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.