Relationship Between Foreign Exchange Rate and Foreign Investor Capital Flows in Kenya

Abstract

This paper sought to establish the relationship between exchange rate and foreign investor capital flows in Kenya. Specifically, the study sought to establish the relationship between exchange rate and foreign investor capital flows; to determine the relationship between commercial tax rate and foreign investor capital flows and to establish the relationship between economic growth rate and foreign investor capital flows. A descriptive research design was adopted in the study. Data for a 10-year period (2006-2015) was collected from KNBS and CBK. The data was analyzed quarterly giving a total of 40 data points. Descriptive, correlation and regression analysis were used to analyze the data. From the descriptive analysis, exchange rate displayed a mean of 81.0950, economic growth rate 5.8758, tax rate 46.39 and foreign investment a mean of 21.5935. The value of adjusted R2 was 0.639 indicating a variation of 63.9% on foreign investor capital flows dues to changes in exchange rate, economic growth rate and tax rate. All the variables were found to be significant (p<0.05). A strong positive correlation was found between exchange rate and foreign investor capital flows as shown by correlation coefficient factor of 0.698. A positive strong positive relationship was also established between economic growth rate and foreign investor capital flows as shown by correlation coefficient of 0.695. However, tax rate and foreign investor capital flows were found to have a negative relationship as shown by correlation coefficient of -0.789. The study concludes that exchange rate and economic growth rate have a positive relationship with foreign investor capital flows in Kenya. However, commercial tax rate displayed a negative relationship. It was recommended that policies would enhance the economic growth be formulated and reduction in the commercial tax rate in Kenya.