The Effects of Interest Rates on Foreign Direct Investments in Kenya

Abstract

Foreign direct investment has always been viewed as a source of capital for domestic investment. It not only helps to create employment but also enhance technology transfer technology and thus makes a major contribution to economic development. Understanding the role played by foreign direct investment to economic development, the government of Kenya recognizes the need to attract it. Kenya needs foreign direct investment for the purpose of supporting her development projects. However, in a globally competitive market, attracting capital is a major challenge that every government has to overcome. The main aim of this study was to determine the effect of interest rates on direct foreign investments in Kenya. The study adopted a descriptive research design which assisted in the establishment of the relationship between interest rates and foreign direct investments in Kenya. The sample frame was based on 44 data points i.e. time series annual data of the dependent and independent variables from 1971 to 2014. The dependent variable was FDI while the independent variables were; interest rates and other variables namely, inflation, exchange rates and GDP since they are the main macroeconomic variables in the economy. Data was gathered only from secondary sources and analysis done using SPSS 17.0. The findings in other areas concurred with other studies while in some areas it contradicts. Descriptive and inferential data analysis was used to analyze the data. The overall findings and conclusion of the study was that interest rates have a positive correlation with FDI but not significant at all in determining the level of FDI inflows in Kenya. Inflation, exchange rates and GDP have negative correlation with FDI therefore not also significant in attracting FDI. 95.58% inflows can be explained by other factors. Another study should be done in Kenya using other variables like labor cost, risk factors, government policy, openness to trade and political stability to determine their role in attracting foreign direct investments. Foreign direct investment is a key pillar in economic development in a country. The government should do its best in ensuring that investors troops in large numbers for investment. By developing friendly investment policies and offering incentives to already existing investors, the whole idea of development will be achieved. Investments through FDIs create jobs for the locals and boost GDP given that the cost and value of goods and services produced and sold within the country will be higher. The government also should embrace private- public sector partnerships to realize some its long term goals. By providing a policy frame work that protects investors the government would benefit more from FDI. High interest rate environment is good also for investors. The government should strike a balance by introducing other incentives for investors other than begging interest rates high. FDI should be channeled to key sectors in the economy like the manufacturing sector, mining, tourism agriculture and education since FDI is harmful to the retail sector especially when foreign companies imports their raw materials. The success of the study wasn’t without challenges. Obtaining data from KNBS data archives especially data for data stored over 44 years ago just after independence. Further research can be done on the role of inflation targeting on foreign direct investments. The study also recommends a research on whether pecking interest to high or too low may be a factor in determining the level of foreign direct inflows in a country.