The Role of Institutional Quality on Foreign Direct Investment (FDI) inflows into Kenya

Abstract

The purpose of the study was to investigate the role of institutional quality factors on foreign direct investment (FDI) in Kenya. Institutional factors such as voice and accountability, corruption control, political stability, rule-of-law, government effectiveness, and regulatory quality all play critical roles in attracting FDI and driving long-term economic growth. Thus, understanding the relationship between these institutional factors, FDI inflows and their subsequent effects on economic growth is of critical importance for policymakers, investors and researchers in Kenya. The study employed time series data and utilized data from world bank database Governance indicators (WGI), UNCTAD and world bank databases for FDI inflows and other macroeconomic factors from the period 1980 to 2022. The study empirically analyzed the effect of distinct institutional quality factors on net FDI inflows and retention while controlling for other relevant macroeconomic factors. By employing this targeted approach focused on specific institutional dimensions the study aimed to provide insight that contribute to both theoretical discussions of determinants of FDI, provide practical policy considerations and deepen the understanding of the intricate relationship between institutional quality, FDI inflows and economic growth. The study findings indicated that institutional quality factors had both positive and negative influence on FDI inflows. Institutional factors such as voice and accountability, political stability and rule of law positively influenced FDI inflows with coefficients of 1.08, 1.04 and 0.163 respectively implying 1.08%, 1.04% and 0.163% increase in FDI inflow with 1% increase in voice and accountability, political stability and rule of law indexes respectively while Regulatory quality, Government effectiveness and Control of corruption were found to negatively influence FDI inflows with 2.85%, 2.81% and 2.7% decrease in FDI inflows with 1% increase in Regulatory quality, Government effectiveness and Control of corruption indexes respectively. Therefore, institutional quality factors play a crucial role in determining FDI inflows and the government and policymakers should put in place mechanism to improve the institutional quality for instance uphold and adhere to rule of law, maintain political stability and reduce violence, promote accountability in order to optimize FDI inflows into the country.