Impact of foreign direct investment volatility on economic growth in Kenya

Abstract

Several empirical studies have confirmed that FDI spur economic growth while FDI volatility negatively affects economic growth. Most Sub Saharan African countries endeavor to attract foreign direct investment (FDI) because of its known importance as an instrument of economic growth and development. The formation of New Partnership for Africa’s Development (NEPAD) is evidence enough for Africa’s quest for FDI; this is viewed as the means of attracting of foreign direct investment to Africa.

This study investigated empirical the impact foreign direct investment volatility in Kenya. Secondary data were used and sourced from the United Nation Centre on Trade and development (UNCTAD), World Bank database and Kenya National Bureau of Statistics. The period of study was 1970– 2011. An endogenous growth model was estimated using the ordinary least squares to determine the relationship between the FDI volatility and economic growth. Using bounds testing approach, it shows that FDI volatility retards long-run economic growth in Kenya. Results suggest that FDI has a positive result on growth whereas FDI volatility has a negative impact on growth. Trade openness is not FDI inducing, thus affecting growth negatively. Labour force has a positive impact on growth. Foreign Direct Investment in Kenya contributes positively to economic growth, although its overall effect on economic growth may not be significant.

The volatility of capital flows may make it harder for the stable and predictable macroeconomic policies to be followed. Therefore unstable inflows may dampen investment, hence affecting economic growth