), James Tobin (1969) and concludes with more recent studies such as ones by Mwega et all (1994), Mwega and Ngugi(2006), Obwona M. and Egesa K.A (2006).The emphasis of all these studies is that FDI contributes to capital formation process which enhances economic growth. This chapter concludes by a review of theoretical and empirical literatures and an emphasis of the importance of FDI to the economy. Under the methodology in chapter three, modern econometric analysis has been employed. The model has been specified with economic growth being the endogenous variable and being explained by FDI, domestic investment by the locals, tertiary education levels, corruption, drought and political violence. The analysis has used dummies to represent non-continuous variables; drought and political violence/unrest. Time series data has been used in this study. The sources of data used are mainly from UNCTAD investment reports, Government of Kenya statistical abstracts, economic surveys and economic outlook publications. In chapter four the regression results have been carried out and a discussion of the various tests done to ensure our model was correctly specified. Based on the data available an estimation equation has been derived. We have also tried to draw a summary of the main tests, indicated their overall implication for the main dissertation hypothesis and further used the outcome of these tests to reach a conclusion. The purpose of this exercise was to give us reasonable assurance that our research findings met established research benchmarks and criteria. The research paper ends with conclusions and policy recommendations with a clarion call to the government of the day to take corrective measures to favorably influence the inflow of FDI. This derives from the findings that the main driver of economic growth in Kenya are domestic investment and tertiary education followed by Foreign Direct Investment .However FDI has not played a significant role in contributing to the economic growth for the period under review and this could have stemmed from its low levels relative to GDP growth and unpredictable pattern, increasing in one year and declining in the next. This affected the cumulative FDI stocks