Discussion Paper No. 48 of 2005 on Institutional Factors and Foreign Direct Investment Flows: Implications for Kenya

Abstract

This study looks at the relationship between Foreign Direct Investment (FDI) flows and various institutional factors. The study uses data for developing countries and draws implications for Kenya. Kenya has in the last decade lost, as a destination for FDI flows, to its neighbouring countries and the question is, how can Kenya regain its position? Results from this study show that Kenya needs to improve its macroeconomic environment and strengthen its institutional base. The government should put a lot of resources to curb crime and restore law and order, embrace positive democratic practices, maintain stability and embrace zero-tolerance on corruption in order to gain substantially in investment growth and particularly in FDI flows. While the economy requires more inflow of external resources to boost public investment, it is important that the flows are efficiently utilized to promote investment and economic growth. It is also important that care is taken to maintain debt sustainability. Growth of the economy is crucial as a pull factor and as a complement to openness of the economy. Attaining and -sustaining macroeconomic stability is also a crucial factor in attracting FDI.