The effects of fiscal policy on foreign direct investment inflows in Kenya for the period 2000-2014

A Research Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree on Master of Business Administration (MBA)Foreign Direct Investments (FDI) plays a key role in attaining sustainable economic growth and development in most developing nations especially in Africa. This is majorly through; improving country’s attractiveness for FDI by strengthening infrastructural base, ICT development, raising productivity and generation of employment opportunities, and also supplementing the balance of payment by enriching exports. Since attracting foreign direct investment (FDI) is currently an important policy concern for the Kenyan Government, it is requisite to instigate benchmarks of the inward FDI flows. The study, hence examined the effects of fiscal policy factors, specifically; balance-of-payments (current account deficit), government development expenditure on infrastructure and total external government debt on the amount of foreign direct investment inflows to Kenya. The study covered 15 years (from 2000 to 2014), a period adequate to provide definitive outcome. Bivariate Linear Regression was conducted in analyzing the secondary data that had been collected. A descriptive research design of quantitative nature was used to draw conclusions. The study established that BOP’s current account deficit had a negative correlation with the FDI inflows to the country. This relation was revealed to be insignificant and this implied that adjustments in BOP’s current account deficit have a negligible effect on FDI inflows to Kenya. The results also indicate that government development expenditure on infrastructure had a significant positive effect on FDI inflows to Kenya. It is positively correlated to the FDI inflows, implicating that with a predetermined change in development expenditure on infrastructure, FDI inflows will oscillate in parallel direction. Consequently, a unit change in development expenditure on infrastructure in Kenya will translate to a positive net effect on the FDI inflows. The study further unveiled that total external government debt had an equally negative and insignificant relationship with the foreign direct investment inflows to Kenya. This implied that a unit change in total external government debt will have a net negative effect on the FDI inflows to the country. Despite the fact that some fiscal factors under study have an insignificant connection with the level of foreign direct investment inflows that the country records, the effect remains explicit. The findings of this paper have important policy implications for government to critically determine how to improve the country’s attractiveness for FDI. The government, other than developing expenditure reducing policies; tailor-made to regulate demand in the economy to reduce consumer spending in the economy particularly on imports, it is recommended that it incorporates expenditure switching policies to turn around consumers' expenditure away from imports and redirect towards goods of local origin. Also, with the evidenced revelation that government development expenditure on infrastructure positively impact foreign direct inflows although not directly, it is recommended that the national government allocates more funds to key infrastructural areas and projects that accelerate trade and investments into the country. Developed infrastructure increases a country’s attractiveness for FDI in the long run. Kenyan should develop a sustainable framework to systematically integrate ethics and economic development based on structures and accountability through policies. Ethical matters should systematically be integrated into the primary constituents of the decision‐making process for managing public resources within the bounds of this framework. Servicing of external debt causes servility on the economy as it invades the resources available for poverty eradication and propelling socio‐economic development. In extreme cases of debt burden, debt restructuring should also be considered part of the adjustment package