THE DETERMINANTS OF DOMESTIC PRIVATE

INVESTMENT IN KENYA.

SHIRLEY ATIENO ADE

BB05/SR/MN/0529/2016

A RESEARCH PROJECT SUBMITTED TO

DEPARTMENT OF ECONOMICS IN THE SCHOOL OF
BUSINESS AND ECONOMICS IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE
AWARD OF THE DEGREE OF BACHELORS OF
SCIENCE IN ECONOMICS AND STATISTICS AT
MAASAI MARA UNIVERSITY

MARCH 2023

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 DECLARATION

This project is my original work and has not been presented for a degree or any other award in
any other university.

Declaration by student

SHIRLEY ATIENO ADE

Signature…………………………………Date…………………………………….

This research project has been submitted for examination with my approval as the University
supervisor.

MR. GEORGE ODHIAMBO

Supervisor

Signature ……………………………………. Date …………………………………

DEDICATION

This work is dedicated to my guardian Mrs. Teresa Atieno Ouma who has relentlessly and
selflessly assisted to see me complete my four-year course in Maasai Mara University.

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 ACKNOWLEDGEMENT

My special thanks gos to my supervisor Mr George Odhiambo to whom I owe the achievement
of this research through his guidance and scholarly help. Above everything I wish to thank the
Almighty God for granting me good health and smooth experience throughout the period of the
research project.

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 ABSTRACT

Private investment is one of the major sources of growth in any economy. It is also a major
source of employment besides positively contributing to national output. With this in mind, this
project was set out to investigate the determinants of the domestic private investments in Kenya,
with real interest rate, real exchange rate and external debt as the variables. Therefore this study
aims to determine how real interest rate, real exchange rate and external debts affect the private
investment in Kenya. The analytical technique of Ordinary Least Squares (OLS) was used. The
study used secondary data spanning from 2015-2021 and the analysis was done through SPSS
version 25. The findings show that real exchange rate is positive and significant determinant of
private investment in Kenya while real interest rate is negative and external debts is positive and
significant. The comparative analysis for economic literature review from various authors is
given. Key theories explaining the relationship between private investments and other
macroeconomic variables are also given. Figurative description on the relation between the
dependent, independent and moderating variable is also shown. Thus the estimated regression
analysis shows that as real interest rate is negatively related to investment therefore, high interest
will lead to low demand of local goods hence leading to low investment, real exchange rate when
its high it leads to high demand of local goods hence increasing investment, external debt if high
it leads to low demand of taxes and increase in price of related goods decreasing private
investment. It was found out that external debt is caused by huge budget deficit, government
projects and unpaid loans which in turn would affect investment in Kenya at a decreasing rate.
The implementation of policies by government through Central Bank of Kenya should ensure
low interest rates to encourage loan borrowing, since high interest rates discourage loan
borrowing thereby lowering levels of private investment and that can be done through monetary
policies. This project is a guide to policy analysts, economists and statisticians to assist in the
application of macroeconomic principles in real life economics of domestic private investments.

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 Table of Contents
DECLARATION............................................................................................................................i

DEDICATION..............................................................................................................................i

ACKNOWLEDGEMENT............................................................................................................ii

ABSTRACT..................................................................................................................................iii

Abbreviations and Acronyms.......................................................................................................x

CHAPTER ONE: INTRODUCTION..........................................................................................1

1.1 Background of the study........................................................................................................1

1.2 Statement of the problem....................................................................................................4

1.3 Research Objectives.............................................................................................................5

1.3.1 General objective............................................................................................................5

1.3.2 Specific objectives.........................................................................................................5

1.4 Research Questions................................................................................................................5

1.5 Significance of the study.......................................................................................................5

1.6 Scope of the study..................................................................................................................6

1.7 Justification of the study........................................................................................................6

1.8 Limitation of the study...........................................................................................................6

1.9 Delimitations..........................................................................................................................7

1.10 Assumption of the study......................................................................................................7

1.11 Ethical..................................................................................................................................7

CHAPTER TWO: LITERATURE REVIEW.............................................................................8

2.0 Introduction............................................................................................................................8

2.1 Theoretical literature..............................................................................................................8

2.1.1Domestic Private Investment...........................................................................................8

2.1.2 Interest rate.....................................................................................................................9

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 2.1.3 External debt.................................................................................................................10

2.1.4 Exchange rates..............................................................................................................11

2.2 Empirical Literature Review................................................................................................11

2.3 Critique of the existing literature relevant to the study.......................................................14

2.4 Research Gaps.....................................................................................................................15

2.5 Theoretical Framework........................................................................................................16

2.5.1 The Accelerator Theory................................................................................................16

2.5.2 The Neo-classical Theory.............................................................................................17

2.5.3 Theory of Purchasing Power Parity (PPP)....................................................................17

2.6 Conceptual Framework........................................................................................................19

2.6.1 Operationalization of Variables....................................................................................20

CHAPTER THREE: METHODOLOGY.................................................................................21

3.0 Introduction..........................................................................................................................21

3.1 Research Design..................................................................................................................21

3.2 Model Specification.............................................................................................................21

The empirical analysis used annual time series data on control variables and private
investment for the period 1980 to 2015. Since the study used time series data in analysis, it
was important to undertake various tests to avoid spurious or nonsensical modeling. The
test carried out included, Autocorrelation................................................................................22

3.3 Definition and Measurement of variable.............................................................................22

3.4 Study Area...........................................................................................................................22

The government of Kenya is generally investment friendly and has enacted several
regulatory reforms to simplify both foreign and local investment, including the creation of
an export processing zone. An increasingly significant portion of Kenya’s foreign inflows
are remittances by non-resident Kenyans who work in the USA, partly Europe and Asia.
Compared to it’s neighbors, Kenya has well developed social and physical infrastructure.22

3.5 Target Population.................................................................................................................23

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 3.6 Sampling techniques............................................................................................................23

3.7 Sampling frame....................................................................................................................23

3.8 Sample size..........................................................................................................................24

3.9 Research Instruments...........................................................................................................24

3.10 Validity..............................................................................................................................24

3.11 Reliability..........................................................................................................................24

3.12 Pilot Study.........................................................................................................................25

3.13 Data collection procedure..................................................................................................25

3.14 Data processing and analysis.............................................................................................25

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS..........................................27

4.1 Introductiont........................................................................................................................27

4.2gression analysis...................................................................................................................27

4.2.1 Regression part 1........................................................................................................27

4.2.2 Regression Analysis part 2...........................................................................................29

4.3 Analysis of Variance............................................................................................................31

CHAPTER FIVE: SUMMARY OF FINDINDS, DISCUSSION, CONCLUSION AND

RECOMMENDATIONS............................................................................................................32

5.1 Introduction..........................................................................................................................32

5.2 Summary of the findings.....................................................................................................32

5.3 Conclusions..........................................................................................................................33

5.3.1 Real Interest Rate and Private Investment....................................................................33

5.3.2 Real Exchange Rate and Private investment................................................................33

5.3.3 External Debt and Private Investment..........................................................................34

5.4 Contribution to knowledge..................................................................................................35

5.5 Recommendations................................................................................................................35

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 5.5.1 Real Interest Rate..........................................................................................................35

5.5.2 Real Exchange Rate......................................................................................................36

5.5.3 External Debt................................................................................................................36

