Foreign direct investment and economic growth in Kenya: An empirical investigation

Abstract

In this paper, the casual relationship between foreign direct investment (FDI) and economic growth in Kenya during the period 1980-2018 is examined. In an attempt to address the omission-of-variable bias, which has been detected in some previous studies, two variables, namely money supply and trade, are used as intermittent variables, thereby leading to a system of multivariate Granger-causality equations. Using the ARDL bounds testing approach, the results show that there is a unidirectional causal flow from economic growth to FDI in Kenya. These results apply, irrespective of whether the causality is conducted in the short run or in the long run. Based on these results, it can be concluded that the current burgeoning FDI inflows that Kenya has attracted in recent years are largely driven by the strong economic growth and prudent macroeconomic policies that the country has been pursuing in recent decades. To our knowledge, this may be the first study of its kind to examine in detail the causal relationship between FDI and economic growth in Kenya in recent years. Policy implications are discussed.