The objective of this study was to analyze the relationship between capital flows and Foreign
Direct Investment (FDI) in Kenya.The study establishes the primary factors responsible for
affecting capital flow in Kenya in relation to Foreign Direct Investment (FDI) in Kenya.
Furthermore this paper attempts to investigate the relative influence of these factors to FDI. With
the help of multiple regression model and Factor analysis the primary factors are traced out.
In thestudy, the determinants of foreign direct investmentwere established and estimated.
Multicollinearity problem is taken into consideration among different independent variables and
there is an attemptto eliminate them. Statistical methods were used to do the analysis based on
yearly basis database of different economic factors. Finally some relationships of those factorswith FDI inflow were found. In the context of Kenyan economy, decrease of external debt and
inflation will bring in more foreign exchange reserve which will act as stimulant to foster
One of the recommendations wasgovernment policies should be directed towards improving the
fundamentals of the economy, such as Gross Domestic Product and total external debts, if the
intention is to attract capital inflows.Also, monetary policy should be managed accordingly so as to
control inflation rates. Finally,contractionary measures should be adopted in the fiscal policy so as lower
real interest rates. As for recommendations to academia, it was established that Current account is
irrelevant in determining the FDI inflows in Kenya. Also, the study recommends multipleregression analysis and factor analysis as statistical methods of choice when analyzing capital
flow determinants.

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