Effects of Foreign Direct Investment on Economic Growth in Kenya

Abstract

The objective of the study was to determine the effect of foreign direct investments on economic growth in Kenya. This study was necessitated by the fact that Kenya has in the past been the country of choice for most foreign investors targeting the East African Region. However, this situation might have changed, with Tanzania, Uganda and Rwanda developing policies that have attracted massive foreign investments. However, Kenya has increased corruption political risks among other factors that might have led to decrease in FDI inflows. This study therefore was expected to enlighten on whether attracting FDI had effect on economic growth in Kenya. The study collected time series quarterly data for the period 2001 to 2020, for the study variables that comprised of FDI, inflation rate, exchange rate fluctuations as well as interest rates. The study adopted the use of Ordinary Least Squares (OLS) where regression analysis was used as the model to determine the effect of the independent variables on the dependent variable. The regression model that was formulated indicated that the model was a strong model as it predicted 66.7% of the changes in economic growth. Only 33.3% of the changes in economic growth was predicted by other factors outside the model. The regression analysis undertaken indicates that there was significant positive effect of FDI on economic growth as the p value of the F distribution was below 0.05 that led to the rejection of the null hypothesis. The correlation analysis that was undertaken by the use of Spearman’s correlation indicated that there was positive significant correlation between FDI and economic growth, as well as between exchange rate fluctuations and economic growth. There was, however, negative significant correlations between inflation rate and economic growth as well as between interest rates and economic growth. The study recommends that government should ensure that it develops policies that would ensure that FDI improves significantly. The study recommends that the inflation rate should be checked and brought as low as possible. It does not matter whether inflation is triggered by wages or other factors, but the government should ensure that it develops policies that would counter increases in inflation rate.