Investigating the Impact of Foreign Direct Investment on Domestic Investment in Sub-Saharan Africa: A Case Study of Kenya and South Africa

In the progression towards economic growth, countries consider investment as a critical feature in raising productivity levels by boosting technological progress and reducing the unemployment rate. In recent years, the government of South Africa and Kenya have both enacted policies to entice Foreign Direct Investment (FDI) in the view of creating more jobs and bolstering the economy. However, in the bid to attract these foreign investors, FDI may either end up complementing or stifling local investments over time. From this perspective, the objective of the study is to investigate the impact of FDI on Domestic Investments in Sub-Saharan Africa (SSA) with an individual investigation on Kenya and South Africa. Analyzing annual series of data from 1972-2011, our Pooled OLS results shows that FDI has no impact on domestic investment in SSA countries. Using time series to dig deeper to establish the relationship between FDI and domestic investment in both countries, we found out that FDI does not impact domestic investment in both the short-run and the long-run period for Kenya but has a crowding-out effect in South Africa only in the short-run period. However, economic growth, inflation rate, trade openness and exchange rate were critical drivers of domestic investment in SSA countries