Determinants of Private Investment and the Relationship Between Public and Private Investment in Kenya

Abstract

This study undertakes to analyse the determinants of private investment and establish the relationship that exists between public investment and private investment in Kenya during the period of 1971-2011. The study adopts the flexible accelerator model using the time series data for the period in consideration. Variables in the model are real GDP, inflation, interest rate, domestic credit, exchange rate, exports and external debt. The data for these variables was collected from various sources including The Central Bank of Kenya, Economic Surveys, Statistical Abstract and International Financial statistics. Using econometric techniques such as unit root tests, co-integration and error correction model, the empirical results show domestic credit, real gross domestic product and exports have positive impact on private investment both in the long run and short run while exchange rate, external debt had both short run and long run negative impact on private investment. Public investment had only a short run negative impact while inflation had no any impact at all on private investment. The research findings show that higher amount of domestic credit, rising gross domestic product, more exports and low levels of total expenditure on public investment, less external debt and moderate exchange rate will boast private investment in Kenya. This study recommend the use of efficient and modern technologies in the manufacturing and agricultural sector to increase their productivity, more domestic credit to the private sector, debt relief among other policies are suggested to boost private investment in Kenya.