EFFECTS OF CAPITAL FLOWS ON ECONOMIC GROWTH IN KENYA

Abstract

Purpose -This study investigated the immediate and lagged effects of the various forms of capital flows - FDI flows, portfolio flows and “Other investments capital flows” (which mainly represents corporate, financial institutions and general government borrowings as well as remittances from the diaspora) - on economic growth in Kenya over a 30 year period from

1984 to 2014.

Methodology – The study adopted a quantitative research design in the form of an econometric model known as Auto Regressive Distributed Lag Model (ARDLM).

Findings -FDI and portfolio investments flows have a negative impact on the GDP growth rate and that their impact is not statistically significant.However, other investments flows, which mainly represent corporate, financial institutions, general government borrowings and remittances from the diaspora, have a positive impact on GDP growth rate and the impact is statistically significant.Based  on the  study findings, it can  be inferred  that a  significant slowdown or a reversal in capital flows in form of “Other investments capital flows” into Kenya result into significant slowdown in economic growth in the country.

Implications -Policy makers may lay much emphasis on attracting portfolio investment flows and “Other investments capital flows”, while investors and firms should consider the upside opportunities that may be created by increase in other investments capital flows and the downside risks that could results from a significant slowdown or a reversal in these forms of capital flows into the country.