Foreign Direct Investment Volatility and Economic Growth in Kenya (1970-2010)•
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Date
2014-03-10
Authors
Ngugi, Grace Ngonyo
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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.
Description
Department of Applied Economics,