An Empirical Analysis of the Impact of Foreign Direct Investments on the Exports of Kenya

Abstract

Foreign Direct Investment (commonly known as FDI) is considered to be a vital tool which influences the export performance of the host nations. Additionally, by encouraging access to the international market, FDI enhances a significant contribution to the host nation’s exports. Several theoretical relationships such as Flying geese model, Vernon product life cycle model, and new growth model can explain the relationship between FDI and export growth performance with all agreeing that FDI has a significant influence on host nations. Firstly the multinational companies take advantage of cheap factor endowments of the host nations such as labour and profuse resources which help them lower production cost so as to increase export competitiveness. Moreover, the supply capacity increasing effect from the expansion of host country’s export is expected. Secondly, the domestic industries can increase host nation’s export expansion through the spillover effects of FDI through technological transfer and skills which bring competition within the export market. This study seeks to examine the potential impact of FDI inflows on export growth performance of Kenya for the period 1961-2014. The study separates the effects of FDI into host country’s export expansion by MNE subsidiaries (supply capacity increasing effects) and domestic enterprises export expansion through the spillover effects such as competition and transfer of knowledge and technology. By using the error correlation model (ECM), the results imply that inward FDI significantly influences the export growth performance in Kenya during the period of 1961-2014. Following these results, it is clearly evident that FDI has a lot of impact on export growth capacity and policies aimed at attracting foreign direct investment should highly be encouraged by the policymakers.