Effect of regime change on foreign direct investment inflows in Uganda (1970-2009).

Abstract

The objective of this study was to examine the effect of regime change on Foreign Direct Investment (FDI) Inflows in Uganda for the period 1970 to 2009. It reviews the theoretical and empirical evidence to assess how GDP growth rate, trade openness, market size, infrastructure development and exchange rate affect FDI inflows across non-NRM and NRM economic regimes in Uganda. Because of the possibility of instability of the underlying parameters in the model, linear model stability tests and tests for structural change were carried out to obtain the appropriate model for analysis. On investigation, it was observed that, the size of the economy’s market explains the increase in FDI inflows across non-NRM and NRM regimes, holding other factors constant. The results show that depreciations in exchange rate are associated with decreased FDI inflows under a non-NRM regime but have a positive impact on FDI inflows under NRM regime, holding other factors constant. Though insignificant, infrastructure development under the non-NRM regime had the expected sign. An improvement in infrastructure development has a positive impact on FDI inflows under both regimes. Openness to trade encourages FDI inflows under non-NRM regime but causes a marked reduction in FDI inflows under NRM regime. It is recommended that government should bolster macroeconomic stability, through addressing structural disequilibrium in the Ugandan economy, as instability increases inflationary pressures, and, as such, negatively affects investments. Government should create a favorable climate for attracting foreign investments by developing the infrastructure. Utilization of taxes should be rationalized and directed to meeting particular economic priorities and targets, such as developing industry, increasing exports, and creating job opportunities.