The effect of foreign direct investments on economic growth in Uganda between 1989 and 2018
Nassango, Lilianne Cotter
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Foreign Direct Investments (FDIs) are one of the most essential drivers of economic growth in developing countries, and over the past two decades, many developing countries especially those in the Sub-Saharan Africa have resorted to encouraging Foreign Direct Investment (FDI) to enhance their growth performances. The study was thus conducted to examine the effect of foreign direct investments (FDI) on Uganda’s economic growth (GDP) for the period 1989-2018 using annual time series data obtained from the World Bank World Development Indicators. The study employed the Augmented Dickey-Fuller (ADF) Test to test for unit root, the bounds test for co-integration analysis and the causality test using the Auto Regressive Distributed Lag model. The ADF test results showed a mixture of stationary and non-stationary variables. The Bounds Co-integration test showed the existence of a cointegrating relationship among the variables. The ARDL-ECM Coefficient showed that in the short run, all variables significantly affected the growth in GDP, but only FDI, Consumption and Real Effective Exchange Rate had a significant effect in the long-run. The study established that a one percentage change in FDI positively affects GDP by 3.26 percent. However, after a one lag period, a percentage change in FDI negatively affects GDP by 2.40 percent keeping other factors constant. In addition, a one percentage change in imports negatively affects GDP by 0.33 percent while a one percentage change in consumption positively affects GDP by 0.29 percent. Real effective exchange rate was found to positively affect GDP both at the instant and after lags. The positive effect of Foreign Direct Investments (FDI) on economic growth in both the short run and the long run could be an implication that FDI inflows are seen as an important source of savings and capital accumulation for Uganda, creating positive spillovers, improving human capital, providing access to advanced technologies and thus lead to more economic growth. However, during the lagged period, FDI had a negative effect on GDP, this could imply that over dependency on FDI could exert negative pressure on the resources i.e., the infrastructure and institutions that develop with foreign investment support further foreign investment and negative externalities such as unemployment, over-urbanization, and income inequality which hinders economic growth. The study therefore recommends that the Government of Uganda must put in place policies that encourage foreign direct investment while protecting the local investors by limiting the use of foreign expatriates and instead encourage use of domestic labor.