Impact of Capital Flight on Private Investment in Kenya

Purpose: Private investment is the engine of growth in an economy. It is a major source of employment besides positively contributing to national output. Conversely, when capital flight occurs, domestic private savings and resource mobilization is undermined thus brings about low private investment. This research paper analyses the impact of capital flight on private investment in Kenya. The paper offers a summary of why private investment in Kenya is undermined by capital flight due to the resource gap which it creates. Further, it develops an equation to estimate investment which is derived from the flexible accelerator theory of investment.Methodology: In order to examine the relationship between capital flight and private investment, time series data from 1970 to 2012 is employed and OLS regression analysis is used.Results: The study found that capital flight has an adverse effect on private investment. Econometric results of this study support the existence of a negative relationship between capital flight and private investments. The study shows that external debt,change in terms of trade, real interest rate and ratio of private credit to GDP also affects private investment.Unique contribution to theory, practice and policy: In order to increase new levels of private investments, government ought to put in place measures to regulate financial flows despite the policies and laws development countries and tax havens. The government should put in place strategies to encourage bias in home investment. This will encourage private investment and reduce capital flight. Lastly, reforms in the financial and regulatory system at the global level are required as well as in international institutions such as World Bank, World Trade Organization and International Monetary Fund. This requires a great deal of coordination between the Kenyan government and the international institutions.