An Analysis Of The Determinants Of Private Sector Investment In Kenya Using The Autoregressive Distributed Lag (ARDL) Approach

ABSTRACT

The study sought to analyze the determinants of private investment in Kenya. The problem of ambiguous results of existing studies, mainly stemming from inappropriate econometric methods, called for further study of methodology and empirical model building. Results from numerous studies that have employed autoregressive distributed lag (ARDL) approaches are more likely to be persuasive than their predecessors. Primary objectives of the study were investigation of determinants of private sector investment and determination of the causal relationship between private sector investment and real gross domestic product. Various specific economic indicators were the data type of interest since the study was purely of economic nature. The study used secondary data, sourced from World Bank and International Monetary Fund. An advanced econometric technique, the ARDL model, was employed in data analysis to help in addressing the objectives that the study sought to address. The study found that real Gross Domestic Product (GDP) and trade openness were the main determinants of private investment in the long run. However, in the short run, real GDP remained an important variable in explaining variations in private investment while openness was no longer important switching with inflation which was found to be important. There is a unidirectional causality effect where private investment granger causes real GDP and not vice versa recommending deeper understanding of factors that influence GDP in the long run and short run. Gross domestic product being a major determinant of private sector investment informs and guides policy makers in quest to providing stable macroeconomic conditions in the economy. Moreover, to ensure sustainable economic development it’s upon policy makers to ensure that local industries are protected since the results indicate an inverse relationship between private investment and trade openness which is a proxy to liberalization.