The Relationship Between Foreign Direct Investment Flows in Kenya and Macro-economic Factors

Abstract

Foreign direct investment (FDI) has been recognized as an important resource for economic development. However, this resource is realized within a set of variables that determine its inflow into a country. The objective of this study was to establish the determinants of the flow of foreign direct investment into Kenya. The regression was statistically significant with an indication that changes in five factors, namely, exchange Rate, Tax Rate, Inflation, GDP Growth and Openness explained 50 percent of the variation in the rate of change in FDI. For specific determinants, the exchange rate is the factor that is most prominent as a determinant of FDI inflows into Kenya. Tax Rate, Inflation, GDP Growth and Openness are not significant drivers of changes in the FDI inflows into Kenya. Policy makers have to watch the fluctuations in KES exchange rates carefully.

Keywords: Foreign Direct Investment, Exchange rate, Economic growth rate , Inflation rate, Trade openness, Kenya