Effect of Stock Market Development on Foreign Direct Investment Inflows in Kenya

Abstract

The capital markets in Kenya play a crucial role in economic growth and especially towards achievement of Vision 2030. However, the stock market development measure, private credit to GDP (%), for Kenya has been below the low and mediumincome countries average for the period between 1964 and 2022. At the same time, Kenya has seen multinational corporations with well-developed countries leaving operations in unpredictable situations and this has adversely affected FDI inflows into the region. The primary objective of this study is to assess the influence of stock market development on FDI inflows in Kenya over a ten-year period, from 2013 to 2022. Additionally, the study aims to examine the correlations between FDI and other control variables, including interest rate, inflation rate, and economic growth. This study was anchored on internalization theory and supported by monopolistic advantage theory and eclectic paradigm framework. This research utilizes quantitative analysis, including correlation analysis and regression modeling, to assess the relationships among the variables. The study employs quarterly data for a ten-year period to provide a comprehensive overview of the dynamics in Kenya's FDI landscape. The study reveals a significant positive correlation between stock market development and FDI inflows in Kenya, suggesting that a well-developed stock market can attract foreign investors. Furthermore, economic growth emerged as another significant predictor of FDI, emphasizing the importance of fostering a robust and growing economy to attract foreign investment. However, interest rates and inflation rates did not exhibit significant correlations with FDI inflows during the study period. The study concludes that stock market development and economic growth are crucial drivers of FDI inflows in Kenya. Policymakers are urged to prioritize initiatives that promote stock market development, sustainable economic growth, and an investment-friendly climate to enhance Kenya's appeal as an investment destination. To attract and retain foreign direct investment effectively, Kenyan authorities should focus on fostering stock market development, promoting sustainable economic growth, enhancing the overall investment climate, and diversifying investment promotion efforts. Future research could expand the temporal scope, incorporate qualitative analysis, delve into sector-specific FDI dynamics, consider the global context, and evaluate policy effectiveness to provide a more comprehensive understanding of FDI in Kenya and guide policymakers and investors effectively