Macroeconomic determinants of foreign direct investment inflows in Kenya

Abstract

Foreign direct investment provides capital for domestic investments, creates employment opportunities, and facilitate transfer of managerial skills and technology which significantly contributes to economic development. Over a decade, despite all these advantages, Foreign Direct Investment inflows has been decreasing in most African states including Kenya. The net FDI inflows in Kenya has been declining and highly volatile despite friendly economic environment and improved polices implement to attract and retain FDI as well as accelerate her economic development. This study attempted to examine the macroeconomic determinants of foreign direct investment inflows in Kenya. The specific study objectives were to determine the effect of exchange rate, infrastructure development, inflation, level of technology, and GDP growth on FDI inflows in Kenya. The study was guided by Neoclassical Theory of investment, Purchasing Power Parity and Accelerator theory of investment. Parameters were modelled using Generalized Method of Moments. Explanatory research design was employed as the study utilised annual time series data which were sourced from World Bank spanning from the year 1980-2020 The study conducted various prerequisite time series test beginning from the stationary property of the data and assumptions of multivariate regression such as normality, heteroskedasticity, auto correlation and multicollinearity. Results indicated that Kenya experienced a decline in foreign investments. Similar to year 2000 and 2010. There is some years Kenya have had a negative FDI inflows in the year 1990 and 199 and a slight improvement from 2012. All the series were stationary at levels except level of technology that attained stationarity after first difference. Inferentially, the number of moments GMM estimation were 6 which is same as the number of parameters implying the estimators were exactly identified. Exchange rate was negative and significant to influenced FDI at 222.2% (β=−2.222, p−value=.001<.05). Furthermore, level of technology and infrastructural development and were positive and significant factors with respective percentage of 121.4% ( β=1.214, p−value=.009<.05) and 180.6% (β=1.806 , p−value=.000<.05). Inflation and GDP growth did not show any significance, but they had positive effect at 53.9% (β=.539 , p−value=.334> 05∧12.4 %( β =.124, p−value=.698>.05) respectively. Study concludes by stating that foreign direct investment (FDI) is attracted by a strong currency that has the potential to grow. Infrastructural development and high level of technology attracts foreign investors which increases FDI inflows thus contributes to the growth and development of Kenya’s economy. Therefore, the study focuses that the results are of great importance to the government and policy makers in understanding several factors that would affect the foreign direct investment inflows in Kenya.