Foreign Direct Investment Volatility and Economic Growth in Kenya (1970-2010)•

Abstract

Attracting FDI has continued to be a vital concern for many developing countries to supplement their insufficient domestic investment. As such the Kenyan Government, over the years, has put great efforts to boost the levels of FDI to spur economic growth by offering various investment incentive packages example establishment of the EPZs which offer incentives such as ten-year tax holiday followed by a 25% tax rate for the next ten years, exemption from import duties, value added tax and stamp duty and repatriation of profits is unrestricted. Despite the Kenyan government effort to attract FDI, it has been volatile. Although several empirical studies have confirmed FDI volatility general affects economic growth negatively, the impact of FDI volatility on economic growth and whether the effects are in the short run or long run has not been addressed in the case of Kenya. The main objective of the study was to empirically analyze the relationship between of FDI volatility and economic growth in Kenya and how FDI volatility affects economic growth in Kenya. The period under study was 1970- 2010. The data for the study were collected from National Bureau of Statistics, UNCTAD and IFS sources. The study modeled FDI volatility using EGARCH methodology, ARDL bound was used to test for cointegration and finally estimated vector error correction model to check the effects of FDI volatility on economic growth. The findings of the study were that there exists some level of FDI volatility in Kenya, where first lag conditional variance of FDI has effects on the current period conditional variance ofFDI. The study found that FDI volatility has long-run relationship with economic growth in Kenya and FDI volatility deters economic growth in the long run.