Volume 3, Issue 4, August 2014, Page: 50-61
Impact of Foreign Direct Investment Volatility on Economic Growth in Kenya: EGARCH Analysis
Kirwa Lelei Ngeny, Macroeconomics Division, Kippra, Nairobi, Kenya
Cyrus Mutuku, Macroeconomics Division, Kippra, Nairobi, Kenya
Received: Nov. 20, 2014;       Accepted: Dec. 4, 2014;       Published: Dec. 17, 2014
DOI: 10.11648/j.eco.20140304.11      View  2935      Downloads  388
This study investigated the impact foreign direct investment volatility on growth in Kenya using time series data spanning 1970 to 2011. An endogenous growth model was estimated using the ordinary least squares to determine the relationship between the FDI volatility and economic growth. Bounds testing approach was employed to show that FDI volatility retards long-run economic growth in Kenya. Results suggest that FDI has a positive effect on growth whereas FDI volatility has a negative impact on growth. Notably, trade openness is not FDI inducing, thus affecting growth negatively. However, human capital endowment has a positive impact on growth. Although the overall effect of Foreign Direct Investment on economic growth is positive the volatility of capital flows may make it harder for the stable and predictable macroeconomic policies to be followed. Therefore, unstable inflows may dampen investment, hence affecting economic growth.
Gross Domestic Product, Foreign Direct Investment Volatility, Arch, ARDL, EGARCH
To cite this article
Kirwa Lelei Ngeny, Cyrus Mutuku, Impact of Foreign Direct Investment Volatility on Economic Growth in Kenya: EGARCH Analysis, Economics. Vol. 3, No. 4, 2014, pp. 50-61. doi: 10.11648/j.eco.20140304.11
Alpaslan, A 2011, Volatility of Foreign Direct Investment and Economic Growth: Empirical Evidence from the Czech Republic and Hungary. Besevler, Ankara, Turkey
Asiedu, E 2007, ‘Democracy, foreign direct investment and natural resources,’ Journal of International Economics, Vol. 84, pp 99-111
Barro, R & Salai-i-Martin, X 1995, Economic Growth .New York: McGraw-Hill.
Bengoa, M & Sanchez-Robles, B 2003, ‘Foreign direct investment, economic freedom and growth: new evidence from Latin America’, European journal of Political Economy, Vol. 19, pp 529-545
Blomstrom, M & Persson, H 1983, ‘Foreign Direct Investment and Spillover Efficiency in Underdeveloped Economy; Evidence from the Mexican Manufacturing Industry,’ World Development, Vol. 11, no. 6
Blomstrom, M 1986, ‘Foreign Direct Investment and Productivity Efficiency: The Case of Mexico,’ Journal of Industrial Economics, Vol.35, no. 1, pp 97-110
Bollerslev, T 1986, ‘Generalized Autoregressive Conditional Heteroskedasticity,’ Journal of Econometrics, Vol. 31 no. 3, pp 307–27
Borenztein, E, Gregorio, J, & Lee, W 1998, ‘How does foreign direct investment affect Economic Growth?’ Journal of International Economics, Vol. 45 no. 1, pp 115-135
Choong, C-K & Liew, V.K-S 2011, ‘Impact of Foreign Direct Investment Volatility on Economic Growth of five Asean Countries,’ Economics Journal, Vol. 29 no. 3, pp 1829-1841
Duasa, J 2007, ‘Malaysian FDI and Growth: Does stability matter?’ Journal of economic cooperation, Vol. 28 no. 2, pp 83-98
Engle, RF & Granger, G 1987, ‘Co-integration and Error Correction Representation, Estimation and Testing,’ Journal of Econometrics, Vol. 55, pp 251-76
Guillaumont, P & Chauvet, L 1999, Aid and Performance, University of Auvergne Press, mimeo
Grossman, GM & Helpman, E 1991, Innovation and Growth in the Global Economy, Cambridge MA, MIT Press
Kinuthia, BK (2010), Determinants of Foreign Direct Investment in Kenya: New Evidence; Africa Studies Centre, Leiden, Netherlands
Lensink, R & Morrissey, O 2000, ‘Foreign Direct Investment: Flows, Volatility, and the Impact on Growth,’ Review of International Economics, Vol. 1, pp 478-493
Lucas, L 1990, ‘Why Doesn't Capital Flow from Rich to Poor Countries,’ AEA Papers and Proceedings, Vol. 80, pp 92-96
Lucas, R 1988, ‘Mechanics of Economic Development,’ Journal of Monetary Economics, Vol. 22 no. 1, pp 3-42
Macharia, P 2010, ‘Foreign Domestic Investments and economic growth: the Kenyan case,’ (M.A, Thesis), University of Nairobi, Nairobi
Mankiw, N 1992, ‘A Contribution to the Empirics of Economic Growth,’ The Quarterly Journal of Economics, Vol. 107, no. 2, pp 408-437.
Musau, K 2009, ‘Impact of foreign direct investments on economic growth and development in Kenya,’ (M.A, Thesis), Nairobi
Mwega, FM & Ngugi, R 2006, ‘Foreign Direct Investment in Kenya, Foreign Direct
Investment in Sub-Saharan Africa: Origins, Targets, Impact and Potential,’ African Economic Research Consortium, PP 133-157
Nyamwenga, M 2007, ‘Foreign Direct Investment in Kenya: A case study in Kenya,’ Nairobi
Pesaran, MH, Renelt, Y & Smith, R 2001, ‘Bounds testing approaches to the analysis of level relationships,’ Journal of Applied Econometrics, Vol. 16, pp 289-326
Philips, CL 2001, ‘Foreign and local Investment in East Africa: Interactions and policy implication,’ Africa Economic Policy Paper
Republic of Kenya 2007, ‘Kenya Vision 2030; A Globally competitive and prosperous Kenya,’ Nairobi, Government printers
Romer, M 1987, ‘Growth Based on Increasing Returns Due to Specialization,’ American Economic Review, Vol. 77 no. 1, pp 56-62
Saggi, K 2000, ‘Trade, Foreign Direct Investment, and International Technology Transfer,’ World Bank Policy Research, Working Paper no 2349, Washington DC
Serven, L 2002, ‘Impact of uncertainty in Foreign Direct Investment on investment in less Developed countries,’ World Bank Policy Research, Working Paper no.2823, Washington DC
Solow, R 1956, ‘A Contribution to the Theory of Economic Growth,’ Quarterly Journal of Economics, vol. 70, pp 65-94
Taylor, SJ 1986, ‘Modelling Volatility in Time Series data,’ New York, Wiley
UNCTAD, 2005, ‘Investment policy review; Kenya,’ United Nations Conference on Trade and Development, New York and Geneva
UNCTAD, 2011, ‘World Investment Report. Transnational Corporations and the Internationalization of R&D,’ United Nations Conference on Trade and Development, New York and Geneva
Browse journals by subject