Developing Country Studies www.iiste.org ISSN 2224-607X (Paper) ISSN 2225-0565 (Online) Vol.6, No.10, 2016 88 The Relevance of Educational Investment to Economic Growth in Kenya Daphen Otieno Ojala Rongo University College ,Department of Social Sciences and Humanities,P.O Box 103-40404, Rongo, Kenya Abstract It is commonly assumed that education has an important positive effect on economic growth, but to date the evidence for this assumption has been surprisingly weak. This study explores the relationship between the role of investment in education and economic growth. The study is guided by two specific objectives; to determine the significance of physical capital formation on economic growth and to establish the contribution of labour input to economic growth. It uses time series techniques to investigate the relationship between government education expenditure per worker and economic growth in Kenya during the period 1963 to 2014.The data were collected from Kenya Government Ministries, Kenya National Bureau of Statistics and from the World Bank. The study has used the multiplicative Cobb-Douglas production function, in which human capital is treated as an independent factor of production, as in the human capital augmented growth model. Unit root and Granger- causality tests are carried out to make allowance for dynamic relationships, non-stationarity, and spurious regression problems. Empirical results show that education expenditure per worker has a positive and significant impact on economic growth, both in the long run and in the short run. Cointegration estimates show that an increase of 1 percent in education per worker raises output by 0.5 percent in the long run. Also, in the long-run, a 1percent increase in fixed capital formation raises output by 0.15 percent, and a 1 percent increase in the use of labour leads to a 0.21 percent decrease in output in the long run. Correlation tests also show that there is a positive relationship between investment in education and economic growth. These results suggest that it is worth investing in education because it contributes to economic growth. The Government of Kenya and the private sector of Kenya need to consider increasing their investment in education. Keywords: Educational Investment and Economic Growth Introduction Since late 1980s, much of the attention of macroeconomists has focused on long-term issues, notably the effects of government policies on the long-term rate of economic growth. This has been in recognition of the fact that labour, capital and technological advancement have been the three big endogenous driving influences which promote sustainable economic development (Schulz, 2002). Now, human capital investment is becoming more and more important to economic growth. This change in emphasis has come as a result of the increasing realization that the difference between prosperity and poverty for a country seems to be dependent upon how fast it grows its human capital over time. In this context, education has been found to be fundamental in the development of human capital (Foster and Rosenzweig, 2009). Thus, the stock of education or human capital, usually proxied by average years of schooling in the working-age population, seems to influence human development. Worldwide, education is viewed as a principal route out of poverty in many countries, as evidenced by the amount of investment that goes towards education in relation to other programmes in most countries (Knack and Keefer, 2010). Many countries of the world have allocated huge sums of money in their national budgets to enhance attainment of education to the citizens (World Bank, 2010). Education is attracting growing interest from economic policy-makers, perhaps for two main reasons. First, the best available economic evidence suggests that rising educational attainment is an important influence on economic growth. Secondly, education accounts for a sizeable share – around 14 per cent in the world as a whole – of public expenditure (Barro and Lee, 2001). The expansion of formal education and training in developing economies in recent years has had substantial and easily observed implications for the skill levels and skill structures of the populations and employed workforces of these countries. Governments, policy-makers, and civil society have emphasized that developing countries need to invest more in education and ensure that their systems of education are efficiently managed, so that the limited funds allocated to this sector can have maximum impact, and that cost-recovery measures are adopted (Crespo and Lutz, 2007). For instance, in the sub-Saharan Africa, investments towards education account for between 25 percent to 60 percent of the national budgets of these countries (Lutz et al, 2007). During Kenya's independence in 1963, there was shortage of skilled labour which limited the growth expansion of the country. To improve on this situation, the government of Kenya devoted a large share of its budget to expanding education. For instance, the education sector’s share has been between 28-32 percent of the total budget based on the 2005-2011 budgets (KNBS, 2010; Ngang’a, 2010). About 30 percent of the national budget goes to education. This investment goes towards enhancing the free primary school education, subsidized secondary school education and loans to the