Determinants of demand for private investment in Kenya. (1970-2003)

Abstract

This paper assesses the determinants of demand for private investment for the period from 1970 to 2003. It deviates from previous studies by incorporating infrastructure, user cost of labor and liberalization as variables that affect private investment. It recognizes that private investment in Kenya constitutes 60% of the total investment. Since 1980s, the share of private investment to total GDP has been declining due to various macroeconomic imbalances despite government efforts in the economic reforms as advocated for by the Bretton woods institutions. Specifically, the paper specifies and estimates a time series model with private investment as the dependent variable so as to determine the significance of the explanatory variables. Policy implications are also analyzed based on the study results. The study utilized secondary data obtained from international financial statistics (IFS), statistical abstracts and economic surveys. Inorder to use the data satisfactorily, several tests including unit root tests and causality tests were done. The study results show that private investment decisions seem to be determined by the infrastructural facilities proxied by the bitumen road length in this study, and liberalization effects dummy (equal to 1 from 1992 on wards) among other variables. Most of the variables conform to economic theory. The study was successful in obtaining its objectives and recommends that in order to provide a sound environment to attract domestic investors and maintain a stable flow of private investment in the economy, the government musUJeate and preserve a consistent, credible and stable policy environment. Efficient infrastructural facilities should be provided since it is a prerequisite for any viable private investment and the overall economic development. Liberalization of firms that render key services should be done with a lot of caution, to ensure that the efficiency of factors of production and quality of output is not compromised.