Relationship between Macroeconomic Factors and Foreign Direct Investment in East African Community
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Date
2023-11
Authors
Wambua, Mwalya
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Foreign direct investments (FDI) are key for the growth of a nation’s economy, since it transfers
money, technology, and knowledge to the recciving nation. Governments of many countrics
actively seek FDI to promote economic growth and development and may offer incentives.
FDI has resulted from globalization through the integration of local or domestic markets with
international markets across the globe. However, the inflows of FDI into the East African
Community (EAC) remain low compared to other regions. Therefore, the goal of this research
was to examine how macrocconomic factors (exchange rate and GDP) affect FDI in EAC
countries, through infrastructural development, trade openness, inflation, resource endowment,
case of doing business as control factors. The study sought to address two specific objectives;
to examine the effect of exchange rate on FDI in the East African Community; and to establish
if there is an endogeneity of exchange rate and GDP with respect to foreign direct investment
in the East African Community. The target population included Burundi, Kenya, Rwanda,
Tanzania, Uganda, and DRC. However, South Sudan, one of the EAC countries, was excluded
from the study because it had not been reporting its data to the World Development Index. The
study used non-cxperimental research design, and theories such as eclectic paradigm,
Keynesian, and Classical to support study variables. The study used published annual data from
2000 to 2021 to estimate Pooled Panel Ordinary Least Square (OLS) to answer the first
objective and estimated Instrumental Variable (V) method and Control Function Approach
(CFA) to address the second objective. Diagnostic tests, namely normality test,
multicollinearity, and heteroscedasticity were conducted. The study found that several factors,
such as GDP, infrastructural development, trade openness, resource endowment, and Foreign
direct investment (FDI) in the East African Community depends on how easy it is to do
business there, whereas the exchange rate was a drag on FDI. Additionally, the results revealed
that there was an endogeneity of exchange rate and GDP with respect to FDI in the EAC. The
research suggests that policymakers in the EAC need to prioritize improving economic growth
in the region by promoting policies that stimulate economic development. EAC countries can
foster an environment favourable for business growth by reducing regulatory burdens,
promoting transparency, and enhancing the region's ease of doing business generally.
Moreover, policymakers in EAC countries should work to stabilize the exchange rate by
adopting policies that promote macroeconomic stability. Further research is suggested to be
conducted in other regions to compare the results obtained from this study with those obtained
from other regions.
Description
A Project Submitted to the Department of Econometrics and Statistics in the School of Business Economics, And Tourism In Partial Fulfillment Of The Requirements For The Award Of The Degree Of Master Of Economics (Econometrics) Of Kenyatta University, November, 2023
Keywords
Macroeconomic, Foreign Direct Investment, East African Community