Global Oil Price Volatility and Foreign Direct Investment Inflows in Kenya

Abstract

External capital flows play a crucial role in driving investment and economic growth in financial resource constrained countries such as Kenya. As such, the vulnerability of a country’s foreign direct investment flows to external shocks is a key area of research interest. In the past, studies on Kenya’s vulnerability to oil price volatility have focused on its pass-through effects through inflation and the exchange rate. To date, there is a gap in literature with regard to assessment of how oil price volatility impacts foreign direct investment flows into Kenya and this has been premised on Kenya being an oil importing economy. In August 2019, however, Kenya made its first commercial sale of oil in the global market selling 200, 000 barrels and realizing USD 12.0 million (Kes 1.2 billion) in proceeds. The first objective was to establish the trend of global oil price volatility between 1970 and 2016 and to investigate the effect of global oil price volatility FDI inflows in Kenya. The study used GARCH model encompassing Kenya’s FDI inflows as the endogenous variable and exchange rate, external balance, inflation, net exports, real interest rate and gross domestic product growth as exogenous variables. The GARCH model entailed estimating two equations, the mean and the variance equations, at the same time with the residuals of the former allowing one to model the volatility of exogenous variables. Multiple linear regression analysis was used to establish strength of linear relationship between the selected macroeconomic variables and FDI inflows in Kenya. The findings of the first objective using ARCH (1, 1) model, yielded a statistically significant coefficient for the lag, 1=1.032, the second objective, the results of multiple linear regression analysis established that only Global Price of Oil (USD per Barrel)  and External Balance (USD)  were statistically significant at 5% level. The findings provide important insights for economic policy implementers regarding how to take necessary measures to counter the effect of global oil price volatility in order to realize sustainable inflow of FDI in the country.

Keywords: Volatility; foreign direct investment; oil price

DOI: 10.7176/JESD/12-8-05

Publication date: April 30^th 2021