The Causal Link between Foreign Direct Investment, GDP Growth, Domestic Investment and Export for Kenya: The New Evidence

Abstract

This study investigates on how foreign direct investment (FDI) relates with host country’s GDP growth, domestic investment and export in Kenya. Therefore the causality relationship between FDI, Export, domestic investment and GDP growth of Kenya from the year 1980 to 2013 is examined by using co integration and granger causality test .The co integration test results indicates that there is a long run relationships ship among the four variables being analyzed in this study. The Granger causality test results shows that the causal unidirectional relationships exist between export(EXP) and domestic investment (DI)at 5 percent level with the direction running direct from export(EXP) to domestic investment(DI) implying that export(EXP) is a good predictor of domestic investment(DI) in Kenya and that export led strategy is appropriate while the results found the bidirectional relationship between export (EXP) and foreign direct investment(FDI) at 5 and 10 percent level respectively implying that there is a feedback linkage of predicting each other between these two variables suggesting that both the export led FDI growth and FDI led Export growth are appropriate strategy to be adopted for Kenya. Finally the results showed domestic investment (DI) and foreign direct investment (DI) to have a unidirectional relationship at 1 percent level with a direction of linkage running from direct investment (DI) to foreign direct investment(FDI) which implies that domestic investment(DI) is important in predicting the inflow of foreign direct investment(FDI) in Kenya economy and not vice versa therefore the policy makers should cautiously base on the obtained results for right decision in policy making that could enable Kenyan economy reach its desired developments objectives.

Keywords: Foreign direct investment (FDI), Gross domestic product growth (GDPG), exports (EXP), Domestic investment (DI), co integration test, Granger causality, Kenya.