Analysis of the determinants of foreign direct investment in Kenya

Abstract

Foreign direct investment (FDI) has been recognized as an important resource for economic growth and, therefore, economic development. However, this is realized within a set of variables that determine its inflow into a country. The objective of this study was to establish the determinants of the flow of foreign direct investment into Kenya. The study was done using secondary data on exchange rates, taxes, inflation, levels of GDP and openness for the 21 years from 1991 to 2012. The study was a multiple linear regression with the annual rate of change in FDI as the dependent variable and exchange rates, taxes, inflation, levels of GDP and rate of openness as the independent variables. The results show that the coefficient of annual rate of change in exchange rates was significant. The coefficient of tax rate was not significant showing tax rates did not affect FDI rate; the coefficient of GDP growth (economic growth) was not significant showing GDP growth did not affect FDI. The coefficient of openness was also not significant indicating that openness did not affect FDI. The whole regression was statistically significant with an indication that the variation in the five variables, namely, Exchange Rate, Tax Rate, Inflation, GDP Growth and Openness explained the variation in the rate of change in FDI. It is, therefore, concluded that exchange rate is the factor that determines the rate of change in the FDI inflows into Kenya. Tax Rate, Inflation, GDP Growth and Openness are not significant drivers of changes in the FDI inflows into Kenya. From the findings it is recommended that policy maker have to put in place policies to keep the Kenyan shilling cheaper to attract more FDI.