Effect of foreign direct investments on export performance in Uganda

Abstract

The Ugandan economy is a mixed economy and private sector plays a dominant role in terms of development potential (World Bank, 1991). Uganda has implemented an ambitious programme of economic liberalization (IMF, 2003) with reforms targeted at restoring macroeconomic stability and fiscal discipline, while improving the investment climate. The introduction of the investment code (1991) and institutional initiatives further improved the investment climate in Uganda. These economic reforms have led to improved both local and foreign investor confidence in Uganda. We adopt UNCTAD, 2006 classification of motivation of foreign investors in undertaking investment in the local economy. This can be resource seeking, market seeking or efficiency seeking. By the nature of its natural resource endowment, Uganda has attracted a number of resource seeking investment to exploit the abundantly available natural resources for example HIMA and Tororo cement industries producing for both the local and regional markets. The country has also attracted a number of market seeking FDI due to its strategic location and membership to several trading blocs such as COMESA, EAC in addition to preferential access to the European market and the United States for some products. Companies such as MTN, Phoenix Logistics, Standard Bank have all come to explore the vast market potential available. These are focused on both the local market and exports for the foreign markets. However, Uganda has not been able to attract the efficiency seeking investment mainly because of under development of the infrastructural sector as well as lack of sufficiently skilled labor to effect timely and cost efficient production and delivery of goods to overseas markets. On the whole, the country has succeeded in attracting more FDI than most countries in the region and among the developing countries as a group, and is one of a group of seven countries identified by UNCTAD as Africa's “front runners” in attracting FDI with inflows rising steadily over the past twenty years from USD 55 million in 1993 to USD 222 million in 2004. The study was intended to determine whether the increase in FDI inflow has had an impact on the country’s export performance and, it found out that FDI coefficient is positive and statistically significant in light of other determinants of export, implying that an increase in FDI inflows increases exports in Uganda. Based on these findings, it has been recommended that government maintain its policy of attracting FDI and also undertake policy interventions that will boost the linkage between FDI and exports to realize optimal benefits from the inflow of FDI.