5.6 Areas for further research....................................................................................................36

References.....................................................................................................................................37

APPENDICES..............................................................................................................................39

Appendix 1: Data Used for the Entire Study............................................................................39

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List of tables

Table 1:Operationalization of Variables........................................................................................20

Table 2: Descriptive Statistics.......................................................................................................27
Table 3:Correlations test................................................................................................................29
Table 4: Model Summary..............................................................................................................30
Table 5: Coefficients test 2............................................................................................................31
Table 6: ANOVA...........................................................................................................................33
Table 7: Data Used for the Entire Study........................................................................................41

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List of figures

Figure 1:Private Investment in Kenya (1980-2015)........................................................................3

Figure 2: Conceptual Framework..................................................................................................19

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Abbreviations and Acronyms

CBK Central Bank of Kenya

OLS Ordinary Least Squares

KNBS Kenya National Bureau of Statistics

IMF International Monetary Fund

GDP Gross Domestic Product

ADF Augmented Dicky Fuller

GOK Government of Kenya

SPSS Statistical Package for Social Sciences

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 CHAPTER ONE: INTRODUCTION

1.1 Background of the study

Investment has been defined as the accumulation of newly produced physical entities. It is also
defined as the placement of money into an asset with the expectation of creation of revenue and
an appreciation of interest earnings. It also stands for change in the physical stock of capital in a
given period.

Reilly and Keith (2009) defined investment as the current commitment of dollars (money) for a
given period to derive future payments that will compensate the investor. Mayo (2006) points out
the ambiguity in defining investment stating that in economics it is defined as the purchase of
physical assets while in corporate finance it could apply to any assets up to and including market
securities.

Private investment can, therefore, be defined as investment by individual people or firms/ entities
as opposed to investments by the government as an entity. The private industry plays a
significant role in the overall macroeconomic development in any country. Private investment
contributes a significant fraction of a country's Gross Domestic Product.

The growth of investment in a country leads to a subsequent growth in the GDP. Programs have
been formulated over the years to stimulate private investments by the government of Kenya to
reduce the rate of unemployment, which stands at about 40% in Kenya since the public sector
can only employ a limited number of people (Economic Survey, 2015).

From the global perspective, several theories suggest that there are many factors that account for
the level of private sector investments. According to the accelerator theory, changes in the level
of demand or output have an effect on the level of investments. Studies show that there exists
evidence to support the point that the level of investment.

These variables include changes in individual incomes, the cost of capital, the rate of returns,
credits available to the private sector investment, taxes, and exchange rates in the case of foreign
investment, inflation among other microeconomic and macroeconomic factors (Anderton, 2007).

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Changes in national and individual incomes are hypothesized to be directly related to investment
levels. A change in the level of income leads to a change in the level of investments in the same
direction. That is to say if income increases then the level of investment is also expected to
increase and the vice versa is also true.

The same effect applies to the rate of return on the investments. The opposite effect is true for
factors such as taxes and cost of capital whose increase has a negative impact on investment.
(Anderton, 2007)

Public investment can either complement or be in competition with private sector investments.
There exists a positive correlation between public and private investment. An efficient public
sector investment provides a condusive environment for private sector investment. Another
determinant of private investment in developing economies is the availability of credit to the
private sector. Therefore private investment is measured in GDP.

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 Private Investment in Kenya
20
18
16
14
Private Investments

12
10
8
6
4
2
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20
Years

Figure 1: Private Investment in Kenya (1980-2015)

The history of Kenya’s private investment growth reveals a series of ups and downs. In 1980 the
level of private investments was relatively high compared to the entire period between 1980 and
2015. The rationale to this improvement is based on the increase in coffee prices in the 1970s. A
less than expected level of investments was witnessed in the early 1980s probably due to the
attempted coup of 1982. In the following years, both public and private investments are seen to
increase significantly. The levels of private investments continued to drop gradually as a result of
the drought experienced in the country in 1984. However, there was a decline in investments in
the early 1990s that are 1992 and 1993, due to the general elections held that year and the
introduction of multiparty politics respectively. The level of investments then fluctuated from the
year 1994 up to 2007 when the country faced a political crisis when the country was going
through post-election violence. The levels of investments continued to drop as a result of the
aftermath of the elections held in 2007. In the following years however the levels of investment
rose gradually, and investments can be said to be growing at a steady level. The low level of
investment in 2008 can also be linked to the financial crisis experienced in the US as it happened
at the same time Kenya was facing inflation. Private investment has not only been seen as an

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engine for job and income creation but also as a player in the provision of infrastructural and
social services.

Private investment depends upon expected profitability or marginal efficiency of capital, which,
in turn, depends upon future expectations that are often fluctuating violently. Hence private
investment becomes highly capricious it is very high in boom periods and low in the period of
depression.

Private investment must be stabilized if full employment is to be maintained but unfortunately, in

a capitalist economy it is very unstable. In a depression private, investment must be raised but
it’s very low when it is needed to be very high.

Prospective entrepreneurs keep on comparing the marginal efficiency of capital with rate of
interest and decide to invest only when the former is higher than the latter. There will be no
investment if the rate of interest is higher than the MEC in other words, if profit expectations are
not very bright there will be some investment if the rate of interest is slightly lower than the
MEC.

1.2 Statement of the problem

Private investment plays a crucial role in promoting sustainable long-term economic growth.
Most literature shows that both domestic and foreign private investments lead to high economic
growth. Business firms always work to maximize their profits while the government seeks to
maximize the social welfare of its citizens among other aims implying that they need to create
more capacity by investment for future production. Slow economic growth in the economy has
been attributed to the low levels of investment.

The determinants of investment are numerous making it difficult to derive simple and
comprehensive demand and supply curves. Studies done to analyze the determinants of
investment have not considered the same variables hence have not produced similar results. In
Kenya, the observation period has not been sufficiently enough to collect enough data to run
Multiple Regression which requires lots of data. This study intends to make improvements
through the use of more recent data. Additionally, most studies have tended to examine only one
variable while it's important that more variables are determined to come up with different

4
empirical evidence and different completions. By understanding the determinants of private
investments in any economy, policy actors can control private sector in the desired direction to
foster economic growth and social services.

1.3 Research Objectives

1.3.1 General objective

The general objective of this study is to identify and examine the macroeconomic variables that
determine private investments in Kenya with the view of knowing their impact on private
investments.

1.3.2 Specific objectives

The study is guided by the following specific objectives;

1. To ascertain the effect of real interest rates on private investments in Kenya.

2. To determine the effects of real exchange rates on private investment in Kenya.

3. To determine the effect of external debts on private investment in Kenya.

1.4 Research Questions

The research will be guided by the following questions

1. How does real interest rate affect private investment in Kenya?
2. How does real exchange rate affect private investment in Kenya?
3. How does external debt affect private investment in Kenya?

1.5 Significance of the study

Investment activities have many stakeholders. This study aims at improving the private
investment function of Kenya, and the following parties may find it in their decision and policy
making;

1. National policy makers especially the government to know the specific variables to
manipulate to affect private investments to the desired goal.

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 2. Investors and company managers by improving their understanding of the investment
environment for better prediction and lobbying to maximize their profits and other goals.
3. Any other interested parties in the affairs of Kenya like scholars and researchers keen on
expanding knowledge: the donors and other partners interested in the investment
environment in Kenya.

