Determinants of Foreign Direct Investment Stock in Kenya

Abstract

Empirical studies have confirmed that FDI inward stock spurs economic growth since it is the investment in the real sector of the economy while FDI net inflows which is volatile negatively affects economic growth. Most Sub Saharan African countries endeavor to attract FDI stock because of its known importance as an instrument of economic growth and development. Africa’s quest for FDI is evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which is seen as the vehicle for attracting of foreign direct investment to Africa. This study investigated determinants of FDI stock in Kenya. Secondary data were used and sourced from the United Nation Centre on Trade and development (UNCTAD), World Bank database, Transparency International and Kenya National Bureau of Statistics. The period of study was 1980– 2012. Linear Regression Model was used to examine the determinants and Granger causality test to analyze and establish the nature of relationship between FDI inward stock and its determinants. Results suggest that rate of return, inflation, quality infrastructure, quality of institutions, cost of the factors of production, discount rates, openness of the economy and GDP growth rates of Kenya affect FDI stock. Economic growth of OECD countries, cost of factors of production, and rate of return have been found to be very significant at 2.12, 4.83 and 2.91 respectively. The study therefore recommends FDI stock should be encouraged in sectors with potential competitive advantages and where complementarity with domestic investments is likely to be high. Also, the government will have to promote effectively the development of technological and human capital capabilities in order to attract FDIs in higher-value added activities, as well as to ensure Kenya can assimilate these technologies effectively.