The Impact of globalization on foreign direct investment in Kenya and South Africa

Abstract

Given that emerging economies in Africa are becoming increasingly integrated into the global economy, it is foreseeable that shocks that occur within these developed economies could have an impact on their investment and other macroeconomic fundamentals. Using panel data, the study assesses Foreign Direct Investment (FDI) in Kenya and South Africa for the period between 1970 and 2014 to show that the level of globalization (as measured by the KOF Index of Globalization) of the United Kingdom, France and Germany do influence the level of FDI in Kenya and South Africa. Market size, trade openness, inflation rate and exchange rate risk are used as control variables in the study. The Random Effects model was utilized to estimate the parameters in the model and as a result, it was found that the level of globalization in the United Kingdom and in Germany do have an impact on FDI inflows into Kenya and South Africa. The level of globalization in France is, however, found to not be a statistically significant determinant of FDI in these two markets. The level of inflation was also found to be statistically insignificant in explaining the level of FDI in Kenya for the time span under analysis