Effect of Foreign Direct Investments, Human Capital and Infrastructure Development on Kenya’s Manufacturing Exports to Comesa Region

Abstract

Kenya‘s manufacturing value added as a percentage of GDP (Gross domestic product) continues to decline over years for example from 12% in 2008 to 9.2% in 2016, this could be attributed to heavy reliance on agricultural exports. Manufacturing sector could be improved by enhancing manufacturing exports to regional trade blocs; such as COMESA (Common Markets for Eastern and Southern Africa). Kenya is an active participant in regional trade and the main exporter to COMESA. Many studies have been conducted to establish the determinants of general exports in relation to population, GDP and exchange rates. However, the studies fell short of considering the importance of macroeconomic variables such as human capital development (HCD), foreign direct investment (FDI) and infrastructure development (ID). The purpose of this study was to explain the effects of human capital development (HCD), foreign direct investment (FDI) and infrastructure development (ID) on Kenya‘s manufactured exports to COMESA region. The specific objectives were to determine the effect of foreign direct investments on Kenya‘s manufacturing exports to COMESA, to analyze the effect of human capital development on Kenya‘s manufacturing exports to COMESA and to determine the effect of infrastructure development on Kenya‘s manufacturing exports to COMESA region. Gravity model anchored on the theory of international trade was used and adopted a correlational research design. Panel data was sourced from World bank and African Development Bank for eighteen COMESA members for the period 2005–2016. Unit root tests were estimated using Im-Pesaran and Shin, and Levin-Li-Chu tests. Hausman Test was used to choose between fixed and random effect models. Results of fixed effect model indicated that FDI was positively significant (β1 = 0.0774) determinant of Kenya‘s manufacturing exports (p – value 0.0380< 0.05) the regression results further documented that HCD had positive and significant (β2 = 2.4183) effect on Kenya‘s manufactured exports (p –value 0.0000 < 0.05). The research results further proved that manufactured exports were positively determined significantly (β3 = 0.4989) by infrastructure development with (p – value 0.0010 < 0.05). This study recommends that Government of Kenya and other stakeholders should invest more in infrastructure, improve human capital through education, training, health, nutrition and housing to increase labor productivity and enhance production of manufacturing exports. Policies aimed at increasing net FDI inflows such as generation of good investment climate