Infrastructure and Foreign Direct Investment in Kenya: A Time Series Analysis 1980-2015

Provision of infrastructure is one of the key roles of governments and is mostly associated with the level of economic growth and development of the respective country. However, with the limitation in budgetary resources, infrastructure development cannot be achieved through budgetary allocations alone without some other external financing sources. However, Multinational Corporation considers the domestic characteristics of the host countries before making investment decisions. Such characteristics include infrastructural development, ease of doing business, economic growth rate, and real effective exchange rate. This paper sought to empirically analyze the long-run and short-run associations between infrastructural and FDI stocks in Kenya. The study used the principal component analysis (PCA) to generate infrastructure component. It is generated from the three main measure of infrastructure which includes electricity generation in kilowatts, Mobile cellular subscription (per 100 people), and the total expenditure on transport infrastructure (Road, air, water, and Rail). The study used annual Time series data for the period 1980- 2015, which will be obtained from the World Bank database and the Kenya Bureau of Statistics(KNBS) publications. The study results indicated that FDI and infrastructural development are related in the long run. Further, the study indicated that FDI affected the infrastructure in the short run significantly. Infrastructural development had a positive significant effect on the FDI in the short run. Granger causality results indicated a unidirectional causality running from FDI to infrastructural development. From the study findings, this study proposed measures to be put in place to facilitate infrastructure development with aim of attracting FDI inflows, and on the other hand, the study proposed policies to be put in place to increase FDI inflows with main aim of facilitating infrastructure development in Kenya