Domestic savings, foreign direct investments and economic growth in Uganda

Abstract

The study investigated the causal relationship between domestic Savings (S), Foreign Direct Investment (FDI) and Economic growth in Uganda. The objectives of the study were: to determine the long run relationship between domestic savings, Foreign Direct Investment (FDI) and Gross Domestic Product (GDP) and to determine the direction if causality between each pair of the variables. Annual time series data from 1970 to 2009 was used for the study. The study was motivated by the low levels of domestic savings in the country compared to its investment needs. Johansen co-integration and error correction, Granger causality tests, variance decomposition and impulse response functions were used to explore the causal relationship between domestic savings, foreign direct investment and economic growth. Johansen co-integration tests revealed a long run relationship between domestic Savings and Foreign Direct Investments and no long run relationship between; domestic savings and Gross Domestic Product, Foreign Direct Investment and GDP. Granger causality tests suggested unidirectional causations running from FDI to both GDP and domestic savings and from GDP to Domestic Savings. Variance decomposition estimates and Impulse Response functions further supported the Granger causality test with much of the variations in GDP being explained by Foreign Direct Investment. This study calls for investment projects like in the provision of infrastructure like roads, electricity and telecommunication networks. The government should also put more emphasis on sustenance of political stability in the country.