Institutional, Governance and Economic Factors Influencing Foreign Direct Investment Inflows on East Africa
Karau, James Ngondi
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Development economists suggest that Foreign Direct Investment (FDI) is important for economic growth as it provides the much needed human and physical capital as well as improved technology for investment. East Africa exhibited the lowest in-flow of FDI when compared to other African Regions, despite the substantial policy and structural changes as well as economic integration that had been taking place in the East Africa during the study period. The main objective of this study was to examine the institutional, governance and economic factors influencing FDI Inflows in Eastern African Countries. Non-experimental panel data analysis was conducted for eight Eastern African Countries during the period 1996-2010. This study employed an econometric technique for analysis of various variables included in the model. FDI was the endogenous variable on which the exogenous variables were regressed. These exogenous variables included institutional, governance and economic factors that influenced FDI. A one-way fixed effects least squares dummy variable model was estimated. The study found that institutional and governance variables particularly control of corruption, political stability, rule of law and infrastructure significantly influenced FDI inflows to East Africa. Other than institutional variables, other factors like inflation, economic growth and rate of return on investment were also found to be significant. But external debt service did not significantly influence FDI inflows. The findings suggested that East African governments needed to strengthen their institutional base and governance as well as improve their macroeconomic environment in order to attract more FDI. The EA Countries should invest heavily on infrastructure, rule of law and control of corruption to enhance FDI inflows.