Effect of Stock Market Performance on Foreign Direct Investments in East Africa

Abstract

This study investigates the effect of stock market performance on Foreign Direct Investment (FDI) inflows in East Africa, focusing on Kenya, Rwanda, Tanzania, and Uganda. Utilizing secondary time series data spanning 2013 to 2022, the research examines the relationship between stock market indices, as measures for market performance, and FDI inflows. Inflation measured by Consumer Price Index was used as a control variable. A descriptive research design and multiple regression analysis were applied to evaluate the data and diagnostic tests confirmed the reliability and validity of the model. The model’s adjusted R-square value indicates that stock market performance and inflation account for 59% of the variability in FDI inflows, with the remaining 41% attributed to factors not considered in the model. Findings revealed a strong and positive relationship between stock market performance and FDI inflows, with stock market indices emerging as a significant determinant. Inflation demonstrated a smaller but significant positive effect, suggesting that moderate inflation levels attract foreign investments. These findings highlight the critical role of stock market performance in enhancing investor confidence and driving foreign investments in the region. The findings offer valuable insights for policymakers, investors, and financial analysts, emphasizing the importance of fostering stable stock markets to attract foreign capital and bridge financing gaps critical for economic development in East Africa.