Effects of foreign direct investment and domestic savings on economic growth in Uganda (2006-2019)

Abstract

The main objective of this study was to examine the effects of foreign direct investment and domestic savings on economic growth in Uganda. Secondary quarterly data was obtained from World Bank development indicators for the time period 2006 to 2019. The main approach was the ordinary least squares to test for the long run relationship, the error correction model was applied to test the short run relationship and to determine the speed of adjustment between the short run and long run equilibrium. The granger causality test was applied to test the causal relationship between foreign direct investment, domestic savings and economic growth. The variables that were investigated in the study included economic growth, foreign direct investment, domestic savings, real exchange rate, inflation, gross national expenditure, private consumption, gross capital formation and trade openness. The empirical results show that both foreign direct investment and domestic savings significantly affect economic growth positively at 5 percent level of significance in both the short (p=0.002) and long run(p=0.000). On the other hand, the following variables had a positive significant effect on economic growth: gross national expenditure (p=0.001), trade openness (p=0.006) and inflation (p=0.000). Real exchange rate and private consumption had a negative significant effect on economic growth. Results from the short run model reveal that the lagged error term coefficient has a negative significant sign. The granger causality test revealed that foreign direct investment does not granger cause economic growth, domestic savings does granger cause economic growth and economic growth does not granger cause either foreign direct investment nor domestic savings. Therefore, there was a uni directional causal relationship between domestic savings and economic growth while foreign direct investment and economic growth were independent of each other. The study recommends that the government should consider to put in place policies that attract more foreign direct investment for example 100% foreign ownership permitted and public finances should help to create a lower risk and more stable environment for foreign investors and also it should put in place policies to enhance income since it plays a major role in increasing savings so as to facilitate economic growth.