1.6 Scope of the study

This study aims at establishing the factors that influence private investment in Kenya over the
period of January 2015 to February2021. It is during this time that major privatization of public
enterprises took place and therefore analysis on possible impact would be of importance to
analyzing the determinants of private investments in Kenya.

The study will focus only on the determinants of private investments in Kenya, and thus the
applications will be limited to the Kenyan case.

1.7 Justification of the study

The findings of the research are vital, as scholars and policy makers will recognize how far the
rate of domestic determinants of investment has reached in terms of macro-economic variables.
More over research studies are over lapping one another due to lack of adequate information
hence, the study intends to feel this gap through identifying right techniques for data collection
that will yield accurate results.

1.8 Limitation of the study

The problem of multicollinearity and autocorrelation may affect this study since it’s going to
deal with time series data. The research will, therefore, focus on private investments and not
every variable that influences decisions to invest will be explored.

As such, some of the variables such as infrastructure and political uncertainty will be excluded
to narrow down the scope of the study to manageable dimension.

Inadequate finance will be a set back and will affect data collection during this study.

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1.9 Delimitations

1. On finance, personal savings, loans and borrowings from economic agencies will help
catapult, data collection process.

2. On correlation, the study will major on private investments in order to collect data efficiently.

1.10 Assumption of the study

The research study was based on the assumptions that secondary data that was utilized was
genuine and accurate. Since the study is done using available data that contained information
about determinants of domestic private investment in Kenya, it will offer clear information on
how the determinants affect the private investments.

1.11 Ethical

1. Plagiarism; this project intends to tackle it by recognizing and appreciating the owners of
all the sources attached through citation.
2. Informed consent will be prevented through explaining to respondents that information
provided is only used for academic purposes; this will aid in gathering accurate findings.
Besides, the information provided by the respondents will only be used for this project
and nothing other than that so as to maintain privacy hence achieving confidentiality.

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 CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction

This chapter covers a review of literature done by other researchers but linked to research study,
a critical literature review, a summary of gaps to be filled by research study and conceptual
framework. Investment concepts date back to before Keynes and have been an area of interest
since then. Many studies show that private investments have been an area of concern based on
various literatures that is the empirical and theoretical aspects.

2.1 Theoretical literature

2.1.1Domestic Private Investment

Unlike capital, investment is a flow term and not a stock term. This means that investment is
measured over a period. Investment plays a major role in problems such as poverty and
unemployment (Muhammad, 2004). According to GOK (1994), investment is measured by
Gross Fixed Capital Formation (GFCF), relating to the stock of domestic reproducible tangible
assets, especially the actual physical assets for the use either directly or indirectly in economic
activity on repeated occasions. Capital formation therefore, measures expenditure on non-current
assets, which represents a gross addition to stock of capital in the economy.

Total real domestic investment in Kenya has been on the decline since 1971. This is attributed to
the collapse of the coffee boom and East African Common market after 1978. Total real
investment fell by 12% of GDP between 1967 and 2006. GDP per share in 2006 was 9.5% of
GDP in relation 10 percent, 1.7% in 1978 and 22% in 1971(IMF, 2008). Private real investment
was 5.2% of GDP in 2006 as compared to 5.8% in 1988, 14% in 1971 and 10.8% in 1967.
Private investment in capital asset such as machinery and transport equipment has been on a
declining trend. It has fallen from 7% of GDP to 3.5% between 1967 and 2006. Thus, the share
has declined from 66% to 51.1% over the same period (IMF, 2008).

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2.1.2 Interest rate

Crowley (2007) defined interest rate as money borrower pays for the use of money from a
lender/financial institutions or fee paid on borrowed assets. Keynes (1936) considered interest
rate as the price of money and the link between income and capital. He defined interest rate as
the price of money or the ‘per cent of premium paid on money at one date in terms of money to
be in hand one year later’.
Therefore, interest on loans is the price the lender charges the borrower for using the borrowed
funds. Stiglitz and Weiss (1981) advanced arguments against high interest rates. They pointed
out that attempt to charge higher interest negatively affects the quality of a bank’s loan because
of two effects; incentive and adverse selection effects. First, it raises the overall riskiness of the
portfolio of assets. Rising interest rates reduces the returns on all projects and makes less risky
projects unprofitable (incentive effect). This makes firms switch to riskier projects as interest
rates rise.
Secondly, MFIs like banks have to screen borrowers. This is because at high borrowing interest
rate, borrowers may be less worried about the prospect of non-payment (adverse selection
effect). The level of interest rates charged by commercial banks and other financial institutions in
Kenya has remained high and has faced a lot of criticism from time to time. Despite the efforts
by the government to bring it down they have still remained high. These high interest rates are
against the regulation in the current finance bill which proposes that interest rates should be
pegged against the Treasury bill maximum interest rate that a bank or any financial institution
may charge for a loan or monetary advance (Ngugi, 2004).
In their study, Gardner and Cooperman (2005) found out that interest rates represent the cost of
borrowing capital for a given period of time. Price changes are anticipated in the real world and
these expectations are part of the process that determines interest rates. Keynes (1936) indicates
that the rate of interest represents the cost of borrowing capital for a given period of time, given
that the borrowing is a significant source of finance for the firms, interest rates are of great
importance to them since it greatly affects their income and by extension their operations.

According to study by Bernstein (1996), developing countries have liberalized interest rates by
allowing the market forces to determine interest rates. Hence uncompetitive banking systems,
inadequate regulatory framework and borrowers that are insensitive to interest rates undermine
9
the efficiency of market-based credit allocation and disrupt the transmission of monetary signals
with adverse consequences for macroeconomic policy.

2.1.3 External debt

Many less developing countries (LDCs), Kenya included are characterized by low capital
formation due to the low levels of savings and investments (Adepoju, Salau&Obayelu, 2007). As
a result, they result to external borrowing to supplement their savings (Safdari&Mehrizi, 2011).
Soludo (2003) contends that countries borrow for two main reason; to finance budget deficits and
to boost investment. There are also other reasons why developing countries borrow such as, to
deal with calamities such as wars and drought and to correct macroeconomic instabilities in their
economies such as inflation and exchange rate volatility. The effect of external debts on
investment can be positive if the marginal benefit of the projects financed by the debt is higher
than the marginal cost of the debt or negative if the reserve is true. Reinhart, Carmen, Vincent
and Kenneth (2012) postulate that when external debts are used for growth related expenditures
it accelerates investments by providing foreign capital for developments, management know how
technical expertise as well as access to foreign markets. The negative effects of external debts on
private investment are explained through the debt overhang hypothesis and the crowding out
theory of debts.

The debt overhang hypothesis holds that when debts are higher than a country’s ability to service
them, domestic as well as foreign investments in the future will be discouraged because potential
investors fear that any increase in output will be taxed to service the debt (Krugman, 1988).
Serven (1997) also agrees that high debt stocks hamper private investments by creating
uncertainties among investors especially in low income countries with debt servicing difficulties.

The crowding out theory holds that debt servicing will crowd expenditures in other areas as
infrastructural and human capital development leading to low investments (Clement, Bhattachrya
and Nguyen, 2005).

