Determinants of Foreign Direct Investment Growth in Kenya

Abstract

The foreign direct investment (FDI) indicators in Kenya show a mixed signal and although institutional indexes for Kenya have been worsening over the years, FDI inflow though sluggish has been on the rise. This evidence poses a problem and necessitated the need to analyze what determines the growth of FDI in Kenya and to what extent. The purpose of this study was to examine and analyze the influence of a group of determinants of Foreign Direct Investment (FDI) in Kenya and present new evidence. The specific objectives of the study were; to examine the extent to which corporate governance elements, political governance, trade openness, market size, exchange rate, and inflation determine growth of FDI in Kenya. To achieve these objectives, the research questions interrogated the relationship between ownership, location and internalization (OLI) together with selected institutional determinants and growth of FDI in Kenya. The study adopted descriptive research design using primary data collected through a self-administered survey questionnaire and an interview guide administered to the respondents in the sample after the research instruments were pilot tested for validity and reliability by use of Cronbach’s Alpha. The target population was 100 manufacturing firms with significant foreign ownership in Kenya. A sample size of 81 firms spread across the country was obtained for study using stratified random sampling. The methodology adopted involved the development of a multiple regression model to prove or disapprove the postulated hypotheses. The statistical tools of analysis that were used for descriptive data were the arithmetic mean and the standard deviation while the statistical tools of analysis used for inferential statistics were Pearson’s product moment correlation and stepwise regression to find correlations among the explanatory variables. F-tests were used to test the hypotheses in the study. Tests of statistical assumptions were carried out before data analysis to avoid invalidation of statistical analysis. Corporate governance, political risk, the country‘s trade openness, exchange rate and size of gross domestic product were found to significantly determine growth of foreign direct investment, however GDP per capita and level of inflation did not significantly determine growth of FDI. It is recommended that to attract FDI in manufacturing sector in Kenya, efforts should be made to improve on governance, manage the political risk and open the economy more to trade to attract FDI in dynamic products and sectors with high income elasticities of demand away from the primary sector. It is also recommended that a combination of traditional determinants of FDI and institutional determinants should be considered when formulating policies to attract foreign investment. Since this study delimited itself to the manufacturing sector, further research can be carried out to investigate the determinants of FDI in other sectors of the economy in Kenya