Real Interest Rate, Inflation, Exchange Rate, Competitiveness and Foreign Direct Investment in Kenya

Abstract

Purpose: The purpose of this study was to establish the effect of real interest rates, exchange rate, inflation and competitiveness on FDI in Kenya. Methodology: The study used annual time series data for the period 1970-2016. The sources of data included World Bank Indicators and Kenya National Bureau of Statistics annual reports. Data was collected for the variables real interest rates, exchange rates, inflation rate, competitiveness/ease of doing business and FDI. The data for all the variables was in percentage. The study employed ordinary least square regression technique to determine the effect of real interest rate, exchange rate, inflation and competitiveness on FDI in Kenya. Results: From the findings, the study concluded that real interest rates and exchange rates have negative and significant influence on FDI inflows into Kenya. Further, the study concluded that competitiveness has a positive and significant influence on foreign direct investment inflows into Kenya. However, inflation was found to have insignificant influence on FDI. Unique Contribution to Policy: There is need for favourable interest rates, desirable exchange rates and liberalization of the economy by undertaking comprehensive programmes to trade reforms, designed to open the economy and increase its competiveness. The Kenyan government should also encourage freedom of capital transactions with foreigners and competition in domestic market.