Global Oil Price Volatility and Foreign Direct Investment Inflows in Kenya
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Date
2021
Authors
Amboko, Oyombe Julians
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
External capital flows play a 2crucial role 2in driving investment and 2economic growth2 in financial resource constrained countries such as Kenya. As such, the vulnerability of a country’s foreign 2direct investment 2flows to external shocks is a key area of research interest. In the past, studies on Kenya’s vulnerability to oil price volatility have focused on its pass-through effects through inflation and the exchange rate. To date, there is a gap in literature with regard to assessment of how oil price volatility impacts foreign direct investment flows into Kenya and this has been premised on Kenya being an oil importing economy. In August 2019, however, Kenya made its first commercial sale of oil in the global market selling 200, 000 barrels and realizing USD 12.0 million (Kes 1.2 billion) in proceeds. This development not only buoyed optimism that the country could soon be benefiting from oil revenue but also elicited renewed interest in understanding2 how oil 2prices shocks affect2 the economy. This study tested the impact 2of volatility oil 2prices in the global market on the flow of foreign direct investment into Kenya. The 2study’s objectives were to establish the trend of global oil price volatility between 1970 and 2016 and to investigate the effect of global oil 2price volatility 2on foreign2 direct investment2 inflows in Kenya. The study used the GARCH model encompassing Kenya’s foreign direct2 investment inflows2 as the endogenous variable and 2exchange rate, external balance, inflation, net exports, real interest2 rate and 2gross domestic 2product growth as exogenous variables. The GARCH model entailed estimating two equations, the mean and the variance equations, at the same time with the residuals of the former allowing one to model the volatility of exogenous variables. Following review of existing literature, the study focused on a non-experimental research design with seven exogenous variables ─ external balance, net exports, real interest rate, exchange rate, inflation, GDP growth and volatility of oil prices. Annual data for the variables between 1970 and 2016 were used in the analysis. The results of the first objective using ARCH (1, 1) model established that the coefficient for lag, 1=1.032, was a statistically significant at 5% level. The second objective which utilized multiple linear regression model established that the coefficients for Global Price of Oil (USD per Barrel) 𝛽1= −7969894 and External Balance (USD) 𝛽2 =−0.158033 were statistically significant at 5% level, while the coefficient for Exchange Rate (USD to Kes) 𝛽3=983309.1; Inflation (Average annual %) 𝛽4=2514802; Real GDP Growth (Annual %) 𝛽5=1954893; Real Interest Rate (Annual %) 𝛽6=−6396840 were not statistically significant at 5% level. For the first objective, ARCH (1, 1) model was used, where the findings revealed a2 statistically significant 2relationship between the global oil prices and their prospective lagged series. Analysis for the second objective using multiple linear regression model showed that only oil price (USD per barrel) and external balance had a 2statistically significant2 negative influence on foreign direct investment in Kenya. Thus, the study concludes that the years between 1973 and 2016 witnessed a significant rise in volatility of the global oil price. In addition, volatility of the oil prices had a significant negative effect on FDI inflows in Kenya. The findings provide insights to policy implementers regarding how findings and therefore be informative for policy implementation with regard to how the country can put in place mechanisms to counter the effect of global oil price volatility particularly so as to realise a significant influence of FDI in the country.
Description
A Research Project Submitted to the Department Economic Theory in the School of Economics in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Economics (Policy and Management) of Kenyatta University, March 2021
Keywords
Global Oil Price, Volatility, Foreign, Direct Investment, Inflows, Kenya