Njeu Jane Muthoni

Foreign Direct Investments (FDI) has not played an important role in the Kenyan economy despite the reforms that have been undertaken and the many incentives provided to foreign investors. FDI levels in Kenya have been on a declining state since 1980s, compared to the neighboring countries such as Uganda and Tanzania. Hence there has been much concern among policy makers over the decline which they attribute to low investor confidence resulting from insecurity, corruption high level of real interest rates and limited legal resource. It’s against this back ground that the study seeks to undertake to find what really the key determinants of FDI in Kenya are.The general objective of the study then was to analyze the determinants affecting FDI in Kenya. The study made use of secondary data over the period 1990-2010 from World Bank Indicators (WDI) and Transparency International (TI).The study employed five objectives. The first objective was to establish whether physical infrastructure has effect on the flow of FDI, the second was to establish whether corruption affects FDI inflows to Kenya.

The third one was to determine the extent to which political risks affects FDI inflows while the forth one was to determine if legal frame work affects FDI flows and the last one was to establish whether market size has any impact on the level of FDI flows. There are many studies that have been carried out on determinants of FDI globally but there has not been any one accepted factor that determines FDI inflows. In Kenya no consensus on findings of determinants of FDI flows has been done.  In the model, the dependant variable was FDI (net FDI inflows). Independent variables were limited to infrastructure, legal framework, corruption, political risks, and market size, to avoid the problem of non-stationarity of time series data, an ADF test was used to detect non-stationarity.The regression results showed that a one percent increase in GDP growth rate will lead to a 1.15 increase in FDI, while a one percent increase in infrastructure will lead to a 7.25 increase in FDI. On the other hand a one percent increase in corruption deteriorates FDI by 9.13% while a one percent increase in political risk deteriorates FDI inflows by 2.82%. From the findings the study concluded that policy makers should sought ways on how to increase market size and also improve infrastructures since these are the main derivers of FDI in Kenya. On the other hand they should also curb corruption and maintain stability in the country as these are the main impediments of FDI inflows. The study recommends that the government of Kenya should put appropriate measures in place to stimulate and sustain growth of the economy and also the private sector should help in rebuilding infrastructures as a key to attracting foreign investors. The ant-corruption body should be strengthened with necessary powers to execute its functions effectively, more still the government should endeavor to maintain peace which is a recipe for attracting and retaining international investors.