Abstract:
The government of Kenya has continuously made efforts to promote private investment
environment through public investment in varied forms of infrastructure as well as in
implementing policies on expenditure management so as to attract private investment. Studies
have shown that private investment has more impact on economic growth than public
investment. Despite this, public investment in Kenya has been growing at a faster rate than
private investment while economic growth has been low, stagnant or declining over the years.
This paper investigated the effect of public investment on private capital formation in Kenya
using rigorous dynamic time series analysis. It also investigated the moderating effect of interest
rate, openness to trade, exchange rate, and credit to private sector on the relationship between
private and public investment. A causal research design was employed and the non-probability
purposive sampling technique was used to select the sample of 36 year's time series data for the
period 1979-2015. Diagnostic tests were performed on normality, lag order selection, residual
autocorrelation, collinearity, and heteroskedasticity. Using the error correction methodology, the
findings indicated that public investment is complementary to private investment in Kenya and
thus consistent with the crowding in hypothesis both in the short run and long run. Gross
domestic product, credit availability and exchange rate had positive and significant effects on
private investment while openness to trade, and real lending interest rate had a negative and
significant effect on private investment. |
International Journal of Social Science & Economic Research
