Effect of Foreign Direct Investment on Economic Growth in East Africa

International Journal of Research and Innovation in Applied Science (IJRIAS) | Volume VI, Issue IV, April 2021|ISSN 2454-6194

Effect of Foreign Direct Investment on Economic Growth in East Africa

Wycliffe Mugun
Department of Economics, Kaimosi Friends University College, Kenya

Abstract-The low economic growth rate coupled with high population growth makes poverty alleviation in Africa increasingly difficult. The average annual flows of FDI into Africa doubled in the 1980’s compared with the 1970s. However, owing to the fact that there are limited studies on foreign direct investment, various studies indicate divergent views on the effect of foreign direct investment on economic growth. For this reason, it is not clear whether or not foreign direct investment affect economic growth in East Africa. The main objective of this study was to investigate the effect of foreign direct investment on economic growth in East Africa. The study was modelled using the Endogenous Growth Theory. Hausman Specification test was conducted to assess whether to use the fixed effect or random effect panel estimation. The results indicated that foreign direct investment had negative and statistically insignificant relationship with economic growth, gross capital formation had positive and statistically significant relationship with economic growth and Infrastructure development; negative and statistically significant relationship with economic growth. The coefficient for foreign direct investment, gross capital formation and infrastructure development were -8.66,0.2198 and -1.5294 respectively. The study concluded that infrastructure development in East Africa plays a greater role though faced by several limitations hindering its growth and expansion. The study thus recommends that East African countries should accelerate economic growth through enhanced regional integration in order to attract the market-seeking FDI and the need to improve transport communication and other infrastructural facilities so as to facilitate trade among East African countries and globally.

Keywords: Economic Growth, Foreign Direct Investment, East Africa

1.0 INTRODUCTION

1.1 Background of the study

Since 1980’s, Africa has experienced a relatively unsteady and low economic performance. For instance, the GDP growth rate of 3.2 % achieved in 2002 translated into a low growth rate of 0.8 % in per capital income compared with the rate of 1.9 % in 2001 while in 2003, Africa’s population grew at 3.6% (UNCTAD, 2003a). The low economic growth rate coupled with high population growth makes poverty alleviation in Africa increasingly difficult. According to Ajayi (2005), the average annual flows of FDI into Africa doubled in the 1980’s compared with the 1970s. It also increased

Read More