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2.1.4 Exchange rates

An exchange rate refers to the rate at which one currency is exchanged for another in order to
enable trading in a host country. It determines how much of one currency is available to be used
to purchase goods and services in a country. Therefore, for currencies to trade in a common
market, one currency has to be expressed in terms of the other. An exchange rate can be also be
defined as the price one currency in terms of another (Mishkin& Eakins, 2009). An exchange
rate can either be a direct or an indirect quotation. A direct quotation refers to how much of the
home currency can buy a unit of the foreign currency while an indirect quotation is how much of
the foreign currency is obtainable from a unit of the home currency (Howells & Bain, 2007).

Exchange rate is said to be the nominal exchange rate when it includes inflationary effects and is
referred to as the real exchange rate when inflationary effects are excluded (Lothian & Taylor,
1997). Prior to 1972, nearly all countries in the world operated on a fixed exchange rate system
whereby their individual country’s currencies had a fixed rate relative to the US dollar.

Changes in exchange rate will affect private investment through the balance of payment of a
country whereby imports will become expensive demoralizing investment especially for
countries like Kenya that import capital equipment and manufactured goods that fetch high
prices in the international market, (Slaughter, 2001 & Miles, 2006). Dornbusch (2001) and Miles
(2006) contend that there are two channels through which a stable exchange rate positively affect
private investment; first, it lowers risk and hence interest rates promoting investments and
secondly, it promotes private investment by lowering transaction cost associated with
international trade. Exchange rates are measured at average on monthly, quarterly and annual
basis.

2.2 Empirical Literature Review

The major objective of this chapter is to offer an overview of the previous studies made and
published related to the study under review. Various research has been examined and critiqued.
Most traditional models are difficult to apply in developing countries, therefore, more relevant
theories have been brought forth to incorporate, and devaluation that fit in the said economies.

11
Investment theories have been modified to control the constraints to private investment. Here are
some of the empirical studies carried out. Matin and Wascow (1992) studies the effect of
restricting foreign exchange allocation in Kenya.

Their model put emphasis on the impact of resource allocation constraints on the behavior of
private investments in the country. The study found out that Kenya's failure to implement
adjustment programs after the collapse of the coffee boom and the disintegration of the East
African common market in the 1970s led to a drastic reduction of private investments in the
1980s. The major causes of the decline were due to reduced private sector credit, fewer imports
and falling stocks of public infrastructure. However, the study did not consider the effect of
public debt on the behavior of private investment.

Kiptui (2005) uses a general regression model to examine the fiscal policy and its relation with
the level of Kenyan domestic private investments. He analyzed the effects of various variables
among them; government consumption expenditure, taxes, budget deficits and public debt on
private investment. The study finds economic growth as the most important positive determinant
of private investment. The study also observes that increase in imports and government
consumption expenditure are promoters of private investments. Budget deficits had significant
negative impact. The other factors that seem to undermine private investment in his study are
public investment and the volatility in foreign aid flows. This approach, however, has a
limitation; by omitting a single of the other significant factors of private investment can have
profound effects on the results of the multiple regression analysis.

Ronge and Kimuyu (1997) conducted a research applying the flexible accelerator model,
modified to accommodate the resource constraints faced by private investors in developing
economies. The findings of their study reveal that the availability of credit, foreign exchange
reserves, and public investment have a beneficial impact on private investments in Kenya. The
study was done using data covering the period between 1986 and 1996. They also found that real
interest rate is not significant in affecting private investments. The factors that seemed to affect
private investments negatively, according to their findings, are public debt and exchange rate
depreciation.

12
Maruga (2006) carried out a similar study but using the neoclassical flexible accelerator model.
The model specifies private investment as a function of interest rate, exchange rates, per capita
income, and consumer price index among other variables. The factors that promote private
investment according to this study were interest rates, per capita income and inflation.

Those that deter private investments are infrastructure and exchange rates. Bwire (1993) studied
private investments in Kenya and estimated a function that showed that investment was affected
by the rate of GDP growth, inflation, and foreign debt service. His study on the external debt
service only considers the short run effects on private investments which are of no major concern
compared to the long-run implications of the size of an economy public debt.

Seruvatu et al. (2001) conducted a study in Fiji to investigate the determinants of the private
investment using the time series technique. Unrestricted error correction model for the period
between 1966 and 1998 was employed to analyze the long-run determinants of private
investments. The study found that real GDP growth, real lending rate, real private sector
investment, real exchange rate index, terms of trade index and real unit labor cost weakly explain
private investments with only 35% of the variations in private investments being explained by
the independent variables. The poor fit of the model is justified by highlighting factors which
include the inadequacies in the legal system, non-fulfillment of contractual obligations and
property rights, land issues, and unexpected civil unrest as the main risks to investment.

Badawi (2004) carried out a study investigating how macroeconomic policies relate with the
level of private investments in Sudan by using data collected in the period between 1969 and
1998. The findings revealed remarkable exclusion of private investments in Sudan, and
formulation of policies which caused devaluation also contributed to discouraging private sector
expansion.

Kurokawa et al. (2008) found that major impediments to private sector investments are access to
finance and finance costs, access to electric power, corruption, tax administration, low skills
levels and transport. The study found that many of these obstacles to private sector expansion are
due to market and government failures.

13
2.3 Critique of the existing literature relevant to the study

According to Bwire (1993) who studied private investments in Kenya and estimated a function
that showed that investment was affected by the rate of GDP growth, inflation, and foreign debt
service. His study on the external debt service only considers the short run effects on private
investments which are of no major concern compared to the long-run implications of the size of
an economy public debt.

Badawi (2004) carried out a study investigating how macroeconomic policies relate with the
level of private investments in Sudan by using data collected in the period between 1969 and
1998. The findings revealed remarkable exclusion of private investments in Sudan, and
formulation of policies which caused devaluation also contributed to discouraging private sector.

This project investigates how macroeconomic policies to private investments in Kenya using
data collected in the recent time that is 2017. The findings will reveal how private investment
and policies have caused valuation and contributed to encouraging private sector.

According to Ronge and Kimuyu (1997) who conducted a research applying the flexible
accelerator model, modified to accommodate the resource constraints faced by private investors
in developing economies. The findings of their study reveal that the availability of credit, foreign
exchange reserves, and public investment have a beneficial impact on private investments in
Kenya. The study was done using data covering the period between 1986 and 1996. They also
found that real interest rate is not significant in affecting private investments. The factors that
seemed to affect private investments negatively, according to their findings, are public debt and
exchange rate depreciation.

Maruga (2006) carried out a similar study but using the neoclassical flexible accelerator model.
The model specifies private investment as a function of interest rate, exchange rates, per capita
income, and consumer price index among other variables. The factors that promote private
investment according to this study were interest rates, per capita income and inflation.

Those that deter private investments are infrastructure and exchange rates. Bwire (1993) studied
private investments in Kenya and estimated a function that showed that investment was affected
by the rate of GDP growth, inflation, and foreign debt service. His study on the external debt

14
service only considers the short run effects on private investments which are of no major concern
compared to the long-run implications of the size of an economy public debt.

The determinants of investment are numerous making it difficult to derive simple and
comprehensive demand and supply curves. Studies done to analyze the determinants of
investment have not considered the same variables hence have not produced similar results. In
Kenya, the observation period has not been sufficiently enough to collect enough data to run
Multiple Regression which requires lots of data. This study intends to make improvements
through the use more data and more recent data. Additionally, most studies have tended to
examine only one variable while it's important that more variables more variables are determined
to come up with different empirical evidence and different completions. By understanding the
determinants of private investments in any economy, policy actors can control private sector in
the desired direction to foster economic growth and social services.

