Analysis of private domestic investment in Kenya.
Okotti, Samuel Matendechere
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Private domestic investment is one of the major contributors to economic growth and development in both developed and developing countries. In Kenya the ratio of private domestic investment to GDP has substantial fluctuations. These fluctuations in investment ratio and levels pose a challenge in formulating policies that lead to attaining the desired level of private domestic investment. The Government has been implementing different strategies to boost private domestic investment but it is not clear to which extent each strategy has affected private domestic investment. Policy uncertainty proxied by political instability also undermines private domestic investment in Kenya. This project aimed at studying the determinants of private domestic investment in Kenya from 1970 to 2012 capturing the political instability such as electioneering periods, different economic policies (i.e. the import substitution policy and the export promotion policies), and their impact on the growth of private domestic investment. The effects of elections were captured using a dummy variable for the election years and one year before and after elections. The accelerator model was modified to capture various factors relevant to Kenya in determining the level of the growth of private domestic investment. The test for a unit root was done on the time series data using the conventional unit root tests known as Augmented Dickey Fuller [ADF] unit root test procedure. The unit root test reveals that broad money supply, public investment and previous domestic investment variables under investigation are 1(1) while growth in private investment, real interest, growth in GDP and growth in domestic saving are 1(0). The results further indicate that in the long run the growth in GDP, previous growth in GDP, growth in domestic investment, and election were significant determinants of growth of the private domestic investment. Whilst real rate of interest, broad money supply, growth in public investment, previous period growth in domestic investment and dummy variable of were not significant determinants of growth of private domestic investment