Abstract:
FDI plays an important role in the receiving country which makes it vital in policy
formulation. Despite the economic importance of FDI, most countries have been facing
a common challenge on how to attract considerable FDI. Kenya, like many other
developing and emerging nations, has had a big challenge in attracting and sustaining
foreign direct investment at levels that allow domestic investment to take advantage of
benefits associated with capital inflows. The purpose of this study was to empirically
analyze selected macroeconomic determinants of foreign direct investments in Kenya.
More specifically, study objective was to examine the causal effect between foreign
exchange volatility and foreign direct investments, causal effect between inflation rate
and foreign direct investment and causal effect between interest rate and foreign direct
investment. The study was informed by the ever increasing challenge of attracting and
sustaining foreign direct investment. The study was anchored on the Dynamic
macroeconomic foreign direct investment theory, the capital arbitrage theory and the
Internalization theory. The study adopted an explanatory research design and employed
an Auto-Regressive Distributed Lag to analyze the results. Study sample entailed of
annual secondary time series data set for a period of 35 years from 1986 to 2021,
sourced from KNBS, Central Bank of Kenya, and World Bank. Findings of diagnostic
test demonstrated that there was no multicollinearity among the independent variables
(vif=1.14), residuals were homoscedastic (p=0.0897>0.05), and there was no auto-
correlation among the residuals (p=0.8637>0.05). The results of the Shapiro-Wilk
normality test showed that the study's variables were normally distributed. The
Augmented dickey fuller unit root test both showed that there was no unit root and that
the variables had a short run relationship. Additionally, the model's stability over time
was confirmed by the CUSUM test. Findings of the study were: the causal effect
between foreign exchange volatility and foreign direct investment was positive and
significant (𝛽1 =0.0070,000.0p ); inflation rate and foreign direct investment were
positive and significant (𝛽2 =0.0238,001.0p ); interest rate had a positve significant
causal effect (𝛽3 =0.0167,005.0p ) with foreign direct investment. The study
therefore recommends that there is need for the government to regulate interest rates
since high interest rates have significant negative influence on foreign direct investment
inflows in the country. Additionally, there is need for policy makers to minimize
exchange rate by improvising sustainable plans that properly controls the foreign
exchange market. There is also need to manage inflation by developing price stability
measures through the use of effective policy measures.