MACROECONOMIC FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT IN EMERGING ECONOMIES

Abstract

The current study aimed to conduct a cross-country analysis of the determinants of foreign direct investment (FDI) across selected East African countries: Tanzania, Kenya, Uganda, Rwanda, and Burundi. This research focused on how various macroeconomic factors influence FDI inflows within the context of the East African Community. Employing a cross-sectional analysis, the study utilized panel data collected from the World Bank databank over a period of 24 years (2000 to 2023), resulting in a total of 120 observations. An interactive fixed effects model was applied to analyze the data, aiming to determine statistical differences in FDI inflows among the selected countries. The findings revealed significant cross-country variations in the impact of selected determinants on FDI inflows. Trade openness and labour force growth were found to exert statistically significant positive effects on FDI, while GDP growth had a significant but negative effect. Notably, trade openness negatively impacted FDI inflows in Tanzania but positively affected Kenya and Rwanda, with non-significant effects in Uganda and Burundi. For GDP growth, significant negative effects were observed in Kenya and Burundi, while the impact was non-significant and positive in Uganda, Tanzania, and Rwanda. Labour force growth demonstrated a non-significant positive effect in Tanzania and Uganda, a significant positive effect in Kenya and Rwanda, and a non-significant negative effect in Burundi. The validity and reliability of the findings are strengthened by the use of panel data and a fixed effects model, providing a nuanced understanding of the relationship between macroeconomic determinants and FDI across these countries. The study concludes that significant differences exist in how macroeconomic factors influence FDI across East Africa, emphasizing the need for context-specific policy interventions. Recommendations include improving trade regulations in Tanzania and enhancing workforce development in Kenya and Rwanda. Foreign investors are also encouraged to assess the economic environments of each country to make informed investment decisions. x