The Relationship Between Foreign Direct Investment and Economic Growth in Kenya

Abstract

This study focused at identifying the relationship between foreign direct investment and economic growth in Kenya. This proposed study sought to ensure that it also investigated on the relationship of other macroeconomic factors such as inflation rate lending interest rates and exchange rate fluctuations on economic growth in Kenya. Panel secondary data for the variables was collected for the period 2001 to 2020 where quarterly data was collected and assessed by the study through the use of a multiple linear regression model. This was undertaken in accordance with the study objectives. FDI had positive significant correlation with economic growth while other variables had insignificant correlations with economic growth. Inflation rate and interest rates had negative correlation with economic growth that means that an increase in inflation rate and increase in interest rates would lead to a decrease in economic growth. Exchange rate fluctuations had a positive but weak correlation with economic growth. The regression analysis that was undertaken on the other hand showed a weak model where the coefficient of determination was found to be 10.8%, indicating that the model was only able to explain 10.8% of the changes in economic growth. On the other hand, the significance was marginally greater than 0.05 that indicated that there was no significant relationship of FDI and economic growth in Kenya. The p value was 0.069 and therefore the study concluded that at 5% significance level, FDI had an insignificant relationship with economic growth in Kenya. The study therefore recommends that government should ensure that it develops policies that would ensure that FDI improves significantly. This means that the study would recommend that factors that adversely affect FDI such as increased political tensions, and increased corruption should be lowered. It should also develop policies that would control inflation and put policies that would make commercial banks’ lending rates are low.