MST-Department of Econometrics and Statistics

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    Effect of foreign direct investment on employment and welfare in Kenya
    (Kenyatta university, 2023-11) Mwangangi, Cornelius Malinda; Steve Makambi
    The principal external source of finance for emerging nation is foreign direct investment. Throughout the last 10 years, Kenya has managed to attract a significant amount of FDI which could be due to incentives and stable investment environment which attract foreign investors. However, while attraction and inflow of FDI has been observed, it is not clear whether FDI translates to improvement of employment and welfare. Effectiveness of FDI can either be felt directly or indirectly which include technology transfer, spillovers, employment opportunities, training of laborers among others. Ultimately the study aims to examine the effect of foreign direct investment on employment and whether it translates to improvement of welfare in Kenya. Specific objectives include:(i) to examine the effect of foreign direct investment on employment in Kenya; (ii) to determine the effect of foreign direct investment on welfare in Kenya. Welfare was approached from two perspectives which included the human development index and the gini index. Secondary time series data used was retrieved and compiled from the following databases which included World Bank, the United Nations Development Programme, and the yearly economic surveys conducted by the Kenya National Bureau of Statistics all between 1990 to 2020. Several diagnostics tests were run which include; unit root test, cointegration bound test, autocorrelation test, test for normality, heteroskedasticity test, omitted variable test and model specification test. To address the first objective and the second objectives of the study the ARDL model was used to investigate the effect of FDI on employment and welfare in Kenya. The following conclusion were made from the study; First, HDI was a better measurement of welfare compared to the gini index since FDI, savings, inflation, and GDP have an effect on HDI and on the other hand only savings had an effect on the Gini index. Second, since there exists a negative relationship between FDI and HDI in the short run there is need for government intervention in order to curb the negative effect to avoid compromising education, per capita income and life expectancy. Also, the study concluded that FDI plays a major a role when it comes to employment creation and improvement of long term and short-term welfare in an economy. The study made recommendations on the following; First, the ministry of investment, trade and industry should make the investing environment more friendly to foreign investors, second, to reduce the cost of investment licenses and setting up companies, third, the government of Kenya should maintain a stable political environment, fourth, the government should constantly revise their policies to protect domestic companies from foreign companies and finally the government should channel FDI inflows into investments projects that favour the poor in order to improve welfare