Effect of Foreign Direct Investment Inflows on Economic Growth in East African Community

Abstract

Foreign direct investment plays a critical role in fostering economic growth, particularly in developing regions such as the East African Community. Despite its recognized potential, the impact of FDI inflows on economic growth remains underexplored in the context of EAC member countries. This study aimed to examine the effect of FDI inflows on economic growth in five EAC countries—Kenya, Uganda, Tanzania, Rwanda, and Burundi—over the period 2008–2022. Grounded in the comparative advantage theory, neoclassical growth models, and the monopolistic theory of FDI, the study explored FDI inflows as the independent variable, with economic growth (proxied by log GDP) as the dependent variable. Public debt, exchange rates, inflation, high technology goods, and balance of payments were included as control variables to provide a comprehensive analysis. A descriptive research design was adopted, using secondary panel data sourced from the World Bank database. Descriptive statistics, correlation analysis, and a random-effects generalized least squares (GLS) regression model were applied to analyze the data. The model explained 57.93% of the variance in economic growth (R² = 0.5793), with a highly significant Wald chi-squared statistic (93.63, p = 0.000). The regression results revealed that FDI inflows had a positive and significant effect on economic growth (β = 0.1993, p = 0.011), highlighting the importance of foreign investments in driving economic performance. Exchange rates also had a positive and highly significant impact (β = 0.3395, p = 0.000), while public debt (β = -0.1445, p = 0.022) and BOP (β = -0.0663, p = 0.017) negatively influenced economic growth. Inflation (β = -0.0044, p = 0.949) and high technology goods (β = 0.0179, p = 0.781) were statistically insignificant. The study concludes that FDI inflows significantly contribute to economic growth in the EAC, emphasizing the need for policies that create a favourable investment climate. Exchange rate stability was also identified as a key driver of growth, while high public debt and adverse BOP conditions were found to hinder economic performance. Policymakers are recommended to adopt sustainable debt management strategies, promote export diversification, and stabilize exchange rates to enhance the region’s attractiveness to investors. Further, regional collaboration on trade and investment policies can maximize the benefits of FDI for economic growth. For future research, the study suggests exploring the role of institutional factors such as governance and regulatory frameworks in influencing the relationship between FDI inflows and economic growth. Investigating sector-specific impacts of FDI would also provide actionable insights for targeted policy interventions. Additionally, incorporating Environmental, Social, and Governance considerations into the analysis could reveal the sustainability of FDI-driven growth.