Effect of External Debt Service on Foreign Direct Investment Inflows in Kenya
Effect of External Debt Service on Foreign Direct Investment Inflows in Kenya

Summary/Abstract: Foreign direct investment has an important role in fixed capital formation of a host country. FDI inflows are of great importance to developing economies than the developed economies since most of the developing economies experience inadequate savings. Further, these economies have incomplete access to advanced technology. In Kenya, fixed capital formation stands at about 21 % of GDP of which about 7% is contributed by foreign direct investment inflows. Economic theory postulates that external debt service is one of the key determinants of foreign direct investment inflows. The theory stipulates that an increase external debt service results to higher taxes which discourage foreign direct investors. This study therefore sought to investigate the effect of external debt service on foreign direct investment inflows in Kenya using time series data running from 1980 to 2014. The study adopted gross fixed capital formation, inflation rate, exchange rate and real GDP as the control variables The study estimated long run cointegating equation and the findings showed that external debt service have a negative impact on country’s foreign direct investments. The study recommends that the government should not heavily rely on external borrowing to finance economic growth but should rather cut her programs to avoid higher budget deficit. This recommendation is premised on the fact that lower external debt service will attract foreign direct investment that will eventually result to a more reduced budget deficit. This is because foreign direct investment inflows result to employment and thus increase in tax collection.

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