Analysis of Macroeconomic Factors Affecting the Performance of Manufactured Exports in Kenya

Abstract

Many developed countries have recognized the advantages of globalization and policies of improving manufactured exports performance and competitiveness in order to promote manufacturing sector. The purpose of this study was to analyze macroeconomic factors that affect manufactured exports performance in Kenya for the period 1976 - 2015. The specific objectives of the study were to determine the effect of terms of trade, trade openness, real effective exchange rate, gross domestic product and foreign direct investment on performance of manufactured exports. The study adopted International Trade Theory, Heckscher-Ohlin (H-O), Rybczynski Theory and Stolper- Smuelson Theory and employed explanatory research design. The study was carried out in Kenya manufacturing sector and used content analysis to obtain annual time series data from Kenya National Bureau of Statistics and World Integrated Trade Solution. The study used descriptive statistics and Johansen and Juselius co-integration test and the Vector Error Correction Method (VECM) was employed in the empirical analysis to evaluate the relationship among the variables. Results indicate that the series had unit root and were integrated of order one and the variables also had structural breaks that were variable specific. Results of Johansen co integration showed that there were long run co integrating relations. Results of Vector Error Correction Model showed that Foreign Domestic Investment (p=0.000), Real Effective Exchange Rate(p=0.000), Trade Openness(p=0.000) and Terms of Trade(p=0.000) had significant and positive effect on Kenya's manufactured exports. GDP(p=0.002) had negative and significant effect on Kenya's manufactured exports.  The results of this study contributed to the existing body of knowledge and will assist manufacturing managers to make long-term decisions based not on long-standing rules and regulations but based on thorough scanning of environments.