Foreign Direct Investment and Balance of Payments in Kenya

Abstract

Foreign direct investment play a key role in accelerating growth in developing countries. Over the past two decades, world savings as a proportion of world income has fallen. As a result saving, real interest rate has declined and inflation rate has risen in the world. It is against this background FDI has appeared increasingly attractive to developing countries facing declining domestic investment and higher costs of foreign borrowing. The objective of this study was to determine the relationship between foreign direct investment and balance of payments in Kenya. The study used a correlation design and collected secondary data from the World Bank database, Central Bank of Kenya, and the Kenya National Bureau of Statistics for a 10-year period from 2008 to 2018. The data was analyzed using descriptive analysis as well as OLS regression analysis after testing for non-stationarity of data using Augmented Dickey-Fuller test. The study found that the relative price of imports had a positive and significant impact on imports at the 1% level of significance while GDP and FDI were not significant in the model. The study concludes that the relative price of imports affects imports and that the relative price of exports and GDP also impact on exports. The study also concludes that FDI does not impact on exports, and did not found any significant impact on balance of payments in Kenya. The study recommends that since FDI inflows have not been large enough to have a significant influence on balance of payments, it is important for policies to be instituted to attract more FDI inflows in Kenya in order to gain from the advantages that come with FDI inflows.

Keywords: FDI inflows, balance of payments, relative price, real interest rates, tax vacation, comparative costs.