Determinants of private investment in Kenya

Abstract

This study undertakes to examine private investment in Kenya. Its major objectives are geared towards the factors that determine private investment. The study was based on data drawn from National Accounts, aid and trade statistics for the country. These sources provided annual observations for the period 1970-2003. The factors that affect private investment were broadly investigated through socio-economic explanatory variables. The factors that featured in the study include; savings, income, aid, consessional loans, foreign exchange availability, interest rates, output price and the variability of returns to investment. A specified simple model was estimated in logs by OLS method. Stationarity of the variables was investigated using Durbin Watson statistic and the augmented Dickey Fuller Statistic. Where data was non-stationary, cointegration of the variables was investigated by Engle - Granger and Johannsen's Procedure. The study found out that domestic funds, aid and concessional loans do affect the growth of investment, but these are not the only factors. Variables reflecting the rate of return to investment are also important. That the demand - side factors are significant suggests that some investors are able to borrow on international capital markets. In particular, the rate of growth of investment can be impaired by an increase in the variability of capital goods prices. The study gives some recommendations to be adopted in the face of declining private investment in the country, which include among others, review of the banking act, reduction of government borrowing from the domestic market and increased government investment on physical infrastructure.