2.4 Research Gaps

Kiptui (2005) uses a general regression model to examine the fiscal policy and its relation with
the level of Kenyan domestic private investments. The researcher analyzed the effects of various
variables among them; government consumption expenditure, taxes, budget deficits and public
debt on private investment. The study finds economic growth as the most important positive
determinant of private investment. The study also observes that increase in imports and
government consumption expenditure are promoters of private investments. Research gap exists
since real exchange rate and real interest rates was not captured. Both real exchange rate and real
interest rate are determinants of domestic private investment, economic growth and it was
necessary for the variables to be analyzed.

Ronge and Kimuyu (1997) conducted a research applying the flexible accelerator model,
modified to accommodate the resource constraints faced by private investors in developing
economies. The findings of their study reveal that the availability of credit, foreign exchange
reserves, and public investment have a beneficial impact on private investments in Kenya. The
study was done using data covering the period between 1986 and 1996. They also found that real
interest rate is not significant in affecting domestic private investments. Research gap come in
since data that will be used is recent dated 2017 thus avoiding the outliers in the research work.

15
Again Real interest rate is very significant in affecting domestic private investment as opposed to
Ronge and Kimuyu who argued that Real interest rate is not an important determinant of
domestic private investment.

2.5 Theoretical Framework

Various attempts have been put in place to explain conclusively the concept of private
investments based on various theories on the determinants of private investments developed. The
following are some of the theories. Various theories have been developed to explain investment.
Some of the approaches commonly used to define investment include; simple accelerator theory,
neoclassical /flexible accelerator model and Tobin's Q theory.

2.5.1 The Accelerator Theory

This study was based on the flexible version of the accelerator theory; a theory in economics that
establishes a link between investment output and cost of capital.

The theory states that the optimal or desired level of investment depends on the level of output
and the use of cost of capital which in turn depends on the price of capital goods, the real rate of
interest and the depreciation rate. Samuelson’s accelerator theory suggests that investment is a
function of past changes in income (Anderton, 2007). It follows the Keynesian view that changes
in investor’s expectations about future economic conditions influence the levels of investment.
The desired investment stock depends on planned output.

Neoclassical writers believed that investment is very sensitive to the interest rate while Keynes
and his followers took the stand that changes in investor’s expectations about future economic
conditions are far important in explaining changes in levels of investment.

Both groups agreed that equilibrium investment occurs when the expected rate of return in
investment equals the rate of interest (Bryn’s and Stone, 1981).

On government spending, it is postulated that decreases in government spending direct deflate

the demand for goods and services. According to Keynesian this leads to decreased investment
activities.

16
2.5.2 The Neo-classical Theory

The Neo-classical theory postulates that the rate of interest is the major determinant of
investment. In contrast with the accelerator model, the neoclassical model assumes that the
desired stock depends not only on planned output but also on the ratio of output price to the
implicit rental price of the services of capital goods (Bischoff, 1971). Precisely it is derived from
a profit maximization process aimed at desired capital given a Cobb-Douglas production
function. Bodie, Alex and Marcus (2009) note that Keynesian (demand-side). Economists
look at effects of taxes on consumption demand whereas supply-siders (Neoclassical)
argue that lowering tax rates will elicit more investment and improve incentive to work.
Accordingly, monetary policy works largely through its impact on interest rates. Increases in the
money supply lower interest rates which in turn stimulates investment demand.

2.5.3 Theory of Purchasing Power Parity (PPP)

Gustav Cassel a Swedish economist was the first to explain the concept of Purchasing Power
Parity Theory (PPP) in 1918 (Shapiro, 1992). This theory was founded on the law of one price
which is held to be true in the absolute version. According to the theory, worldwide levels of
exchange adjusted price should be the same meaning that a home currency unit purchasing
power should be similar the world over.

When the difference in the aggregate price between two countries is matched by the depreciation
in the home currency relative to the foreign currency, then PPP is said to exist (Sarno& Taylor,
2002). This means in effect that issues such as transportation costs, tariffs and quotas are taken
into account.

PPP is not a complete exchange rate calculation theory as the deviations from the theory have
continued to exist throughout the world history (Krugman&Obstfeld, 2009). The theory states
that exchange rates are determined by considering the trade patterns changes that take place due
to the difference in inflation rates across countries. The theory states that the exchange rate will
keep on changing so as to maintain the purchasing power parity (Schreyer &Koechlin, 2002).

The changes in foreign currency stated in percentages should change in such a way that they
maintain parity between the two countries new price indices. The challenge of the theory is in its

17
explanation of how exchange rates relate to the barriers to trade and the type of goods from a
country.

The theory assumes that all goods are the same in different countries and that barriers to trade
together with transportation costs are always low in different countries. This can’t be true
(Sarno& Taylor, 2002). With PPP, ideal situations are observed. In perfect conditions, foreign
capital investment flows would not be influenced by exchange rates as the profit gained by
operating in a country whose currency is weaker would not materialize. All costs would be the
same thus no need to invest elsewhere other than your home country (Krugman&Obstfeld,
2009).

18
 2.6 Conceptual Framework

The variables on the left side are treated as independent variables while that on the right is the
dependent variable.

Real Exchange Rate Interest Rate External Debt

High Low High Low High Low

High Low demand of High demand

Low Low demand Increased
Demand taxes and of goods due
Demand of local goods demand of local
increase in to low prices
goods
price of goods

Decrease in Low High Decrease in Increase in

Increase in
domestic domestic domestic domestic domestic
domestic
investment investment investment investment investment
investment

Figure 2: Conceptual Framework

19
2.6.1 Operationalization of Variables

Variables Measurements

Real Interest Rate The GDP deflator measures real interest rate. GDP

Deflator is the ratio of nominal (current prices) to

Real (constant prices) of GDP multiply by 100.

Deposit Interest Rate Deposit interest rate is measured as an index of

prices using GDP Deflator.

Lending Interest Rate Lending interest rate is measured by ration of

Interest income to asset generating the income.

Real Exchange Rate Real exchange rate is measured using the local

currency units relative to the US Dollar.

External Debt External debt is measured using saving rates

stock level.

Table 1:Operationalization of Variables

20
 CHAPTER THREE: METHODOLOGY

3.0 Introduction

This chapter deals with the procedures of data collection and analysis. It will be concerned with
the research designs, sample size, sampling techniques, target population, data collection
procedures, analysis, post diagnostic tests and definition of terms.

3.1 Research Design

This study used casual research design. This is because the data analysis relates the impact of
several independent variables on the dependent variable which is private investments and
attempts to determine their relationship.

3.2 Model Specification

To analyze the determinants of private investment, multivariate regression model was used. The
independent variables were interest rate, external debts and exchange rate while the dependent
variable was private investment. The variables were log linearized to take care of non-linearity in
the relationship between private investment and any of the independent variables. A dummy
variable for political factors was also included in the model.
The dummy variable took the values of 0 and 1; 0 indicating the absence of political factors and
1 indicating their presence.
Since the value of the dummy was fixed OLS estimation was used to establish whether the
dummy variable affected private investment.

