An Analysis of the effects of foreign capital inflows on unemployment: a case study of Kenya

Abstract

Unemployment remains a critical socio-economic challenge in Kenya despite the increasing inflow of foreign capital. This study examines the impact of disaggregated foreign capital inflows on unemployment in Kenya using the Auto-Regressive Distributed Lag-Error Correction Methodology (ARDL-ECM) over the period 2008Q1 to 2023Q4. The foreign capital inflows analyzed include Foreign Direct Investment (Greenfield and Brownfield), Foreign Portfolio Investment ( Equity), Diaspora Remittances, Foreign Debt, and Official Development Assistance (Bilateral and Multilateral). Various diagnostic tests, including autocorrelation, heteroscedasticity, normality, stability, and stationarity, were conducted to ensure data robustness. The findings indicate the presence of a co-integrating relationship between disaggregated foreign capital inflows and unemployment. Empirical results suggest that Greenfield FDI has a significant negative relationship with unemployment in both terms. While, diaspora remittances, FPI Equity and multilateral ODA contribute to reducing unemployment in both periods but insignificant in the long term. Conversely, Brownfield FDI, bilateral ODA, and population growth exhibit a positive relationship with unemployment. The impact of external debt and GDP is mixed, with GDP showing no significant effect in both the short and long run, while external debt has a negative and significant influence in the short run. The study was grounded in the Solow Neoclassical Growth Theory, Dual-Gap Theory, and Keynesian Multiplier Effect Theory to explain the interaction between foreign capital inflows and employment dynamics. Based on the findings, the study recommends that the government foster an investor-friendly environment, support high-potential companies in going public, and enhance collaborations between foreign and domestic firms to maximize technology spillover effects. A key limitation of this study was its reliance on secondary data, which may not fully capture qualitative aspects influencing unemployment trends. Future research could explore the role of the informal sector in employment generation. Keywords: Foreign Capital Inflows, Unemployment