The determinants of foreign direct investment in Kenya

Abstract

Foreign Direct Investment forms one of the most important links between developing and industrial countries and increasingly among developing countries. Like trade, it provides an important channel for global integration and technology transfer. Kenya faces a big challenge in attracting and sustaining foreign direct investment at levels that allow domestic investment to take advantage of benefits associated with capital inflows. The study therefore sought to conduct an empirical investigation on the determinants of foreign direct investment in Kenya.

The theoretical framework is based on the concept of institutional FDI fitness theory, developed by Saskia Wilhelms. The study used data over 1967-1999 period, partly because after independence (1963), marked the beginning of the development process. The results were interpreted based on the generalized least square model (GLS).

The estimated linear regression model revealed that, economic openness is the most significant determinant of foreign direct investment inflows in Kenya. Other variables that were significant determinant of FDI inflows included growth rate of GDP, credit availability from the monetary authority, domestic investment, the exchange rate and internal rate of return. The rest of the remaining variables in the estimated model were statistically insignificant. These include: external debt; inflation rate; trade balance; university enrolment rate and gross domestic savings. The implication of all these findings is that ensuring the promotion and sustainability of Foreign Direct Investment, as a tool that enhances Kenya's economic growth is a formidable challenge to policy makers now and the years to come.