Determinants of Foreign Direct Investment in Kenya (1970 - 2009)
Manyanza, Rhodah M.
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The Kenyan government has employed policy incentives in order to encourage foreign direct investment (FDI) inflows into the country. Despite these measures, FDI inflows into the country have continued to be characterized by fluctuations. These fluctuations have been more marked from 1980's onwards. The objective of the study was to examine the factors that influence FDI flows into Kenya, specifically, the wage rate, exchange rate, trade balance, savings rate, external debt, GDP growth rate, inflation, openness of the economy, policy incentives and macro-economic reforms. The study also sets out to measure the relative effects of these factors and to give policy recommendations based on the study findings. To develop the model the flexible accelerator model by Chenery was used. Time series data was collected from secondary sources, which included statistical abstracts, economic surveys and World Bank development indicators for period 1970-2009. Regression analysis was employed, using Ordinary Least Squares (OLS) to estimate the linear model and best results reported. The linear regression results revealed that the exchange rate was the most significant variable in determining FDI inflows in Kenya. Other significant variables were trade balance, wage rate, savings rate, openness of the economy and policy incentives. Of these, the trade balance and wage rate had a negative effect on FDI. In addition, the rate of inflation, GDP growth rate, external debt and macro-economic reforms had negative effect on FDI inflows. Finally policy recommendations were also drawn from the regression results on the future of FDI inflows in Kenya. The need for Kenya to establish a conducive investment climate is an area that requires further research.