Economics

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Browsing Economics by Subject "economic growth"

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    Effect of financial deepening on private investment in Kenya
    (Chuka University, 2024-10) Chepkorir Brendah
    Private investment remains an important sector in the growth of economy and sustainable development in Kenya. It is envisioned to create job opportunities, distribute income and alleviate poverty. The underperforming growth rate of private investments that is below the expected growth rate of 24% has been witnessed in the past years. Since 1980, the highest growth that has been achieved is 15.2% in 2014. It then declined to 12.96% in 2021, 13.34% and 13.40% in 2022 and 2023 respectively, which are much below the projected growth rate. Existing studies in Kenya lack substantial inquiry on the relationship between financial deepening and private investment and have dealt with them separately without linking the two in a dynamic framework. Additionally, most of those studies tend to rely on a limited set of indicators of financial deepening, while employing different methods for analysis that may not be appropriate for unbiased results. The current study intended to determine the effect of financial deepening on private investment. Gross Fixed Capital Formation for the general private sector measured private investment, a dependent variable. Further, financial deepening (independent variable) was proxied by Private sector credit broad money and bank deposits (savings). The study also included public investment real interest rates and GDP Per capita as control variables. Financial intermediation theory and financial liberalization theory are the theories that guided the study. A causal research design was adopted and data were obtained from KNBS and World Development Indicators websites. STATA software was used in the analysis of the collected data. ARDL model was employed and the ECM was estimated since there was cointegration. From the findings, Private sector credit, Broad money and Bank deposits were statistically significant with positive coefficients of 0.32, 0.39 and 0.49 respectively in the short run. An increase in 1 percent of private sector credit, Broad money and Bank deposits cause private investment to increase by 0.32, 0.39 and 0.49 percent respectively. The findings show that private sector credit has a positive effect, while broad money and bank deposits have negative effect on private investment in the long run. The three models were good predictors of private investment as shown by R-squared values of 0.96, 0.94 and 0.94 respectively. The study concluded that financial deepening is important for growth of private investment in Kenya. Therefore, Financial intermediation theory is applicable in Kenya. The study recommends policymakers to conceptualize the policies that aim at facilitating financial access and inclusion for the marginalized groups in remote and rural areas. Further, the government needs to support financial sector through enhancing the growth of microfinance institutions. This will facilitate the provision of credit and savings services to individuals earning low income and owning small businesses.
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    Effect of fiscal policy variables on private investment in Kenya
    (Chuka University, 2024) Chege Cecilia Njeri
    The tenacity of the country's entrepreneurs and the favorable climate has been credited with the rapid expansion of private sector activity in the Kenyan economy. New technology and increased private investment propel the country's economy toward full employment, where resources are best used and economic development is achieved. Investment levels should be over 32 percent of Gross domestic product, with state investment comprising above 9 percent of Gross domestic product and private investment being 24 percent of Gross domestic product, according to Vision 2030. This objective does not appear to be attainable at the current growth pace. Several studies have examined the nexus between fiscal policy variables and private investment. However, there are mixed findings across countries and regions. For instance, some studies find a positive relationship, others find an insignificant effect, while others find a negative relationship. The contrasting findings could be due to differences in methodology, measurement of variables or country specific differences. Kenya has a dynamic economy with unique characteristics. It is therefore necessary to conduct further study in the country using a robust methodology and recent data. This study contributes to the existing literature by providing an empirical investigation of the effect of fiscal policy variables on private investment in Kenya using data covering the period of 1980- 2022.The specific objectives were; development government expenditure, recurrent government expenditure and corporate tax effect on private investment in Kenya. The study's theoretical foundations included the Keynesian Approach (Crowding in and crowding out) model and the Neo-classical Approach Theory (Tobin’s Q 1969). To find the casual effect link between the variables, a casual study design was used. A sample of 42 years from the yearly series data was taken from the websites of the African Development Indicators, Kenya National Bureau of Statistics, and Kenya Revenue Authority for the years 1980 to 2022. The study employed the autoregressive distributed lag (ARDL) model and the ECM was estimated since there was cointegration. It was found that development government expenditure had a positive (1.3860) significant effect on private investment in the short run and a negative (-1.2120) insignificant effect on private investment in the Long run. This could have been attributed to by factors such as efficient resource allocation in the short run. Government spending on infrastructure, Social security, education, research and technology has a positive effect on private investment. There was a negative (-0.3631 and -2.7596) significant effect of recurrent government expenditure both in the short run and Long run respectively on private investment in Kenya. This implies that more government spending on recurring costs may increase the demand for borrowing by the government, which would raise interest rates hence, crowd-out private investments. The findings demonstrated that corporate tax had a significant negative (-0.3088) effect on the short run and positive (0.4161) effect on the Long run on private investment in Kenya. A rise in corporate taxes immediately raises a company's short-term investment costs. Higher taxes lower businesses' after-tax profits, which may deter them from expanding their operations or making new investments. In the long run, businesses might eventually modify their tactics to account for increased taxes. This entails streamlining their operations to lessen the effect of taxes on investment, maximizing their capital structure, or looking for tax breaks. According to the study, the government is recommended to allocate funding for development in a balanced manner that considers both the short-term and long-term benefits of stimulation. It suggests that the government implement changes to lower costs and improve the efficacy of ongoing expenditures. This means reducing bureaucracy, optimizing staffing levels, and streamlining the procurement process. In order to facilitate investment planning, a consistent corporation tax policy may be implemented by allocating revenue money to worthwhile endeavors that will increase private investment in Kenya. Future studies may be done targeting other variables as well as in other countries.