Thesis:

The effect of trade liberalization on economic growth in Kenya

Trade liberalization and its impact on economic growth has been a subject of debate for many years both at international and local level. The debate has been lengthened by the fact that there are not theoretical underpinnings that directly link trade liberalization to economic growth or are there any absolute terms and conditions by which trade liberalization leads to economic growth. Trade liberalization is the removal or reduction of barriers to trade that ensures free movement of goods and services from one nation to another. Kenya liberalized their trade with the hope of having dynamic gains from trade, and that the liberalization will lead to economic growth and, consequently, improve welfare. However, its key development challenges still include poverty, inequality, youth unemployment, continued weak private sector investment, and the vulnerability of the economy to internal and external shocks. This study aims to examine the effect of trade liberalization on economic growth in Kenya and finding empirical answers to this phenomenon is what motivated this study. The objective of the study is to examine the effect of manufacturing output, foreign direct investment and import on Kenya’s GDP. Foreign direct investment, import and manufacturing output will be tested to determine their effect on the Kenyan economic growth. The underpinning theories for this study are the theory of comparative advantage, Heckscher-Ohlin factor endowment theory and the new trade theory. This study adopted descriptive research design. Time series data spanning 1990 to 2022 was used for the study. The data was meticulously sourced from the World Bank. Time series diagnostic tests were carried out on the data. This study adopted descriptive designs. Vector Autoregressive (VAR) model was applied. Results showed that Foreign direct investment inflows to Kenya(β= -17.345, p=0.005<0.05), imports of goods and services (β=2.259, p=0.045<0.05) and manufacturing output (β=8.421, p=0.001<0.05) had a significant effect on economic growth in Kenya. In conclusion, these findings imply that although foreign direct investment (FDI) may have negative effect on Kenya's economic growth, other factors such as imports and manufacturing output support economic growth. In order to support long-term economic growth, Kenyan policymakers are recommended to consider ways to draw in beneficial FDI while simultaneously emphasizing the manufacturing sector. Furthermore, trade policies that facilitate imports led-growth could also be beneficial for the economy. Future researchers are recommended to focus on trade liberalization and public budget this will examine the relationship between trade liberalization and government income and expenditure in developing nations.