The Impact of Selected Macroeconomic Variables on Foreign Direct Investment in Kenya

Abstract

The Organization for Economic Co-operation and Development (OECD) describes FDI as investments that involve creating relationships for the long run and contemplate a long-term interest in controlling an establishment by a resident in a single economy (the investing foreigner) in a commercial venture domiciled in a different economy. FDI is fundamental to many of the nations’ economic growth since it links the variance between the investments and savings of each nation necessary for a substantial economic growth. In Kenya, investments from foreign countries remain considerably low bearing in mind the size of its economy. This paper seeks to evaluate the impact of the GDP growth rate, the inflation rate and foreign currency exchange rate on FDI inflow into Kenya. Secondary annual data for the period 1988 to 2018 were sourced from the World Bank and analyzed. The dependent variable, FDI inflow into Kenya was represented by the FDI remittances to Kenya as a percentage of the country’s GDP. The analysis of the data found out that there is a weak positive correlation between the FDI inflow and the selected macroeconomic variables: the inflation rate, GDP growth rate and the exchange rate as indicated by the computed Pearson correlation coefficients. Regression analysis revealed that the dependent variable had a correlation of 26.7% with the independent variables as depicted by the R-squared value. At 95% confidence level, the regression model was fit for the data as the F-value was 3.274 is associated with the small p-value of 0.036 indicating that the independent variables reliably predict the dependent variable. This study concludes that the selected macroeconomic variables contributed to 26.7% of the variations in the FDI inflow into Kenya. That means the GDP growth rate, inflation as well as the exchange rate hand an influence on FDI decisions. The magnitude of the influence, however, has been established to be minimal.