Effect of foreign direct investment volatility on economic growth in Uganda (1986-2016)

Abstract

The objective of this study was to determine the effect of foreign direct investment (FDI) volatility on economic growth in Uganda for the period 1986-2016. Quarterly data with 124 data points was used for analysis. Specifically, the study established the short and long run effect of FDI volatility on economic growth and also investigated the long run effect of labor force participation rate and trade openness on economic growth. The log-linear model was used to ascertain the effect of FDI volatility on economic growth using the Autoregressive Distributed Lag (ARDL) approach. The variables used for analysis included; Real GDP growth rate, Foreign Direct Investment Volatility, Trade Openness and Labor Force Participation Rate which were obtained from World Bank open access database and labor force participation rate which was obtained from International Labor Organization website.

The results revealed that in the long run for the period before the structural break (1986Q4- 1990Q4), foreign direct investment volatility, labor force participation rate, trade openness had a significant negative relationship with economic growth (p=0.001, p=0.004 and p=0.000 respectively). For the period after the structural break, foreign direct investment volatility had a significant negative effect on economic growth (p=0.000) while labor force participation rate, and trade openness had a positive relationship with economic growth though insignificant (p=0.121 and p=0.712 respectively). In the short run, foreign direct investment volatility had a negative significant relationship with economic growth for both periods, that is, p=0.001 and p=0.000 respectively. Moreover, it was established that while economic growth may drift in the short run, the disequilibrium adjusted at about 55.0 and 19.6 percentages quarterly for the period before and after the structural break towards long run equilibrium to bring stability in economic growth. The study recommends factors that volatility need to be addressed to make FDI inflows more stable which will be a major boost to economic growth through availing adequate resources to finance long term investment.