The Impact of investment climate on economic growth

Abstract

This paper investigates the investment climate by using the Solow model and the Endogenous growth model and assesses its impact on economic growth over the period 1965-1995. The empirical findings suggest that the Solow and the Endogenous growth models are applicable to Kenya's economy. The primary and secondary school enrollment rates which were used to proxy human capital efficiency were found to impact positively on economic growth. This is consistent with the Endogenous growth model. On the other hand, the volume of trade and capital formation had a positive but relatively weak effect on growth. Further analysis showed that Kenya's trade performance has been low, erratic and inconsistent like in most African economies. The trade performance is consistent with the Solow model which emphasizes openness of economies as an important investment climate yardstick that determines factor productivity and economic growth. The policy implication is the need to strengthen our trade and investment institutions and also periodically review our trade and investment laws, incentives, procedures, etc to be in line with the requirements in the global marketplace. Capital formation findings are also consistent with past studies in this field. Policies should be put in place to mobilize savings both in the public and private sectors. Since the school enrollment rate was found to positively impact on growth, the policy implication is that there is need to invest more in education and the Kenyan government current provision of free primary education is commended. However, secondary school education needs more attention in terms of expanding facilities to cater for demand taking into account the strong positive impact it has on economic growth.