Private Investments in Kenya

FACTORS INFLUENCING PRIVATE INVESTMENTS INKENYA

BYKING’ORI, Z. I. BA(Econ.)(Nbi.); Msc.(Econ.)(Zim.)MAKERERE UNIVERSITYJanuary 2007

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ABSTRACT

This paper investigates the determinants of private investment in Kenya over the period of 1967-2005. Variables are first tested for unit root using the Dickey-Fuller (1979) andPhillips-Perron (1988) techniques. The long run private investment equation is derivedusing the Johansen cointegration techniques (Johansen, 1988; Johansen and Juselius,1990). An error correction model (Engle and Granger, 1987) is also run where Hendry’sgeneral to specific approach is applied to reveal the short-run private investment model for Kenya (Campos

et al

. 2005). A long-run model stability test is undertaken using theCUSUM test and CUSUM of squares test (Brown

et al.

1975).The unit root test reveals that all the variables under investigation are I(1) and arecointegrated in the long-run. The results further indicate that in the long-run, publicinvestment, foreign exchange reserves, real GDP growth rate, public savings and interestrates have positive affect on private investments, whilst inflation, openness to internationaltrade and external debt have a negative influence. The long-run model is further found to be stable. In the short-run, foreign aid, savings, real GDP growth rate, inflation, interestrates and foreign exchange rate positively influence private investment, while openness tointernational trade has a negative influence.

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TABLE OF CONTENTS

ABSTRACT.................................................................................................................iiLIST OF TABLES.......................................................................................................ivLIST OF FIGURES.....................................................................................................ivCHAPTER 1: INTRODUCTION.....................................................................................11.1 Background to the Study...................................................................................11.2 Statement of the Problem..................................................................................51.3 Objective of the Study.......................................................................................61.4 Study Hypotheses..............................................................................................61.5 Significance of the Study..................................................................................61.6 Scope................................................................................................................71.7 Organization of the Study..................................................................................7CHAPTER 2: LITERATURE REVIEW...........................................................................92.1 Theoretical Literature Review...........................................................................92.2 Empirical Literature Review...........................................................................102.3 Implications of the Literature Review..............................................................12CHAPTER 3: METHODOLOGY...................................................................................133.1 Model Specification........................................................................................133.2 The Determinants............................................................................................143.3 Data Sources and Variable Choice..................................................................163.4 Estimation Issues............................................................................................183.4.1 Unit Root Testing....................................................................................193.4.2 Cointegration Tests..................................................................................193.4.3 Parsimonious Reductions.........................................................................203.4.4 Stability Testing......................................................................................203.4.5 Residual Diagnostic Tests........................................................................20CHAPTER 4: EMPIRICAL RESULTS..........................................................................224.1 Unit Roots Results..........................................................................................224.2 Cointegration Results......................................................................................234.3 The Long-Run Equilibrium.............................................................................244.3.1 The Stability Test....................................................................................254.4 The Short-Run Model.....................................................................................254.5 Overall Results Interpretation..........................................................................29CHAPTER 5: CONCLUSIONS AND POLICY IMPLICATIONS.................................335.1 Conclusions....................................................................................................335.2 Policy Implications.........................................................................................335.3 Limitations and Suggestions for Further Research...........................................37REFERENCES...........................................................................................................38

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