East African community's foreign direct investment landscape: a study of macroeconomic factors

Abstract

This study examines the impact of macroeconomic factors on foreign direct investment (FDI) in the East African Community (EAC) from 2000 to 2021. Specifically, Pooled Panel Ordinary Least Squares (OLS) was employed to examine the impact of the exchange rate on FDI, while the Instrumental Variable (IV) method and Control Function Approach (CFA) were used to investigate the potential endogeneity between the exchange rate, GDP, and FDI. The study focused on exchange rate and GDP as the key macroeconomic factors, controlling for infrastructure development, trade openness, inflation, resource endowment, and ease of doing business. The study findings reveal that the ease of doing business, trade openness, GDP, resource endowment, and infrastructure development positively impact FDI in the EAC, while the Exchange rate volatility negatively impacts FDI. The study also found evidence of a bidirectional relationship or endogeneity between the exchange rate and GDP in their impact on foreign direct investment (FDI). This means that exchange rate and GDP influence FDI while also being influenced by FDI, suggesting a complex interrelationship between these variables. To attract more foreign direct investment (FDI) and promote economic development, policymakers in the East African Community (EAC) should: Implement policies that stimulate economic development, reduce bureaucratic hurdles and regulatory burdens and enhance the ease of doing business to make the region more attractive to investors. Policymakers should also prioritize macroeconomic stability to stabilize exchange rates and attract investment.