The relationship between investment rate and economic growth rate in Kenya

Abstract

The importance of investment is a prime factor in maintaining and expanding the capital stock and production capacity of any economy cannot be overstated. Kenya being a country endeavoring to be a middle income country by 2030, investment is believed to be a channel though which this can be realized. This study was done to establish the relationship between investment and economic growth in Kenya. Data that was used was that of GDP values and investment for the period 1993-2012 collected from the Kenya National Bureau of Statistics. The relationship between GDP and investment was analyzed using regression of the annual growth rate in GDP as the dependent variable and Investment rate as the independent variable. The significance of the constant term and the coefficient from the regression was tested using the t-test; the significance of the regression model was done using the F-test; correlation was tested using the Pearson’s correlation coefficient, while the coefficient of determination was used to determine how much variation in GDP rate was explained by variation in investment rate. The level of accuracy for this study was 95%. The results show low correlation between GDP rate and Investment rate. Both the constant term and the coefficient of investment in the regression were positive, but statistically insignificant. The regression model was found to be statistically insignificant and the variation in GDP rate was poorly explained by the variation in investment rate. The study, therefore concluded a weak positive relationship between investment and economic growth indicating that the current structure of investment did not strongly drive economic growth. The study, therefore, recommends that policy makers establish the investment behaviour of investors in Kenya concerning which investments the put their money in and encouragement done to make Kenyans focus their investment efforts towards those assets