The Effect of Foreign Direct Investment on Stock Market Development in Kenya

Abstract

Theoretically, there has been a prove of a triangular causal association between the FDI and the development of the stock market whereby FDI inflows is considered a wellspring of progress in terms of technology and decreasing unemployment in most countries that are still developing. This will then increase the production of goods and services which ultimately result to increased GDP. Therefore, increased GDP means the growth of economy which has a positive effect to the development of the stock market and the rise of share prices (Adam & Tweneboah, 2009). This study sought to determine the effect of foreign direct investment inflows on stock market development in Kenya. The independent variable was FDI as measured by annual FDI inflows into the country as a percentage of GDP. The control variables were economic growth as measured by GDP on an annual basis, interest rate as measured by CBK annual lending rate, inflation rates as measured by annual CPI and exchange rates as measured by annual exchange rate between KSH and USD. Stock market development was the dependent variable which the study sought to explain and it was measured by market capitalization as a percentage of GDP. Secondary data was collected for a period of 30 years (1987 to 2016) on an annual basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.357 which means that about 35.7 percent of the variation in stock market development in Kenya can be explained by the five selected independent variables while 64.3 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with dividend payout ratio. ANOVA results show that the F statistic was significant. Therefore the model was fit to explain stock market development in Kenya. The results further revealed that individually, FDI inflows, economic growth, interest rates, exchange rates and inflation were statistically insignificant determinants of stock market development in Kenya. This study recommended that policy makers should come up with policies that will contribute to fastening the development of the Kenyan stock market as it is believed to have a direct relationship with economic growth in the country.