The role of institutions in determining Foreign direct investment inflows to East Africa (Uganda, Kenya, Tanzania)

Abstract

The study analyses the role of institutions in determining foreign direct investment inflows to East Africa particulary; Uganda, Kenya and Tanzania between 1987 and 2008. Specifically the study examines the impact of institutional indexes on FDI inflows. Standard panel data techniques are employed to an eclectic model developed by Dunning (1981) but modified to include institutional variables in order to achieve the objective of this study. Analytically fixed effects (FE) and random effects (RE) models are used, and then Hausman’s specification test is used to determine the preferable model which in this case is the fixed effects model. The findings show that institutional variables such as economic risk rating (ERR) and political risk rating (PRR) significantly influenced FDI inflows to East Africa whereas governance and law and order did not. Apart from institutions other factors like inflation, GDP per capita and openness of the economy were found to be significant too.

The study recommends increased attention to the role of institutions in attracting FDI inflows to East Africa; the need to maintain social and political stability and macro economic stability.