Private investment and gross domestic product growth: an empirical analysis (1967-2007)
Mwai, Daniel N
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Private investment in Kenya in real terms, as well as a ratio of gross domestic investments has been falling in some periods from 1967 - 2007. Viewed against the background of growing evidence of a link between private investment and economic growth, an inconsistent and downward trend in Kenya's private investment is a matter of concern. The question of what determines private investment behaviour in Kenya therefore becomes an important one. This paper investigated the determinants of private investment, aswell as, established the relationship between private investment and growth rate in GDP in Kenya over the period 19h7 - 2007. The study utilized secondary time series data that was sourced from international Financial Statistics, Economic Surveys and Statistical Abstract. Variables were first tested for stationarity using the Augmented Dickey-Fuller techniques. The long lUI! private investment equation was derived using the Johansen cointegration technique. An error correction model was estimated, where Hendry's general to specific approach was applied to reveal the short-run private investment model for Kenya The study adopted a private investment function that was estimated based on the accelerator model, this was adapted to reflect the institutional and structural constraints facing Kenya. Ordinary least squares technique was used to estimate the regression function. The results indicated that in the long-run, credit to private sector, real GDP growth rate, public savings, lending rates and change in political regime had positive effect on private investment, while inflation, deposit interest rates, public investment, real interests, total debt and real exchange had a negative int1uence. The long-run model was further found to be stable. In the short-run, credit to domestic credit, GDP growth, public investment and savings positively influence private investment, while real interest rates and the change in political regime had a negative influence on private investment.