21
The model is presented as follows:
Y=f (real interest rates, exchange rates, external debts)
Y =β0+β1 X1 + β2X2 + β3X3 + E
Where;
Y- Private Investment
X1- Real Interest Rate
X2- Real Exchange Rate
X3 – External Debt
E – represent other factors that influences the rate of private investment in Kenya.

The empirical analysis used annual time series data on control variables and private investment
for the period 1980 to 2015. Since the study used time series data in analysis, it was important to
undertake various tests to avoid spurious or nonsensical modeling. The test carried out included,
Autocorrelation.

3.3 Definition and Measurement of variable

Both the independent variables (Real exchange rates, Real interest rates, External debts) will be
measured by, using the local currency units relative to the US Dollar, GDP deflator and Deposit
Interest Rates, saving rates and investments levels respectively, and dependent variable (Private
investment)

3.4 Study Area

The government of Kenya is generally investment friendly and has enacted several regulatory
reforms to simplify both foreign and local investment, including the creation of an export
processing zone. An increasingly significant portion of Kenya’s foreign inflows are remittances
by non-resident Kenyans who work in the USA, partly Europe and Asia. Compared to it’s
neighbors, Kenya has well developed social and physical infrastructure.

The study analyzed the macroeconomic determinants of Private investment in Kenya. The
location was chosen because Kenya had experienced fluctuation rates in Private investment
among its neighbors despite it being considered as the regional economic hub (Dupas and
Robinson, 2011). The researcher therefore sought to determine why these fluctuations in Private

22
investment as well as instabilities in macroeconomic factors continued to be experienced in
Kenya. The data was then obtained from World Bank, Kenya National Bureau of Statistics and
Central Bank of Kenya whose headquarters are located in Nairobi, Kenya. These institutions
provided all the required historical data about the determinants of Private investment.

3.5 Target Population

The target population for the study was time series data for determinants that affect private
investment for years spanning from the period of 1980 to 2015 fiscal year. The data was sourced
from the Central Bank of Kenya, Kenya National Bureau of Statistics and World Bank bulletin
and the year 2015 will be the cutoff date as it gives the latest available data on aggregate of each
and every determinant. Chairpersons will be 100, Secretary 100, junior employees will be 200 to
be targeted.

3.6 Sampling techniques

This study employed the purposive sampling which is a type of non-probabilistic method.
Purposive sampling allows the researcher to deliberately choose the items that he/she feels are
supreme for the study, (Kothari, 2004). The study used a sample size of macroeconomic data for
15 years from 2000 to 2015. This is the period during which stabilization policies begun to be
implemented by the government to improve private investment. It also focused on three
macroeconomic factors namely; Exchange rate, Interest rate and External debt and their impact
on private investment.

3.7 Sampling frame

A sampling frame is the source of material or device from which a sample is drawn. It justifies
the choice of the technique adopted. The sampling method has been chosen due to the fact that it
ensures the groups selected are proportionately represented. The method further will account for
the differences in the s groups selected. Kenya National Bureau of Statistics, World Bank Data,
and IMF chairpersons, secretaries and junior employees will be considered

23
3.8 Sample size

The data was obtained from the World Bank data bank, IMF statistics as well as the Kenya
National Bureau of Statistics (KNBS). The content validity was sought from the supervisors,
Directors, Managers and other experts in the field of economics. From target population 10%
will be sampled for each category. Chairperson will be 10, secretaries will be 10 and junior
employees will be 20

3.9 Research Instruments

The study used secondary data and a data collection checklist to collect data on Private
investment and on independent variables which were interest rates, exchange rates and external
debts. The data was obtained from the World Bank data bank, IMF statistics as well as the Kenya
National Bureau of Statistics (KNBS) by Abstraction of previous research papers and surveys
and most importantly by interviewing the supervisors and other experts in the field of
Economics.

3.10 Validity

The research instruments will be pretested in order to test for validity. Validity is the degree by
which items in the research instrument represents the content, the test is designed to measure. A
valid instrument is said to be one that measures exactly what it purports to measure. To establish
the validity of the research, instrument the researcher will seek opinions of experts in table
banking especially the researcher’s supervisor, lecturers and students.

3.11 Reliability

Reliability is a measure of the degree to which a research instrument yields consistent results or
data after repeated. The study will use the Ordinary Least Squares (OLS) method to analyze the
relationship between the independent variables and the dependent variable. Since the data used
was time series, estimation using non-stationary variables leads to spurious results with high R2 .

24
3.12 Pilot Study

The research instrument will be pilot tested before administration in the final study. This will be
conducted among some few members of the table banking groups to test both the validity and
reliability of data collected.

3.13 Data collection procedure

The data employed in this study will quantitative in nature. This study will incorporate the use of
secondary data. Data will be time-series covering the span of 2000-2015 regarding the
relationship between the macroeconomic variables and domestic private investment. The time-
series data refers to data collected over a period of time and it is characterized by seasonality,
trend, cyclical and random components, (Gujarati and Porter, 2010). The sources of data will
include statistics from Kenya National Bureau of Statistics, Statistical Abstracts and Economic
Surveys, World Bank’s and IMF’s world development indicators. The data will be collected by
filling the checklist for the period of 15 years from 2000 to 2015. This period is long enough for
economic inferences to be made from its analysis. Data for each variable was considered from a
single source for uniformity.

3.14 Data processing and analysis

The essence of data acquisition is to transform it, by analysis using economic principles, into
useful information from which inferences are drawn through description, prediction and
explanation. These inferences will be then used to support the identification of the potential
alternatives that facilitate decision making in managing or controlling the phenomenon under
study.

There are different types of analytical methods, each one suitable for use under specific sets of
assumptions. To achieve this study, economic analytical methods will be used. These include
descriptive statistics, regression and correlation. In descriptive statistics, graphics displays will
be used to illustrate the key features of the study variables.

The data will be analyzed using descriptive and inferential statistics and also using statistical
package for social sciences (SPSS). Descriptive statistics include: frequencies, percentages,

25
means, and standard deviations. Mostly descriptive statistics will be used to determine the
relationship between Real exchange rate, real interest, external debt and domestic private
investment.

26
 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introductiont

This chapter presents the findings based on the analyzed data. The study fitted a multiple linear
regression model as illustrated below;
Y=555.801X0+12.938X1+568.740X2
The summary statistics of the fitted model showed that adjusted R2=0.976 . Meaning that Real
interest rate, real exchange rate and external debt are jointly accounted for 97% of the variation
in private investment after the errors have been removed.
The result of the test for adequacy showed that at 95% level of confidence there was sufficient
evidence to reject the null hypothesis and conclude that the independent variables that is real
interest rate, real exchange rate and external debt were adequate to explain changes in private
investment, P<0.05. This shows at least one of the independent variable had a significant effect
on private investment

4.2gression analysis

4.2.1 Regression part 1

Model Summary

Model R R Square Adjusted R Square Std. Error of the

Estimate

1 .989a .977 .976 .433

Predictors: (Constant), External Debts, Real Exchange Rate, Real Interest Rate.

Table: Model Summary

27
From the table above, R2 shows the proportion of variation explained by the independent
variables. This means that, 97.6% of Private Investment is jointly explained by External Debts,
Real Exchange Rate and Real Interest Rate.

