Foreign Direct Investment and Economic Growth in Kenya: A Comprehensive Analysis

Abstract

The study investigates the relationship between foreign direct investment (FDI) and economic growth in Kenya through comprehensive regression analysis and causality tests. Theoretical literature argues that FDI inflow can transfer great advantages to the host country, however, empirical studies show that the benefits of FDI vary greatly across countries. Kenya has traditionally been one of the largest recipients of FDI in Africa, foreign investors provide intangible assets to support the operation of the domestic firms. However, recently Kenya has experienced dwindling FDI levels. Despite an increasing empirical focus on the relationship between foreign inflow and the economy, little is known about the role of FDI in this nexus in Kenya. The study investigated the contribution of foreign direct investment to economic growth in Kenya using an Autoregressive Distributed Lag (ARDL) regression approach and causality tests. Secondary time series data for Kenya were used during empirical analysis. The time series data is from 1990 to 2021. The findings indicate that increasing FDI inflow will lead to an increase in economic growth. Additionally, the result indicates trade openness and climate change matter from a growth perspective. Notably, the results show that short-run to long-run foreign direct investment kindles economic growth in Kenya. Accordingly, Kenya must have more effective FDI strategies and pursue macroeconomic policies that attract FDI into the country, offers investor friendly environment, reduces bureaucratic hurdles and addresses the challenges of accumulating domestic investment and foreign exchange, particularly by productively opening the market and allowing FDI inflow to boost investment accumulation and economic growth.