Factors affecting foreign direct investment in Uganda (1985-2019)

Abstract

Foreign Direct Investment (FDI) plays a crucial role in speeding up the development and economic growth of Uganda. Many developing countries rely on FDI to promote their economy as they face capital shortage for their development process. The strong growth performances experienced by the Ugandan economy greatly depends on FDI. FDI inflows of Uganda started fluctuating from 2007 to 2019 and this high volatility of Uganda’s FDI inflows drew the researchers’ attention to examine the factors affecting FDI in Uganda by using the annual time series data from year 1985-2019. An Auto Regressive Distributed Lag (ARDL) model is applied to study the relationship between explanatory variables and explained variable and empirical results show that gross domestic product growth and gross capital formation, significantly and positively affect Uganda’s FDI. In the short run, gross capital formation and trade openness significantly and positively affect Uganda’s FDI while private investment is significant but negative. In order to increase foreign direct investment, government should ensure policies such as; lowering the interest rates, increase real wages, devaluation of the domestic currency, development of new technology, introduction of new management techniques, improved skills and qualification and public sector investment.