The Moderating Role of Foreign Exchange Rate in the Relationship between Outward Foreign Direct Investment and Economic Growth in Kenya (1986-2021)

Abstract

Purpose: The purpose of this study was to investigate the moderating role of foreign exchange rate in the relationship between outward foreign direct investments and economic growth in Kenya. The central purpose of any government is to formulate strategies that boost economic growth and correct capital flight. The Foreign Exchange Rate (FER) fluctuations generated by globalization are expected to leverage the effect of capital flight and boost economic growth, but this seems not to happen. Further, the loss of foreign exchange reserves resulting from capital flight demonstrates that some financial savings are lost to the economy. Since FER is a strong determinant of Gross Domestic Product (GDP), the effects of this scenario are a great economic concern. The dependent variable for this study was economic growth, while the independent variable was outward foreign direct investments. The general objective of this study was to investigate the moderating role of foreign exchange rate in the relationship between outward foreign direct investments and economic growth in Kenya. The specific objective was to determine and evaluate the effect of outward foreign direct investments on the economic growth in Kenya as well as to investigate the moderating role of foreign exchange rate in the relationship between outward foreign direct investments and economic growth in Kenya. The indicator of economic growth was the percentage change in GDP.

Methodology: This study adopted an ex-post facto research design with a sample size of 35 years from 1986 to 2021 and relied on secondary data from Kenya National Bureau of Statistics (KNBS), International Financial Statistics (IFS), Central Bank of Kenya (CBK), International Monetary Fund (IMF), World Development Index (WDI), United Nations Commodity Trade (UN Comtrade) and African Development Indicators (ADI).

Findings: Using a panel data model, the study found that outward foreign direct investments did not have any significant effect on economic growth when foreign exchange rate was included in the model as an interaction variable. Foreign exchange rates had a significant effect on economic growth. The relationship was inverse indicating that the foreign exchange rate affected economic growth negatively. The interaction variable had a positive and significant coefficient indicating that the foreign exchange rate moderated the relationship between outward foreign direct investment and economic growth.

Unique contribution to theory, practice and policy: From the empirical findings, we can infer that outward foreign direct investment did not constrain resources and did not affect economic growth.