Determinants Of foreign Direct Investment Inflows in Uganda

Abstract

In the progression towards economic growth, countries consider investment as a critical feature in raising productivity levels by boosting technological progress and reducing the unemployment rate. In recent years, the Government of Uganda has enacted policies to entice Foreign Direct Investment (FDI) in the view of creating more jobs and bolstering the economy. However, the performance of FDI has registered mixed understanding of trends with oscillations rather than a clear growth trajectory. One would then wonder, what could be the determinants of FDI inflows in Uganda. A longitudinal research design comprised of a 29-year time series was used with inflation rate, interest rate, Balance of Payment, GDP percapita and exports serving as the determinates of FDI inflows in Uganda. Several diagnostics tests were conducted. Johansen test for cointegration which revealed that the long run relationship exists amongst the variables. Pearson Correlation technique was used to establish the level of relationship between the macro economic factors and FDI inflows. Vector Error Correction Model was constructed to determine the contribution of these variables to FDI inflows. Results from the study revealed that Inflation, exports, interest rate and GDP percapita determine the FDI inflows in Uganda. Foreign investment is driven by the size of GDP percapita of Uganda, implying that investors target more domestic market. An average of 6% inflation rate is desired by foreign investors in Uganda. And, a high interest rate of Uganda attracts more FDI inflows meaning that investors require a safe and stable business environment. It was also found that balance of payment is statistically insignificantly related to FDI. This means that the relationship could actually be by chance. Government is therefore urged to; i. Devise mechanisms and policies that target improving percapita income of the population. This will increase the market size hence more FDI inflows. ii. Monetary policy should target maintain inflation rate at 6.4%. This is highly required to support foreign investments. iii. Target import substitution and provision of incentives for investors that target export market to attract more export oriented FDI into the economy