Relationship between foreign direct investment inflows and selected macroeconomic variables in Kenya

Abstract

Foreign direct investment (FDI) is a key component of attaining sustainable economic growth and development in most developing economies. This is majorly through strengthening infrastructural system, information and communication technology (ICT) development, raising productivity and creation of employment opportunities, and supplementing the balance of payment by enriching exports. The purpose of the study, therefore, is to determine the relationship between foreign direct investments and selected macroeconomic variables. The study employs unit root test to determine the stationarity of individual variables. The causality of macroeconomic variables on foreign direct investment inflow is checked using granger causality test. Economic growth and exchange rates are significant in influencing the level of foreign direct investments and inflation and exchange rates are significant in influencing interest rates. Economic growth proxied by gross domestic product is positive and significant determinant of foreign direct investment inflows instantaneously. The study recommends for policies that enhance foreign direct investment through promoting the prospects of economic growth.