Currency Fluctuations and Foreign Direct Investment in Kenya

Abstract

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.