Abstract
The Objective of this study is to find out the effect of capital flows on economic growth in Kenya, With Three specific objectives; To investigate the effect of foreign direct investment on economic growth in Kenya, to find out the effect of foreign portfolio investment on economic growth in Kenya, and to determine the effect of diaspora remittances on economic growth in Kenya. Quarterly data from 2002 to 2017 was used in the study, and Descriptive research design and inferential research design were used to analysis the data. Descriptively, mean and standard deviation were used and Inferentially the Auto regressive distribution Lag technique using the STATA software Version 15. Diagnostic tests were conducted on the data; Normality test using Jarque Bera test supported by the skewness and Kurtosis results; Unit root was tested using the Augmented Dickey Fuller Test .The Auto Regressive Distributed Lag regression short run results show that, foreign direct investment had an positive and insignificant effect on gross domestic product, whereas foreign portfolio investment had a positive and statistically significant short run effect on gross domestic product at 1% level of significance and diaspora remittances had a positive and very significant effect of gross domestic product at 5% level of significance. The Error Correction Model regression results showed that in the long run, Foreign Direct Investment, Foreign Portfolio Investment, and Diaspora Remittances had a positive and very significant effect on the economic growth at 1% level of significance.
Highlights
The global financial crisis of 2008-2009 rekindled the debate about the desirability of financial integration in both advanced economies and emerging markets
The objective of this study was to investigate the effects of foreign capital flows on economic growth in Kenya using the gross domestic product growth rate as the indicator for economic growth
The study analysed the effects of foreign direct investment flows, foreign portfolio investment and Diaspora remittances on the economic growth in Kenya over 64 quarterly periods from 2002q1 to 2017q4
Summary
The global financial crisis of 2008-2009 rekindled the debate about the desirability of financial integration in both advanced economies and emerging markets. An important issue in the debate over the desirability of freer capital mobility for developing countries is whether capital flows have significant effect on economic growth. This calls for an enhanced capital flow to overcome the high poverty levels and improve the standard of living in developing countries. Internal sources of finance are not usually enough to finance both recurrent and development expenditures of the country (Afrodad, 2003) To curb this financial constraint, the country obtains external finances in terms of foreign direct investment, foreign portfolio investment, foreign debt, foreign aid and remittances
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