Effect of Trade Openness on Foreign Direct Investments in Kenya

Abstract

Kenya launched its 2030 vision in 2008 with the goal, among other things, of attaining global competition for FDI and economic growth. Inconsistent FDI inflows have occurred in Kenya since the 1970-1980s. In response to structural shifts and industry trends, Net FDI was extremely unpredictable and generally diminishing in the 1980s and 1990s. The objective of this research was to determine the effect of trade openness on Kenya’s FDI inflows. The study was based on internalization theory, monopolistic advantage theory and new economic geography theory. The independent variable was trade openness while the control variables were; interest rate, inflation and economic growth. The dependent variable that the research attempted to explain was the FDI inflows in Kenya. The data was obtained on a quarterly basis for a duration exceeding twenty years (from January 2002 to December 2021). A descriptive research approach being utilized in the research, with a multivariate regression model utilized in examining the link between the research variables. The research conclusion depicted a 0.271 R-square value, signifying that the selected independent variables can describe 27.1 percent of the variance in Kenya’s FDI inflows, whereas the other 72.9 percent was attributable to other factors not surveyed in this research. The F statistic was significant at a 5% level with a p=0.000. This proposes that the model was satisfactory for explanation FDI inflows in Kenya. Further, the results demonstrated that trade openness had a positive and significant influence on Kenya’s FDI inflows. Interest rate and inflation had no significant influence on Kenya’s FDI inflows. Economic growth had a significant positive influence on FDI inflows in Kenya. The study recommends the need for practitioners and policy makers to ensure that the level of trade openness keeps on improving as this will enhance FDI inflows into the country. Policy makers should also aim at developing policies aimed at ensuring sustainable economic growth as this is an important determiner of FDI inflows. Future studies can focus on other determinants of FDI in Kenya such as corruption, financial development among others. Future studies can also focus on other countries in the East Africa Community to confirm the findings.