Effect of Foreign Direct Investment on Employment and Welfare in Kenya

Abstract

The principal external source of finance for emerging nations is foreign direct investment. Due to supportive policies throughout the last 10 years, Kenya has managed to attract a notable significant amount of foreign direct investment. Foreign direct investment is felt directly or indirectly, which includes technology transfer, spillovers, employment and training of labourers. Ultimately, the study aims to examine the effect of foreign direct investment on employment and whether it translates to improvement of welfare in Kenya. Specific objectives include:

• To examine the effect of foreign direct investment on employment in Kenya,


• To determine the effect of foreign direct investment on welfare in Kenya.

Welfare was approached from two perspectives, which included the human development index and the Gini index. Secondary annual time series data was used between 1990 and 2020. The study used an autoregressive regression model estimation technique.

Conclusions:

• First, the human development index is a better measurement of welfare compared to the Gini index.


• Second, there exists a negative relationship between foreign direct investment and human development index in the short run.


• Third, foreign direct investment plays a major role in employment creation and improvement of welfare long- and short-term in an economy.

Recommendations are for Kenya Investment Authority to make the investing environment friendly to foreign investors, to reduce the cost of investment licenses and setting up companies and for the government of Kenya to maintain a stable political environment.