An investigation of the impact of private sector credit and foreign direct investment on domestic private investment in Uganda

Abstract

This study empirically evaluates the impact of foreign Direct Investment (FDI) and Private Sector Credit (PSC) on Domestic Private Investment (DPI) in Uganda over the 1987-2018 periods. Specifically, the study aims at establishing whether FDI substitutes (crowds out), complements (crowds in) or has no effect on DPI in Uganda and also investigate the role of PSC in explaining DPI growth in Uganda. Employing Ordinary Least Square (OLS) regression analysis based on co-integration models, the study findings reveal that FDI substitutes (crowds-out) DPI investment in Uganda as evidenced by the negative and statistically significant coefficients for FDI. Also, PSC emerges as statistically significant to accelerate Uganda’s level of DPI which supports the economic theory arguing that credit availability forms one of the sources of investment capital and bridges the savings-investment gap a constrain in many developing countries (LDCs). In addition, while Gross Domestic Product (GDP), Public Investment (PUBI), External Debt (ED) and Trade Openness (TRADE) positively affected DPI fluctuation in Uganda, interest rate negatively affected DPI in the country. The study recommends investing more in infrastructure and financial development as well as having good policies that encourage access to international markets. Another important recommendation is that of providing incentives (such as free land and tax holidays) to domestic firms to allow them to have fair competition with their counterparts (foreign firms).