The relationship between exchange rates and foreign direct investment in the horticulture industry in Kenya

Abstract

Several studies have established that exchange rate movement impact on FDI. When a currency depreciates, meaning that its value declines relative to the value of another currency, this exchange rate movement has two potential implications for FDI. First, it reduces that country’s wages and production costs relative to those of its foreign counterparts. All else equal, the country experiencing real currency depreciation has enhanced locational advantage or attractiveness as a location for receiving productive capacity investments. By this relative wage channel, the exchange rate depreciation improves the overall rate of return to foreigners contemplating an overseas investment project in this country and vice versa for a currency appreciation (Goldberg, 1993). The type of research design was the causal study that relies on control factors. The study employed a survey of horticulture industries within the period of study. The population of the study consisted of 30 horticulture companies that traded in the period 2000 to 2010 in Kenya. The study used secondary sources of data from the UNCTATED, HCDA, KFC and Investment Promotion Council for the respective horticulture companies over the period. Data collected was used to calculate and analyse export of goods and services, Import of goods and services, exchange rates, Goss domestic product, interest rates, openness of the economy and wages for the period under study. The study established that there is a relationship between foreign direct investment and export of goods and services, exchange rate, gross domestic product, interest rates and openness of the economy. This study recommends that government to use various economic stimulus programs in order to boost the country’s gross domestic product as this will positively influence foreign direct investment in the horticultural sector, the government should also provide a conducive environment that will encourage FDI into the horticulture industry, and this may include boosting infrastructure and beefing up security in the country. The study also recommends the government through various stakeholders in the agricultural sector to have standardized wage rates, as it is, the study found that increase in wages in the sector negatively affected the foreign direct investment into the sector, this will help in increasing foreign direct investment in the horticultural sector.