Effect of Infrastructure Development on Domestic Private Investment and Foreign Direct Investment in Kenya

Abstract

Kenya has prioritized infrastructure development since its independence. This is evidenced in the seasonal paper number 10 of 1965, various economic development policies of the 1970s, National development policies of the 1980s, Economic Recovery strategy for wealth and employment creation of 2003-2007, Current medium-term plans of 2008 to the present term, as well as the vision 2030. All these economic planning strategies aim to provide an excellent environment for infrastructure development in the country to facilitate industrialization and make Kenya an attractive market economy. The availability of quality infrastructure boosts economic productivity and the cost of production, improves the quality of life, raises the country's regional and global effectiveness, boosts domestic private investment (DPI), attracts foreign direct investment (FDI), and helps modernize the country. There is an evident effect of infrastructure development on DPI and FDI, as seen by the empirical literature. However, no study has analyzed whether the growth in infrastructure development is the reason for the structural change in FDI inflow and DPI development in Kenya. FDI and DPI in Kenya had a more or less uniform in trend from 1970 to 2006, to a significantly steeper upward trend from 2007 to 2021. This means that there is an observed structural change in both FDI and DPI. The study used a logistic regression model to explain the shift in the mean values from the low mean observed in 1970-2006 to a higher mean observed in 2007-2021, making this study different from any other study carried out on the subject. The first objective of the study was to analyze the effect of infrastructure development on FDI, while the second objective was to analyze the effect of infrastructure development on DPI in Kenya. Flexible accelerator theory on investment was the central theory of the study. The study used a logistic regression model to analyze the effect of infrastructure development on FDI and DPI in Kenya, using annual time series data from 1970 to 2021. From the results of the study, ICT infrastructure had a positive and significant effect on both FDI and DPI at a 5 per cent level of significance. Energy infrastructure had a positive and significant effect on FDI but for DPI, it had a positive and insignificant effect. Transport infrastructure, on the other hand, had a positive and significant effect on DPI, but it also had a positive and insignificant effect on FDI inflow in Kenya. GDP growth rate, inflation rate and exchange rate were used as the control variables in the study, and they were statistically insignificant for both FDI and DPI at a 5 per cent level of significance. Based on these findings, the government should prioritize ICT development since it has a ripple effect on the FDI inflow and DPI development. Investing in cyber security measures and cloud networking will give investors confidence in the security of their data and, hence, the urge to invest. Foreign investors prioritize energy generation capacity in the host country. Therefore, the government should prioritize expanding the energy supply to attract more investors. Domestic investors, on the other hand, rely on transport infrastructure. Therefore, the government should see how to reduce road congestion, port clearance bureaucracies, and freight charges to boost investment. The study concludes that infrastructural development is a prerequisite for both FDI inflow and DPI development in Kenya.