The Moderating effect of governance quality on the relationship between foreign capital inflows and economic growth in Kenya

Abstract

Foreign capial has gradually increased its inflows into Kenya during the past several years and is touted to play a role in enhancing development of various economic aspects. The purpose of the study was therefore to analyse the moderating influence of governance quality on the effects of foreign capital inflows on economic growth in Kenya. Specifically, the study analysed the effect of foreign direct investment, foreign portfolio inflows, diaspora remittances and official development assistance on economic growth in Kenya. The study also analysed the moderating effect of governance quality on the relationship between foreign capital inflows and economic growth in Kenya. The study was grounded on the Neoclassical Growth Theory, Institutional Theory and the Dependency Theory. The positivism research philosophy was also employed. The study also adopted an explanatory research design. The study collected secondary data from the CBK. The data was collected on the variables for the period between 1993-2022. The collected study data was analyzed using descriptive and inferential analysis. The study found out that there was a significant influence for development assistance, foreign portfolio inflows, diaspora remittances and governance on economic growth while an insignificant influence was recorded for foreign direct investment on economic growth in Kenya. The study recommends that the government should create more investment opportunities for the diaspora by developing attractive investment vehicles such as diaspora bonds, real estate opportunities, and small business ventures. The study also recommends improving the governance of ODA funds by adopting transparent monitoring and evaluation systems to ensure funds are used efficiently and for their intended purposes. The study also recommends a comparative study be conducted with other East African countries and or developing countries to provide a broader perspective on how different economies are utilizing foreign capital.