Relationship Between Fiscal Policy and Foreign Direct Investment Inflows in Kenya

Abstract

Foreign direct investments' determinants have become a topic of importance for governments, policy makers and also for academic research purposes. Both theory and empirical literatures hold that a country’s growth has a direct link with the economy, which is made of many variables such as the fiscal policy, FDI, interest rate, inflation, exchange rate, money supply, and many others. These variables are the backbone of any economy. Foreign direct investment inflows movements into a country are influenced by changes in many economic variables and these fundamentals’ future prospects changes. Countries need to seek new ways of attracting FDI stock since motives of investors are varying over. The study aimed at determining the impact of fiscal policy on foreign direct investments inflows in Kenya. The independent variable was fiscal policy as characterized by government expenditure on a quarterly basis in natural logarithm form and balance of payment as measured by quarterly difference between exports and imports in natural logarithm form. The control variables were economic growth as measured by quarterly GDP and external debts as measured by quarterly external debt in natural logarithm form. FDI inflows in Kenya were the dependent variable which the study sought to explain and it was measured by FDI inflows in the country on a quarterly basis. Collection of secondary data was done for a period of 10 years (January 2008 to December 2017) on a quarterly basis. This study used a descriptive research design. A multiple linear regression model was employed for analyzing the association between the variables. SPSS version 21 was employed for data analysis purposes. The results of the study produced R-square value of 0.650 whose implication is that about 65 percent of the variation in FDI inflows in Kenya can be explained by the four selected independent variables while 35 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables were strongly correlated with FDI inflows (R=0.806). ANOVA results show that the F statistic was significant at 5% level with a p-value less than 0.005. Therefore the model was fit to explain FDI inflows in Kenya. The results further revealed that individually, only external government debt have a significant positive effect on foreign direct investment inflows while government expenditure, balance of payments and economic growth has an insignificant effect on foreign direct investment inflows in Kenya. This study recommends that there is need for policy makers to pay attention to the prevailing levels of external government debt prevailing in the country bearing in mind that they influence FDI inflows in the country.