Relationship between the determinants of foreign direct investment and effects on economic growth in Kenya.

Abstract

Foreign direct investment (FDI) plays important role in achieving rapid economic growth through bringing the latest technology and management know-how and bridging the gap between domestic savings and investment. Kenya has recently experienced a hit in foreign direct investment following a period of substantial decline of FDI inflows. The net FDI inflows in Kenya has been declining and also highly volatile despite friendly economic environment and improved polices implement to so as to attract and retain FDI and accelerate her economic growth and development. The study aims at investigating the relationship between the determinants of foreign direct investment and the economic growth of selected sectors in Kenya. The target population is the seventeen activities as listed in the Kenya facts and figures (KNBS, 2014). Theories applied in the study included; Market Imperfection Theory; Internalization Theory; Eclectic Paradigm and Solow Type Growth Theory. Descriptive research design was used while data collected covered a period of five (5) years from 2011 to 2015. Descriptive research design is adopted and census used. Secondary data was obtained from the Central bank of Kenya publications, the Kenya National bureau of statistics publications, International Monetary Fund (World Economic Outlook Database) publication and the World Bank (WDI. The study used panel data model which included dependent variable as economic growth while independent variables was market size, economic openness and cost of labor. Diagnostic tests included panel unit root test, multi collinearity, serial correlation, Heteroscedasctity and cross sectional dependence test and due to violence of CLRM, Hausman specification test used to evaluate the aptness of either the fixed model or random model to be used was not done instead the model was fitted using Robust Standard Errors. The Ms-Excel and STATA was used to analyze the data.