Theses and Dissertations
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Item Modeling the effect of real exchange rate volatility on foreign direct investment in Kenya: a garch approach(KCA University, 2025) Muruny, Haron K.Foreign direct investment (FDI) is central in Kenya’s economic progress, boosting capital, technology, and employment. However, exchange rate volatility, driven by inflation, trade imbalances, and external shocks, creates uncertainty that could potentially deter FDI in emerging markets like Kenya. Kenya’s FDI at 1.4% of Growth Domestic Product (GDP) in 2023 lags behind Ethiopia’s 3.7% and Tanzania’s 2.1%, signaling a competitiveness gap. Prior studies, often using static OLS, overlooked time-varying volatility and risk aversion frameworks, limiting insights into Kenya’s FDI dynamics. Specific objectives examined how exchange rate volatility, inflation volatility, trade openness, interest rate differentials, foreign exchange reserves, and GDP growth (control) impact FDI. This study modeled real exchange rate volatility’s effect on FDI inflows (1993–2023), alongside inflation volatility, trade openness, interest rate differentials, foreign exchange reserves, and GDP growth, using a quantitative time-series design. It offered investor’s strategies to navigate risks, guided policymakers on stability-focused reforms, and enriched academic literature on volatility-FDI linkages. Employing a quantitative time-series design, data from World Bank, Central Bank of Kenya, and IMF were analyzed using a GARCH (1,1) model to estimate volatility, integrated into OLS regression with GDP growth control. Findings revealed exchange rate volatility (β=0.026, p=0.472) and inflation volatility (β=0.011, p=0.627) had insignificant impacts on FDI, contrary to expectations. Trade openness (β=0.084, p=0.083) and foreign exchange reserves (β=2.53, p=0.000) significantly drove FDI, while interest rate volatility and GDP growth were insignificant. Co-integration suggested long-run equilibria, with the model explaining 74% of FDI variation (R²=0.74). Results indicated that GDP growth mitigated volatility risks, enabling investors to tolerate fluctuations in resilient markets, while openness and reserves signaled market access and stability, respectively. This highlighted the critical role of economic growth in moderating macroeconomic uncertainties, particularly during crises like 2008 and 2020. The study concludes that Kenya’s FDI inflows were resilient to exchange rate and inflation volatility when supported by robust economic growth, with trade openness and reserves as primary investment drivers. Recommendations include policymakers prioritizing reserve accumulation through export promotion to buffer shocks, deepening engagement in trade agreements like AfCFTA to enhance market access, and investing in infrastructure to sustain GDP growth, mitigating volatility’s effects. In practice, investors should adopt hedging strategies during growth phases to minimize risks and sustain engagement in Kenya’s dynamic market, ensuring long-term investment success.