Foreign direct investment- economic growth Nexus in Uganda

Abstract

The research examined the causal interaction between Foreign Direct Investment (FDI) and Economic Growth using annual time series data spanning from 1983 to 2021. Data was obtained from the Ministry of Finance Planning and Economic Development (MoFPED), Bank of Uganda (BoU), Uganda Revenue Authority (URA), and the World Bank. The research employed a VAR test, where FDI causes economic growth in Uganda. Furthermore, ARDL approach was used to investigate the factors influencing economic growth in Uganda. In the long-run, inflation and trade openness have a positive and statistically significant effect on GDP at 5% level of significance. In addition, the lending interest rate and exchange rate were found to have a negative and statistically significant effect on GDP. In the short run, economic growth is positively influenced by FDI and the exchange rate at 5% level of significance, while it is negatively influenced by inflation and the lending interest rate. The study recommends the need to channel foreign direct investments in strategic economic sectors like energy, oil and gas and transportation that have stronger economic growth multipliers by offering a range of tax incentives, holidays/ concessions and breaks, the need for Bank of Uganda to control the high lending interest rates offered by commercial banks, and the need to promote trade openness by reducing barriers to trade such as quotas, tariffs and non-tariff barriers to create a more open and predictable trade environment.