Foreign dependency and economic growth nexus in Kenya

Abstract

Foreign dependency is an economic phenomenon, which is characterized by asymmetrical benefits, favouring specific countries at the expense of others, and impeding the growth potential of dependent economies. The main objective of the study was to determine the relationship between foreign dependency and economic growth in Kenya. To achieve this overarching aim, specific objectives have been delineated to include an evaluation of the effect of Foreign Direct Investment inflows, import volumes, external debt levels and manufacturing output on economic growth in Kenya. The theoretical underpinnings of this study draw from several key economic theories and models, each offering unique insights into the dynamics of foreign dependency. These encompass the Dependency Theory, Absolute Cost Advantage Theory, the Harrod-Domar Growth Model, and the Solow-Swan Growth Model. The study factored in the effect of manufacturing output and import to the existing knowledge of foreign dependency. The study adopted explanatory design and leverages a forty-two year time series dataset spanning the years 1980 to 2021, which were sourced from the World Bank. Data stationarity was tested using Augmented Dickey-Fuller which they all attained stationarity property after first difference with their p-values less than 5%. The Johansen co-integration technique was applied which established the existence of co-integration. Using Breusch-Godfrey LM test the results revealed that the chi-square p-value was 0.6365, suggesting that no serial correlation was detected. To facilitate a comprehensive analysis, the Autoregressive Distributed Lag (ARDL) model was applied. The empirical analysis revealed noteworthy relationships between determinants of economic growth in the Kenyan context. Specifically, Foreign Direct Investment (FDI) inflows (β = −3.58, p = 0.00), imports of goods and services (β = 0.27, p = 0.026), external debt (β = 1.44, p = 0.00), are all identified as having statistically significant impacts on the trajectory of economic growth in Kenya while manufacturing output (β = 0.21, p = 0.969)was concluded to be statistically insignificant to the economic growth in Kenya . In conclusion, these findings suggest that while FDI may have a negative impact on economic growth in Kenya, other factors like imports, external debt, and a strong manufacturing sector contributes positively to economic growth. The study recommends that policymakers should explore strategies to attract productive FDI and stimulate positive investment spillover effects within the economy. Responsible external debt management is underscored as pivotal to fostering sustained and robust economic growth. Additionally, trade policies designed to facilitate import-led growth are posited as potentially beneficial for the Kenyan economy.