An Analysis of the Relationship Between Macroeconomic Indicators and the Flow of Foreign Direct Investments in Kenya

Abstract

The research sought to look at specific macro economic determinants that affect the Foreign Direct Investment (FDI) inflow to Kenya. The logic being that each country is structurally diverse and that there are substantial discrepancies in the basic macroeconomic variables that characterize an economy. The study therefore sought to determine the critical macroeconomic indicators and their relationship to the flow of FDIs to Kenya and to develop a regression model to predict the level of FDI based on the identified macroeconomic indicators. The study w as restricted t 0 the Kenyan economy between the years 1990 and 2005, the period being judgmentally selected as it is more relevant to the current situation. Due to the fact that the FDI inflow depends on a number of macroeconomic determinants, multiple linear regression was used to determine the important variables that influence FDI inflow to kenya. Research findings from the Data Analysis indicate that the mam macroeconomic indicators that affect FDI inflow to Kenya include inflation, NSE Index, Annual GDP growth rate, total external debt, total exports, tax on International transactions and total imports. High Inflation and taxes on international transactions continuously created negative distortions to the Kenyan economy reducing FDI Investors. On the other hand, increased volumes of trade (import and export) have positively signaled to openness of trade and therefore more FDIs to Kenya. Similarly the findings reflect that higher external debt is positively related to FDI inflow to Kenya since increased multilateral donor funding to the Kenyan government helps to boost investor confidence hence higher FbI inflows through Multinational Enterprises. Contrary to the previous literature, the FDI inflow to Kenya has been negative to GDP growth. This is explained by the fact that the Kenyan government has tended to dispose its stake in parastatals to foreign investors in periods when the economic growth is low in order to get more funding to bridge the budgetary gap hence increased FDIs. The findings further reveal that high NSE Index levels negatively relate to the FDI inflow to Kenya. The findings opens the way for further research on the impact of FDI inflows to reduction of poverty levels in Kenya as well as the impact of FDI inflows to the stock market in Kenya.