Determinants of Domestic Private Investments in Kenya

Abstract

Private investment is the engine of growth in any economy. It is a major source of employment besides positively contributing to national output. With this in mind, we set out to investigate what determines new levels of domestic private investments in Kenya. The study used data covering the period 1970-2010. The estimated long-run regression shows that real GDP growth rate, real exchange rate and broad money supply have a positive and significant effect on private investment. Others like trade policy, domestic savings, lending rates and foreign aid have a positive but insignificant impact on private investments. Markets play a major role when it comes to new investments. This microeconomic variable has never been studied in past studies to see how markets affect new levels of investments. This study has attempted to establish the impact of markets, even though this impact has not been quantified. Private sector credit and political regimes have a negative but significant influence on private investments. Public investment, real deposit rates, public debt, inflation, foreign exchange reserves and financial liberalization have a negative but insignificant impact on private investments. In view of the positive contribution of public investment, the study suggests policies such as increasing allocation of public funds for capital accumulation. Since real lending rates have a negative influence, it is important to reduce cost of credit through monetary policies. He study is a guide to policy makers, economists and researchers in applying macroeconomic principles in real life economics of domestic private investments.