The Impact of Foreign Direct Investment on Economic Growth in Kenya

Abstract

The general benefits of foreign direct investment (FDI) for emerging economies are well documented. Given the appropriate host-country policies and a basic level of development, various studies show that FDI results in technology spillovers, enables human capital formation, improves international trade integration, helps create a more competitive business environment and improves enterprise development. All of these result in higher economic growth, which is a crucial tool for alleviating poverty in developing countries. This study explores the impact of foreign direct investment on the Kenyan economy using FDI and GDP inflow data series from 1982 to 2012. The Statistical Package for Social Sciences was used to analyse the data where descriptive analyses, frequencies and trend analysis, as well as inferential analyses involving Analysis of Variance (ANOVA) and Correlation analysis to establish relationships between the variables. Graphical trend analysis of FDI and GDP reveals a direct positive relationship between the two variables. The Pearson correlation was computed for GDP and FDI inflow data series resulting in a correlation coefficient of 0.565 at the 0.001 (2 tailed) significance level which indicates a strong positive correlation between the variables; this in turn means that there is a significant direct proportional relationship between foreign direct investment and economic growth in Kenya. These findings have led to the conclusion that the impact of foreign direct investment on the Kenyan economy is a positive one. As such, we can say that FDI promotes economic growth and suggest that the Kenyan government embrace policies that aim to attract more foreign direct investment while micro-managing the same to avoid the negative impacts of FDI on local firms such as crowding out.