The impact of investment climate on foreign direct investment in East African community partner states

Abstract

The last decade has witnessed dramatic decline in the levels of foreign direct investments (FDI) flowing into the East African Community (EAC) region. In an attempt to explore the key factors behind this poor performance of FDI, the study focused on the relative importance of various economic variables among them nominal GDP, real GDP per capita and real GDP growth rate. The study also integrated soft variables such as the level of infrastructure development, literacy levels and interest rates in assessing the attractiveness of the EAC countries to FDI inflows. The study adopted a panel data econometric methodology where a multi-country panel data for the three EAC partner states; Kenya, Tanzania and Uganda for the period 1996 to 2005 were employed to explore factors responsible for influencing the decision of foreign investors. The results of the study reveal that per capita income, level of infrastructure development, availability of adequate human capital and GDP growth rate levels are significant and important decision parameters in choosing whether or not to locate an investment in a particular country. The findings also show wide disparity in FDI policies across the three countries. The study therefore recommends that the three countries step up efforts of encouraging improvement in the levels of the identified parameters in order to boost their attractiveness to FDI inflows. Improvement in other aspects of the investment climate should also be pursued in order to realize a robust growth and sensitive increase in FDI inflows to the region. To achieve the same, the three countries also need to harmonize their investment policies. Accordingly, the results and discussions of the study have been organized in five chapters. Chapter 1 discusses the conceptual framework, significance of the study, the problem of the study, the scope and the purpose of the investigation. It also contains the hypotheses and research questions. Chapter 2 which focuses on review of literature pertaining to FDI highlights the types and motivations of FDI, theories of FDI, traditional and current determinants of FDI and the existing empirical studies. Chapter 3 presents the methodology adopted. It includes the theoretical framework, specification of the model, data types and sources and expected signs of the coefficients. Chapter 4, on results, lays out the summary statistics, correlation results and regression results. The study's conclusions and recommendations are presented in Chapter 6. The paper ends with an outline of a bibliography and list of appendices.