FDI and Trade Competitiveness in Kenya: A Long-Run Cointegration Analysis of the Export Nexus

The FDI-export nexus is critical to Kenya’s international trade performance, yet its long-run resilience mechanisms remain empirically contested. This study investigates the dynamic and long-run equilibrium effects of Foreign Direct Investment (FDI) on Kenya’s trade competitiveness (TC) from 1993 to 2023. Grounded in New Open Economy Macroeconomics (NOEM), the research employs an explanatory design using annualised data from the World Bank, IMF, and Central Bank of Kenya. Methodologically, the study utilises the Augmented Dickey-Fuller (ADF) test, Johansen Cointegration, and the Vector Error Correction Model (VECM) to identify structural relationships. Results confirm that all variables are integrated of order one, I (1), with a stable long-run cointegrating relationship. Granger causality tests reveal bi-directional flows between GDP and TC, and a robust unidirectional causal flow from FDI toward TC. VECM estimates show that FDI (β = 0.315, p < 0.05) and GDP (β = 0.150, p < 0.05) are significant long-run drivers of competitiveness, with the error correction term (ECT) validating rapid convergence to equilibrium. These findings demonstrate that FDI functions as a driver rather than an outcome of competitiveness. Consequently, the study recommends that the Government of Kenya and the Central Bank prioritise export-oriented FDI (EO-FDI) and GDP-driven diversification. This research contributes to international trade policy by providing precise time-series insights into the FDI-export performance nexus in emerging economies