THE EFFECT OF MACRO ECONOMIC FACTORS ON PERFORMANCE OF FOREIGN DIRECT INVESTMENT IN KENYA

Abstract

Foreign Direct inflow has grown significantly over the last two decades, according to Word Bank World Economic report 2014, foreign direct investment in Kenya has increased from as low as 50 Million Dollars in 2001 to 944.3 Million Dollars in 2014. From the analysis of previous researches, the relationship between FDI and Macroeconomic factors is inconclusive, mixed results have also been evident with some results indicating that macro-economic factors like interest rate has a positive impact on foreign direct investment. A Kenya specific research on the effect of macroeconomic factors on foreign investment is not clear. This paper investigated on the effect of macroeconomic factors on performance of foreign direct investment in Kenya. The researcher adopted, Inflation, interest rate, Exchange rate and money supply as independent variable and foreign direct investment inflows as the dependent variable. The study employed descriptive research design, which is designed to explain how one variable affects another. Secondary data was used in this study and  the population consisted of all FDI data available in world development indicators report database from 1970 to 2014, the study considered all foreign direct investment inflow data, Interest rate, Inflation, Exchange rate and money supply from year 1995 to year 2014. This aimed at achieving comprehensive coverage and a decade will give a much accurate results. Year 1995 was specifically selected because that was the year when structural adjustment program implementation began; there was increase liberalization of interest rate and elimination of exchange rate control through repealing of the Exchange Control Act in December 1995. The study generated Quantitative data; this data was pre-analyzed using E-views. This was utilized in further analysis of data through use of descriptive statistics such as measures of central tendency. Regression analysis was conducted to find out the significance of the regression coefficients. The data was presented using tables and charts. The study found out that money supply and interest rate are the ideal factors that affect foreign direct investment in Kenya. From these findings, the study therefore asserts that there is a significant relationship between money supply and interest rate and foreign direct investment in Kenya. In addition, the study concluded there is no significant relationship between Exchange rate and inflation and foreign direct inflow. The study recommended that policy makers should adopt fiscal policies that spur the money supply. Interest rate is another significant determinant of FDI under this study. Interest rate adjusted for inflation is good measure and important variable of FDI inflows. Also central bank of Kenya to formulate policies that will stabilize exchange rate and reduce rate of inflation which are essential for attraction of FDI inflows in Kenya.

Key words: FDI, Inflation, Interest rate, Exchange rate, Money supply