The Relationship Between Political Risk and Investments in Kenya

Abstract

Investments are determined by many factors. Many risks come into the mind of investors at the time of making investments. The bottom line of any investment is usually whether returns will be satisfactory or not. To earn these returns, underlying risks are usually assessed based on the premise whether the risks materialize or not so that the net gain should be more than the investment made. This study had the objective to establish whether there is a relationship between and political risk and investments in Kenya. Investment was measured using an investment rate, which was a percentile of gross capital formation (annual investments) and gross domestic product, and data was collected using secondary data from the World Bank data bank for the gross capital formation and from KNBS for the GDP. Political risks variables obtained from political risk service international website were political stability and absence of violence, government effectiveness, and regulatory quality, rule of law and control of corruption. Data was collected for thirty (30) years. Descriptive statistics, diagnostic tests and thereafter inferential statistics namely the correlation analysis and regression analysis were undertaken. According to the descriptive analysis, it was observed that during the election period in the 90’s, investments were affected within the same year, while in the 2000’s the investments were affected the year after the election (following year (post-effect)). During the promulgation (a major political breakthrough) in 2010 it was observed there was increase in investment in that year compared to 2009 and 2011. The findings of the inferential statistics was that there is a statistical significant relationship of 72.5% that existed between investments and political risk, meanwhile amongst the political risk variables, political stability, government effectiveness and regulatory quality were seen to be significant to the model while rule of law and control of corruption were insignificant. The government effectiveness variable of political risk had a positive coefficient hence supporting the general theory of investment, whilst the political stability and regulatory quality had a negative coefficient, hence, supporting the portfolio theory. The study recommends that though political risk influences investments in Kenya, other risks also need to be taken into considerations such as economic risks and financial risks. Conversely, the study also recommends that similar studies should be done separately for developed and developing countries. Finally, the study used investment as a percentile of GDP, hence, future studies should use absolute values and adjustments to real values in order to enhance comparability.