Determinants of private domestic investment in Uganda

Abstract

Uganda’s pursuit of economic transformation hinges critically on accelerating domestic private investment, yet persistent structural, institutional, and macroeconomic constraints have kept investment levels below national development targets. This study investigates the determinants of domestic private investment (DPI), measured as gross fixed capital formation (% of GDP), in Uganda over the period 1990–2020. Guided by the Flexible Accelerator Theory, Credit Rationing Theory, and Real Options Theory, the research employs an Autoregressive Distributed Lag (ARDL) model to examine the dynamic effects of GDP growth, exchange rate stability, domestic credit to the private sector, infrastructure investment, and institutional quality proxied by regulatory quality, control of corruption, and government effectiveness on DPI. The results reveal a statistically significant long-run cointegrating relationship among these variables, with domestic credit (coefficient = 0.60, p < 0.01) and infrastructure investment (coefficient = 0.50, p < 0.05) exerting strong positive effects on DPI. GDP growth also has a positive long-run effect (coefficient = 0.30, p = 0.057), while exchange rate depreciation significantly reduces investment (coefficient = -1.20, p < 0.05), underscoring the destabilizing effect of macroeconomic volatility. Regulatory quality shows a marginally positive effect (coefficient = 0.80, p = 0.080), whereas control of corruption and government effectiveness are statistically insignificant. The short-run dynamics indicate similar trends, with a significant error correction term (-0.65, p < 0.01), indicating that 65% of disequilibrium adjusts annually toward the long-run equilibrium. The model demonstrates strong explanatory power (Adjusted R² = 0.67) and passes all diagnostic and stability tests. These findings emphasize that macroeconomic stability, improved credit access, and infrastructure investment are crucial for unlocking Uganda’s private investment potential, while institutional reforms though currently limited in effect remain essential for reducing transaction costs and uncertainty. The study contributes to empirical literature by integrating institutional variables into a robust time-series framework and offers actionable policy recommendations aimed at expanding credit to SMEs, stabilizing the exchange rate, upgrading infrastructure, and improving regulatory efficiency to stimulate domestic private investment and advance Uganda’s development agenda