Foreign Investment and Trade Balance Dynamics in Kenya: A Decadal Review

Abstract

This study examines relationship between Financial Account Balance and Merchandise Trade Balance in Kenya, while controlling for gross domestic product (GDP), inflation, and exchange rate. Kenya has continued to experience a persistent merchandise trade deficit because imports of petroleum products, machinery, industrial supplies, and intermediate goods have generally exceeded export earnings. At the same time, Financial Account movements have remained important in financing external-sector activities and influencing the wider balance-of-payments position. Unlike foreign direct investment, Financial Account Balance is a broader measure that includes cross-border direct investment, foreign portfolio investment, other investment, financial derivatives, and reserve-related transactions. The study therefore focuses on Financial Account Balance rather than FDI.