Currency Fluctuations and Foreign Direct Investment in Kenya
DOI:
https://doi.org/10.47941/ijecop.1562Keywords:
Currency Fluctuations, Foreign, Direct Investment, KenyaAbstract
Purpose: This study investigates the relationship between currency fluctuations and Foreign Direct Investment (FDI) in Kenya over the period from 2013 to 2022.
Methodology: Employing a causal explanatory research design and time-series secondary data, the study identifies the trends and determinants of currency fluctuation and its relationship with FDI. Secondary data is collected from the CEIC website while PICOT is utilized to select the relevant studies for analysis. The correlation analysis is conducted using SPSS to determine the relationship between currency fluctuation and FDI.
Findings: The analysis reveals mixed uptrend and downtrend in both variables, showcasing a substantial reduction in FDI in recent years. The correlation analysis establishes a statistically significant negative relationship between exchange rates and FDI, in alignment with the theory of hysteresis and option values. This underscores the impact of currency fluctuations on inducing uncertainty, resulting in reduced FDI due to high sunk costs and delayed investment decisions.
Unique Contribution to Theory, Practice and Policy: The study fills a crucial gap in the existing literature by offering insights on the relationship between currency fluctuation and FDI in the Kenyan context. Policy implications stress on the importance of stabilizing the Kenyan Shilling, mitigating real shocks, and fostering economic diversification to enhance the attractiveness of Kenya to foreign investments. This study provides valuable guidance for policymakers, the Kenyan government, and stakeholders seeking to formulate strategies that promote a conducive environment for sustained FDI and economic growth in Kenya.
Downloads
References
Abdi. (2020). Factors Affecting Exchange Rate Volatility In Kenya.
Abel, A. (1983). Optimal Investment Under Uncertainty.
Alhammouri & Alkhaldi. (2017). Risk Determinants and Investment Decisions: An Explanatory Study. Research Journal of Finance and Accounting, 8(20).
Blonigen, B. A., Davies, R. B., Waddell, G. R., & Naughton, H. T. (2007). FDI in space: Spatial autoregressive relationships in foreign direct investment. European Economic Review, 51(5), 1303–1325. https://doi.org/10.1016/j.euroecorev.2006.08.006
CEIC Data. (2023). Kenya Foreign Direct Investment: % of GDP, 1996 – 2023 | CEIC Data. Www.ceicdata.com. https://www.ceicdata.com/en/indicator/kenya/foreign-direct-investment--of-nominal-gdp#:~:text=Kenya%20Foreign%20Direct%20Investment%20
Central Bank of Kenya. (2019). Monetary Policy | CBK. Centralbank.go.ke. https://www.centralbank.go.ke/monetary-policy/
Chowdhury, A. R., & Wheeler, M. (2008). Does Real Exchange Rate Volatility Affect Foreign Direct Investment? Evidence from Four Developed Economies. The International Trade Journal, 22(2), 218–245. https://doi.org/10.1080/08853900801970601
Cushman, D. O. (1985). Real Exchange Rate Risk, Expectations, and the Level of Direct Investment. The Review of Economics and Statistics, 67(2), 297. https://doi.org/10.2307/1924729
Cutler, Lute, Price, Gordon, Jeniffer Harris, Christopher Smart, Jake Sullivan, Ashley J. Tellis & Tom Wyler. (2020). Making U.S Foreign Policy Work Better for the Middle Class. Carnegie Endowment for International Peace.
Cytonn. (2023). Currency Note, A doomed Kenyan Shilling?
Dehn, J. (2000, August 1). Commodity Price Uncertainty in Developing Countries. Social Science Research Network. https://ssrn.com/abstract=632497
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton University Press.
European Investment Bank. (2022). A structural analysis of foreign exchange markets in Sub-Saharan Africa.
Froot, K. A., & Stein, J. C. (1991). Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach. The Quarterly Journal of Economics, 106(4), 1191–1217. https://doi.org/10.2307/2937961
Goldberg, L. S., & Kolstad, C. D. (1995). Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty. International Economic Review, 36(4), 855. https://doi.org/10.2307/2527262
Gorg, H., & Wakelin, K. (2002). The Impact of Exchange Rate Volatility on US Direct Investment. The Manchester School, 70(3), 380–397. https://doi.org/10.1111/1467-9957.00308
Hanusch, M., Nguyen, H., & Algu, Y. (2018). Exchange Rate Volatility and FDI Inflows. World Bank, Washington, DC. https://doi.org/10.1596/29911
International Trade Administration. (2022). Kenya - Country Commercial Guide.
Kiptui. (2015). Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks.
Lal, Satish Kumar, Dharen Kumar Pandey, Varun Kumar Rai, Weng Marc Lim. (2023). Exchange rate volatility and international trade. Journal of Business Research, 167. doi:https://doi.org/10.1016/j.jbusres.2023.114156
Lemi, & Asefa. (2001). Foreign Direct Investment and Uncertainty: Evidence from Africa.
Morgan, Farris, and Johnson. (2022). Foreign Direct Investment in Africa: Recent Trends Leading up to the African Continental Free Trade Area (AfCFTA). Economic Research Service.
Ndikumana, Naidoo & Aboobaker. (2020). Capital Flight from South Africa: A Case Study. University of Massachusetts Amherst.
Ndolo. (2015). Determinants of Foreign Direct Investment in Kenya.
Ogutu. (2014). Effects Of The Real Exchange Rate On The Trade Balance In Kenya.
Oqubay, A. (2018). Industrial Policy and Late Industrialisation in Ethiopia. African Development Bank Group.
Oryema, J.B., Nnyanzi, J. & Kilimani, N. (2022). Real exchange rate undervaluation, regional integration and services sector performance: evidence from the East African Community. Journal of Economic Structures, 11(17). doi:https://doi.org/10.1186/s40008-022-00279-3
Seong, Bradley, Leung, Woetzel, Ellingrud, Kumra & Wang. (2023, September 22). Asia on the cusp of a new era. McKinsey Global Institute.
Udoh, E., & Egwaikhide, F. (2010). Exchange Rate Volatility, Inflation Uncertainty and Foreign Direct Investment in Nigeria. Botswana Journal of Economics, 5(7). https://doi.org/10.4314/boje.v5i7.60304
Udomkerdmongkol, M., Morrissey, O., & Görg, H. (2009). Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies. Review of Development Economics, 13(4), 754–764. https://doi.org/10.1111/j.1467-9361.2009.00514.x
Ullah, Haider, & Azim. (2012). Impact Of Exchange Rate Volatility On Foreign Direct Investment A Case Study of Pakistan .
United Nations Conference on Trade and Development. (2023). Investing in Sustainable Energy for All. United Nations.
Wasike. (2013). : Factors influencing currency exchange rate fluctuation: A case study of Kenyan shilling against the US DOllar.
Yao and Liu . (2023). Diversification of the Nigerian Economy. International Monetary Fund.
Zeira, J. (1990). Cost uncertainty and the rate of investment. Journal of Economic Dynamics and Control, 14(1), 53–63. https://doi.org/10.1016/0165-1889(90)90005-2
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Faith Musembi, Ambrose Jagongo
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