28
4.2.2 Regression Analysis part 2

Coefficientsa
Table 2: Coefficients test 2

Model Unstandardized Coefficients Standardized T Sig.

Coefficients

B Std. Error Beta

(Constant) .332 2.306 .144 ..886

RIR -.501 .220 -.075 -2.276 .026

1
RER .038 .019 .050 2.049 .044

EXTDEB .834 .029 -.896 29.109 .000

29
a) Dependent variable: Private Investment

From the findings, the regression model was established.

Y= 0.332X0 -0.501X1 + 0.038X2 +0.834X3

From the findings of the regression analysis, it was found that holding all the independent
variables constant, nominal Private Investment would grow at the rate of 0.332 unit’s pa. The
model also revealed that a unit increase in Real Interest Rate would lead to decrease in nominal
Private Investment by 0.501 units. A unit increase in Real Exchange Rate would lead to an
increase in nominal Private Investment by 0.038 units. A unit increase in External Debts would
lead to an increase in nominal Private Investment 0.834.

4.2.2.1 Effect of Real Interest Rate on Private Investment Kenya

The study sought to establish the relationship between interest rate and private investment in
Kenya. Interest rate is an ingredient of private investment hence needs to expand its growth. The
coefficient obtained from the regression model was -0.501. This implies there is an inverse
relationship between interest rate and private investment, hence influencing private investment
negatively. This is consistent with Keynesian theory where exist an inverse relationship between
interest rates and private investment, which states an increase in interest rate will decrease private
investment. A unit increase in interest rate in small economies like Kenya will have a negative
effect on private investment. This is because an increase in interest rate crowds out private
investors.

4.2.2.2 Effect of Real Exchange Rates on Private Investments in Kenya

We define exchange rate as the number of domestic currency (Kenya shillings) required to buy
one unit of foreign currency. The coefficient obtained from the regression model was 0.038, which
implies that real exchange rate is positively related to private investment in Kenya. A unit increase
in real exchange rate leads to an increase in private investment because increase in exchange rates
means devaluation of Kenyan currencies against foreign currency, this therefore means that
imports become expensive while exports become cheaper, therefore consumers will tend to
consume locally produced goods which facilitates improvement in local investments.

30
4.2.2.3 Effect of External Debt on Private Investment in Kenya

From the model, the coefficient for external debt was 0.834. This implies that a unit decrease in
external debt will result to an increase in private investment by 0.834 unit. The positive
relationship can be caused by the lower interest rates charged by external lenders and long
payment period. The lower interest rates motivate the investors hence increasing the private
investments in the economy.

4.3 Analysis of Variance

Table: ANOVA
ANOVAa

Model Sum of df Mean Square F Sig.

Squares

Regression 555.801 3 185.267 988.016 .000b

1 Residual 12.938 69 .188

Total 568.740 72

a. Dependent Variable: PI

b. Predictors: (Constant), EXTERNAL DEBTS, REAL EXCHANGE RATE,

REAL IINTEREST RATE

To determine the goodness of fit, analysis of variance was done. From the table above, the
significance level of the model is 0.000, which shows that the model is not statistically
significant.

31
 CHAPTER FIVE: SUMMARY OF FINDINDS, DISCUSSION, CONCLUSION AND
RECOMMENDATIONS

5.1 Introduction

This chapter provides the summary of the study findings which formed the foundations of the
discussions, conclusion and recommendations.

5.2 Summary of the findings

The purpose of this study was to analyze the macro determinants of private investment in Kenya.
This was achieved by analyzing the effects of Real Interest Rates, Real Exchange Rate and
external debts on private investment.

In the literature on the real interest rate, real exchange rate and external debt to Private
Investment, there are ongoing debate amongst the economist and other practitioners. There are
views that some highlighted exogenous variables have negative effect on private investment
while others argue that some exogenous variables have positive effect on private investment.

The objective of this study is to identify and examine the macroeconomic variables that
determine private investments in Kenya (Jan 2019-Feb 2021), which used the data collected from
Jan 2019-Feb 2021 collected from KNBS, WB and IMF. The empirical analysis of the study
rested on the accelerator theory, neo- classical theory and purchasing power parity theory, from
different researches done by different practitioners.

The data went through regression, coefficient and correlation analysis test on which its main aim
was to establish the relationship between variables used, the study found out that real interest rate
was negatively related to private investment in Kenya (-0.501 units). Real exchange rate was
positively related to private investment (0.038 units). External debt rate was positively related to
private investment (0.834 units). The R2 was 0.976 implying that 97.6% of the variations in
private investment are explained by real interest rate, real exchange rates and external debts.

32
5.3 Conclusions

5.3.1 Real Interest Rate and Private Investment

Conclusions were made from the findings of the study. First it was established that real interest
rate had a negative significant relationship with domestic private investment with a coefficient of
-0.158. Private investment increases by 0.501 when interest rate is decreased by 1 unit holding
other factors constant. It was therefore concluded that an increase in interest rate will lower the
rate of growth of domestic private investment in Kenya. High interest rate leads to low demand
for local goods hence declining domestic investment. Thus it was concluded that real interest rate
has an effect against private investment negatively.

Ronge and Kimuyu (1997) conducted a research applying the flexible accelerator model,
modified to accommodate the resource constraints faced by private investors in developing
economies. They found that real interest rate is not significant in affecting private investments,
according to the findings, real interest rate affects private investment negatively and is
significant.

Maruga (2006) carried out a research using neoclassical flexible accelerator model. Model
specifies private investment as a function of real interest rate, exchange rate and per capita
income. Maruga further argues that high interest promote investment, this leaves a gap because it
was found that low interest rate promotes private investment.

The government through the Central Bank of Kenya should ensure low interest rates prevail in
the market since high interest rates discourage loan borrowing thereby lowering levels of private
investment. Low interest rate tends to attract investors both locally and Internationally thus
promoting investment.

5.3.2 Real Exchange Rate and Private investment

The research findings also revealed that real exchange rate had a positive significant relationship
with domestic private investment with a coefficient of 0.038. Private investment increases by
0.24 units when interest rate is decreased by 1 unit holding other factors constant. A conclusion
was thus reached that domestic private investment rate was bound to increase when the exchange

33
rates of the country went up, hence depicting that exchange rate has effect on private investment
in Kenya positively. High Exchange rate leads to high demand of exports and low demand of
imports, thus increasing investment.

Changes in exchange rate will affect private investment through the balance of payment of a
country whereby imports will become expensive demoralizing investment especially for
countries like Kenya that import capital equipment and manufactured goods that fetch high
prices in the international market, (Slaughter, 2001 & Miles, 2006). There exists a gap to be
filled since from the findings, exchange rate is positively related to private investment and rather
would promote investment since imports will be cheaper and exports expensive.

Dornbusch (2001) and Miles (2006) contend that there are two channels through which a stable
exchange rate positively affect private investment; first, it lowers risk and hence interest rates
promoting investments and secondly, it promotes private investment by lowering transaction cost
associated with international trade. Exchange rates are measured at average on monthly,
quarterly and annual basis. Real exchange rate is positively related to investment thus its fully
supported. Kenya should ensure it runs a stronger currency in relation to foreign currency since
this will boost exports and therefore increase domestic private investment.

