Private capital inflows and economic growth in Kenya

Abstract

Most studies on private capital inflows and economic growth are cross-country and give more weight to foreign direct investment than the other components of private capital inflows. In addition, the question as to whether it is private capital inflows that promote economic growth or it is economic growth that attracts private capital inflows has not been investigated in Kenya. This study investigated the causality between foreign direct investment, portfolio investment and cross-border interbank borrowing and economic growth; and analyzed the effect of foreign direct investment, portfolio investment and cross-border interbank borrowing on economic growth in Kenya. The study found that there was a unidirectional causality from foreign direct investment to economic growth and from economic growth to cross-border interbank borrowing. The coefficient of foreign direct investment as a ratio of gross domestic product was positive and statistically significant, and the coefficients of portfolio investment as a ratio of gross domestic product and cross-border interbank borrowing as a ratio of domestic product were positive and statistically insignificant. Following these results, the Government of Kenya should work towards an environment that attracts foreign direct investment and pursue a high and sustainable economic growth rate so as to attract cross-border interbank borrowing.