ABSTRACT

Developing countries have invested heavily in pursing policies and strategies to attract foreign direct investments to augment the existing capital stock. These efforts have seen a substantial increase in the flow of foreign direct investments to developing countries. For the last two decades foreign direct investments inflows in Kenya have risen substantially but the effect of the rising inflows on economic growth has not been felt. The growth in foreign direct investments inflows has been coupled with an upsurge in income repatriation, as foreign investors repatriate earnings and it is probable that the whopping repatriation has eroded the benefits associated to such inflows. This study sort to establish the relationship between income repatriation, foreign direct investments and economic growth using time series data from 1970 to 2017. The data was obtained from World Bank United Nations Conference on Trade and Development, and Central Bank of Kenya. The study used vector autoregressive modelling to show the direction of causality between foreign direct investment, income repatriation and economic growth and to analyze the impulse response. After establishing the direction of causality, autoregressive distributed lag modelling was applied to show the short run and the long run effect of income repatriation to foreign direct investment and income repatriation to economic growth respectively. Private domestic investments, trade openness, human capital, real exchange rate, inflation and real interest rate were used as the extraneous variables. From the results of the study, Income repatriation was found to have a positive and significant effect on foreign direct investments in the short run and in the long run but had a negative significant effect on economic growth in the short run and in the long run. From the findings of the study, the income repatriation has an undesirable effect to the economy and the government should consider pursuing policies that not only attracts foreign investment into the country but also policies that require the foreigners to reinvest a certain proportion of their earnings to the host country. Equally, it is evident that private domestic investment has a positive and significant effect on foreign direct investment and economic growth in the short run and in the long run and thus, the government should also consider policies geared to promoting and encouraging private domestic investment more than the foreign direct investments as growth in private domestic investment has a positive cascading effect on foreign direct investment and economic growth in the short run and in the long run.