A Study of the Impact of Foreign Direct Investments on Economic Growth in Kenya

Abstract

This study has analyzed the impact of foreign direct investment on economic growth in Kenya over the period from 1990 to 2007. It was specifically conducted to explain the influence that FDI inflows have on economic growth. However it was also designed to analyze the influence of additional variables of gross capital formation and labour on economic growth. The study was carried out by analyzing the rate of economic growth measured by the GDP per capita as the dependent variable and FDI inflows, capital formation measured by average share in GDP of gross capital formation and labour measured by total recorded employment as independent variables. It used multiple regression model to study the relationships between these variables. SPSS was used to support the analysis and to provide a basis for the conclusions drawn. The study has established that FDI influences economic growth though not very strongly. The findings show that the proportion of gross capital formation that comes from FDI is still very low in Kenya and perhaps is the reason why the extent of influence on economic growth is not very strong. However, capital formation emerged as the major driver of economic growth of all the three variables that were studied. Although this study reveals that the FDI does not have a very significant effect on economic growth, it is logical to attribute this to the relatively small amounts of capital inflows into the country. The government can conduct a campaign to attract the foreign investors so as to compound the benefits of FDI inflows which have already been confirmed by this study.