Determinants of Private Investment in Kenya:an Empirical Analysis

Abstract

This study was motivated by the conviction that private investment is the key to economic growth and increasing it is one of the prerequisites for achieving a sustainable economic growth. The study examines the determinants of private investment in Kenya over the period 1970-2007. Due to non-stationarity of the macroeconomic variables in the model and the existence of a cointegrating relationship, an Error Correction Mechanism (ECM) was employed. The estimated long-run results show that real GDP growth, real exchange rate and broad money supply as a ratio of GDP have positive and significant influence on private investment in Kenya. The impact of trade policy, domestic savings, real lending rates, foreign aid and FDI were positively related to private investment but insignificant. Credit to the private sector and dummy variable for political regimes have a negative and significant effect on private investment. Public investment, real deposit rates, public debt, inflation, foreign reserves and dummy variable for financial liberation was negatively related to private investment but insignificant. Given the positive impact of real public investment, the study suggests policies such as allocating public sector resources to capital accumulation. Since real lending interest rates have a significant positive effect, it is essential to maintain the financial liberalization status and in order to maintain the important link between GDP and private investment, there is need to expand the agricultural sector from rain fed agriculture to irrigated agriculture. There is also equally need to increase the rate of industrialization sector for economic development. The study may serve as a guide for economist, policy makers and researchers in applied macro-economists on the effects of macroeconomic variables on private investment.