Relationship Between Foreign Direct Investment and Balance of Payments in Kenya

Abstract

Foreign direct investment has been argued to play a key role in accelerating growth in developing countries. Over the past two decades, world saving as a proportion of world income has fallen. As a result saving, real interest rate has declined and inflation rate has risen in the world. It is against this background FDI has appeared increasingly attractive to developing countries facing declining domestic investment and higher costs of foreign borrowing. The government of Kenya therefore has been putting up incentives to ensure that foreign companies are attracted to the country in an attempt to increase the investments to the country and improve the level of economic growth in the country. The objective of this study was to determine the relationship between foreign direct investment and balance of payments in Kenya.The study used a correlation design. The study collected secondary data from the World bank database, Central Bank of Kenya, and the Kenya National Bureau of Statistics for a 20 year period from 1993 to 2012. The data was analysed using descriptive analysis as well as OLS regression analysis after testing for non-stationarity of data using Augmented Dickey-Fuller test. Three equations were modeled for this study and used in the regression. The study found that the relative price of imports had a positive and significant impact on imports at the 1% level of significance while GDP and FDI were not significant in the model. This model accounted for 59.6% of the variance in imports and it was jointly fit in explaining the variance in imports. The study found that the relative price of exports and GDP had positive and significant impacts on exports at the 5% level of significance while FDI and lagged FDI did not have a significant impact on exports at all acceptable levels of significance. The model accounted for 52.6% of the variance in exports and was jointly fit in explaining the variance in exports. The results showed that FDI and Dummy2008 did not have a significant impact on CABECT at all acceptable levels of significance. The model accounted for only 18.4% of the variance in CABECT and it was not fit to jointly explain the impact on CABECT. The study concludes that the relative price of imports affects imports and that the relative price of exports and GDP also impact on exports. The study also concludes that FDI does not impact on exports, imports, or CABECT. There is therefore no evidence of FDI having a significant impact on balance of payments in Kenya. The study recommends that since FDI inflows have not been large enough to have a significant influence on balance of payments, it is important to policies be instituted to attract more FDI inflows in Kenya in order to gain from the advantages that come with FDI inflows.