Short and Long Run Effects of Exchange Rate Volatility on Foreign Direct Investment in Kenya
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Date
2017-11
Authors
Malot, Kimeli Kenneth
Muniu, Joseph
Kosgei, Margaret
Journal Title
Journal ISSN
Volume Title
Publisher
International Journal of Economics, Commerce and Management
Abstract
Foreign Direct Investment is a significant factor in enhancing Kenya’s economic growth and
development. However, exchange rate volatility appears to be a disincentive to this aspect
owing to the risks it possesses to foreign direct investments. This study investigates the short
and long run effects of exchange rate volatility on foreign direct investment on Kenya. The
study uses annual secondary data set for the period 1980 to 2014. The study addresses two
specific objectives: to investigate the effect of the short-run and to measure the effects of
exchange rate volatility in the long-run. The short run effect of exchange rate volatility on foreign
direct investment was achieved by estimating an error correction model, while the long run
effects were estimated using a multiple regression. Results indicate that the error correction
term is statistically significant at five percent, with a value of -0.73. This implies a percentage of
73 percent of disequilibrium is corrected within a year. In the long run, the exchange rate
volatility coefficient is negative and statistically significant at five per cent. An increase in
exchange rate volatility by one per cent unit will lead a reduction of foreign direct investment by
10.19 per cent. The empirical results obtained in this paper recommend the Kenyan government
to implement exchange rate policies that promote stability of exchange rate, which could help
reduce exchange rate volatility in order to attract more FDI.
Description
A Research Article in the International Journal of Economics, Commerce and Management
Keywords
FDI, Exchange Rate, Exchange Rate Volatility, Openness, Inflation, GDP
Citation
Kenneth, M. K., Muniu, J., & Kosgei, M. (2017). Short and long run effects of exchange rate volatility on foreign direct investment in Kenya. International Journal of Economics, Commerce and Management, 5(11), 386-399.