Abstract:
The study of foreign trade and economic growth has mainly focused on two main
hypotheses; export led growth and import led growth hypothesis. Conflicting results
have been reported whereby export and import led growth have been found to be valid
for some countries and not valid for some. This study therefore sought to answer the
question whether or not foreign trade causes economic growth in Kenya. Specific
objectives include; determining causality between exports and economic growth, to
find out causality between imports and economic growth, to determine causality
between openness to trade and economic growth and to determine causality between
foreign direct investment and economic growth. The following hypotheses were tested;
exports, imports, volume of trade and foreign direct investment inflows do not cause
economic growth. The study was based on the international trade theory. This study
adopted both descriptive and explanatory research designs. ARDL and Granger
Causality models were used to test the relationship and causal direction among the
variables. Annual time series data for the years 1970 to 2017 from World Bank
databank was used. Data analysis entailed unit root test, cointegration analysis, Granger
Causality test and finally running model diagnostic tests. Wald Test of Cointegration
(F-statistic = 6.0802) revealed that long run equilibrium relationship exist between
imports, foreign direct investment, exports, openness to trade and economic growth.
Further analysis showed that imports (p=0.1798), foreign direct investment (p=0.3129),
exports (p=0.1798) and openness to trade (p=0.0750) were not significant in
determining economic growth in the long run. In the short run period, imports (p=
0.0084) were significant and positively related to economic growth. Openness to trade
(p= 0.0149) was significant and negatively related to economic growth. Other variables
such as FDI (p=0.8983) and exports (p=0.1987) were not significant in determining
economic growth in the short run. Granger causality tests revealed that there was no
causality between FDI (p=0.8972), openness to trade (p=0.9224), imports (p=0.3110),
exports (p=0.3827) and economic growth in the long run at 5 percent level of
significance. Since imports, exports, FDI and openness to trade do not cause economic
growth in the long run, the study concluded that import and export led growth
hypothesis are not supported in Kenya. In order to realize positive gains from foreign
trade, policy recommendations include; encouraging more FDI inflows, more trade
openness to attain a positive impact on economic growth