Selected Macroeconomic Determinants of Foreign Direct Investment in Kenya
Stella Kagendo Ndwiga Ndung’u *
Department of Economics, School of Business and Economics, Moi University, Nairobi, Kenya.
*Author to whom correspondence should be addressed.
Abstract
This study empirically investigates the effects of selected macroeconomic determinants on foreign direct investment (FDI) inflows in Kenya. Using annual time-series data covering 1986–2021, the study applies an autoregressive distributed lag (ARDL) model to capture short-run dynamics and lagged adjustment effects in FDI. Secondary data were obtained from official national sources: exchange-rate and interest-rate series were drawn from the Central Bank of Kenya, while inflation and FDI series were obtained from the Kenya National Bureau of Statistics. The ARDL bounds test suggests no cointegration at the 5% level; therefore, the results should be interpreted mainly as short-run relationships. Structural-break testing indicates a regime shift around 2013. The regression results show that the contemporaneous exchange-rate measure has a positive and statistically significant association with FDI. Inflation is positive and significant in the current period and at selected lags, while interest rates are positive and significant in the current period and show a delayed effect. The findings underscore the importance of macroeconomic conditions in shaping Kenya’s FDI dynamics and suggest that policies promoting exchange-rate predictability, inflation stability, and interest-rate credibility may strengthen investor confidence.
Keywords: Foreign direct investment, exchange rate volatility, inflation rate, interest rate, ARDL model, time-series analysis