5.3.3 External Debt and Private Investment

Lastly, the relationship between external debt and domestic private investment was found out to
be positive and statistically not significant with a coefficient of 0.834. A conclusion was
therefore reached that the accumulation of external debts stock in the economy will lead to an
increase in the domestic private investment rate within the economy. Thus it was concluded that
external debt has an effect on private investment positively. Low accumulation of external debt,
leads to high demand of taxes and decrease price in goods thus increasing investment.

These findings were not similar to those of Siti, Ahmad and Saini (2003) in Malaysia who found
that external debt had a long run and negative relationship with private investment.

The debt overhang hypothesis holds that when debts are higher than a country’s ability to
service them, domestic as well as foreign investments in the future will be discouraged because

34
potential investors fear that any increase in output will be taxed to service the debt (Krugman,
1988).

Serven (1997) also agrees that high debt stocks hamper private investments by creating
uncertainties among investors especially in low income countries with debt servicing difficulties.
The crowding out theory holds that debt servicing will crowd expenditures in other areas as
infrastructural and human capital development leading to low investments (Clement, Bhattachrya
and Nguyen, 2005).

There exists no gap to be filled since all researchers positively conclude that external debt
hamper private investment, an increase in debt will reduce the level of private investment in
developing economies. Kenya should ensure the external debt levels remain within manageable
levels so that there’s less need of increasing taxes in an attempt to service the external debt.

5.4 Contribution to knowledge

This study will aid in identifying factors contributing to domestic private investment in Kenya.
The study will help private investors in Kenya to come up with proper strategies on improving
investment locally. Investors will be made aware of what to invest in and forecast any future
occurrence in terms of investments. The scholars as well as economics practitioners will
positively gain knowledge on the factors contributing to domestic private investment in Kenya.

5.5 Recommendations

5.5.1 Real Interest Rate

There are various implications and suggestions that arose from this study. This study shows that
private investment is influenced by macroeconomic factors such as real exchange rates, real
interest rates, and external debts. The government through the Central Bank of Kenya should
ensure low interest rates prevail in the market since high interest rates discourage loan borrowing
thereby lowering levels of private investment.

35
5.5.2 Real Exchange Rate

Appreciation was found to positively influence private investment. Therefore, Kenya should
ensure it runs a stronger currency in relation to foreign currency since this will boost exports and
therefore increase domestic private investment.

5.5.3 External Debt

When investors anticipate a future fall in taxes, they tend to increase their investment. Therefore,
Kenya should ensure the external debt levels remain within manageable levels so that there’s less
need of increasing taxes in an attempt to service the external debt.

5.6 Areas for further research

This study has been based on the determinants of private investment in Kenya. It would be
preferable if other countries were included, test on applicability of various variables, how
investment model would perform in various economies, and also discerning effects of various
variables. Also from the findings, the variables under consideration of the study were found to
determine private investment, however did not lead to a 100% change in private investments.
Therefore, it implies that the other variables that affect the dependent variable. Thus there is need
for establishing other factors that have an impact on private investment in Kenya.

36
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 APPENDICES

Appendix1: Data used for work study

Months Real Interest Real Exchange External Debt Private Investments

Rate Rate KES billion
Jan 2015 2.9 90.8 19.1 18
Feb 2015 2.9 90.6 19.1 18
Mar 2015 2.9 92.3 19.1 18
Apr 2015 2.9 94.7 19.1 18
May 2015 2.9 97 19.1 18
Jun 2015 2.9 99 19.1 18
Jul 2015 2.9 100.6 19.1 18
Aug 2015 2.9 105.3 19.1 18
Sep 2015 2.9 105.5 19.1 18
Oct 2015 2.9 104.8 19.1 18
Nov 2015 2.9 102.5 19.1 18
Dec 2015 2.9 101.4 19.1 18
Jan 2016 2.9 102.6 19.6 20
Feb 2016 2.9 102.8 19.6 20
Mar 2016 2.9 101.7 19.6 20
Apr 2016 2.9 100.9 19.6 20
May 2016 2.9 101.1 19.6 20
Jun 2016 2.9 101.4 19.6 20
Jul 2016 2.9 101.5 19.6 20
Aug 2016 2.9 101.6 19.6 20
Sep 2016 2.9 102.5 19.6 20
Oct 2016 2.9 102.7 19.6 20
Nov 2016 2.9 102.4 19.6 20
Dec 2016 2.9 102.2 19.6 20

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Jan 2017 2.9 103 23 22
Feb 2017 2.9 102.2 23 22
Mar 2017 2.9 103.1 23 22
Apr 2017 2.9 103.4 23 22
May 2017 2.9 103.6 23 22
Jun 2017 2.9 104.7 23 22
July 2017 2.9 103.1 23 22
Aug 2017 2.9 103.7 23 22
Sep 2017 2.9 103 23 22
Oct 2017 2.9 103.5 23 22
Nov 2017 2.9 103.1 23 22
Dec 2017 2.9 103.5 23 22
Jan 2018 2.9 101.3 24 23
Feb 2018 2.9 100.5 24 23
Mar 2018 2.9 100.9 24 23
April 2018 2.9 100.2 24 23
May 2018 2.9 100.4 24 23
Jun 2018 2.9 100.9 24 23
Jul 2018 2.9 100.7 24 23
Aug 2018 2.9 100.5 24 23
Sep 2018 2.9 101.1 24 23
Oct 2018 2.9 103.7 24 23
Nov 2018 2.9 103.5 25 24
Dec 2018 2.9 102.9 25 24
Jan 2019 2.9 101.4 25 24
Feb 2019 2.9 100.8 25 24
Mar 2019 2.9 100.7 25 24
Apr 2019 2.9 100.9 25 24
May 2019 2.9 101.5 25 24
Jun 2019 2.9 103.4 25 24

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Jul 2019 2.9 103.3 25 24
Aug 2019 2.9 103.2 25 24
Sep 2019 2.9 103.2 25 24
Oct 2019 2.9 103 26 25
Nov 2019 2.9 101.8 26 25
Dec 2019 2.9 101.2 26 25
Jan 2020 2.9 101.5 26 25
Feb 2020 2.9 101.8 26 25
Mar 2020 2.9 106.4 27 26
Apr 2020 2.9 107.5 27 26
May 2020 2.9 107.8 27 26
Jun 2020 2.9 107.8 27 26
Jul 2020 2.9 107.6 28 27
Aug 2020 2.9 108.2 28 27
Sep 2020 2.9 108.6 28 27
Oct 2020 2.9 109.2 28 27
Nov 2020 2.9 109.2 28 27
Dec 2020 2.9 109.7 28 27
Jan 2021 2.9 109 28 27
Feb 2021 2.9 109

Entire Study

WORK PLAN
Chapter 1: Completed in October 2022
Chapter 2: Completed in November 2022
Chapter 3: Completed in Dec 2022/Data collection
Chapter 4: Completed in Jan 2023
Chapter 5: Completed in Feb 2023

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Submission: in March 2023

Number Activity Item Amount (Ksh)

1 Literature review Internet bundles, 1500
journal, books
2 Printing and binding Printing of papers 200
of the research
proposal
3 Stationaries Pens, full scaps used 1000
for writing the project
4 Data analysis 1000
5 Printing and binding Typed data, printing 500
of the research papers and binding
project of research project
Total=4200

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