Foreign Direct Investment and Economic Growth in Uganda (1986- 2016

ABSTRACT Study used multivariate vector autoregressive model (VAR) to investigate the impact of foreign direct investment (FDI) on economic growth, and assess the determinants of FDI inflows in Uganda for the periods between 1986 and 2016. Interpretations of results are based on GrangerCausality and innovation accounting (variance decomposition and impulse response functions). The study finds that international capital flows are of great importance in stimulating economic growth in Uganda. Results further revealed that the determinants of economic growth are foreign direct investment(FDI), human capital, infrastructure, trade openness The study detected three different channels through which FDI inflows impacts on economic growth in Uganda. The first one is direct transmissions from FDI to GDP growth. The second channel is indirectly through domestic investments and by multiplier process, higher level of economic growth is generated. The third channel is through exports thereby yielding export-led growth. Macroeconomic stability through proper policies among others all these will attract FDI’s. The government should however put in place measures to limit FDI’s from coming along with experts from their home countries but rather employ the local people this will reduce problems of retrenchment or lay off some workforce that comes along with privatization. This will also will also solve the problem of limited skills and lead to skills improvement among the people as well as reduce unemployment. There is adequately need for an adequate policy on the development and management of the FDIs in order to avoid the negative effect of some trade of FDI nature, regulations and monitoring is adequately needed to ensure proper form of the foreign businesses in the country together with enhancing the management situation for the management of the business for economic growth.

TABLE OF CONTENTS

DECLARATION ............................................................................................................................. i

APPROVAL.................................................................................................................................... ii

DEDICATION ...............................................................................................................................iii

ACKNOWLEDGMENTS.............................................................................................................. iv

ABSTRACT................................................................................................................................. viii

CHAPTER ONE............................................................................................................................ 1

INTRODUCTION........................................................................................................................... 1

1.0 Introduction............................................................................................................................... 1

1.1 Background of the Study........................................................................................................... 1

1.1.1 Historical Perspective............................................................................................................. 1

1.1.2 Theoretical Perspective .......................................................................................................... 3

1.1.3 Conceptual Perspective .......................................................................................................... 4

1.1.4 Contextual Perspective ........................................................................................................... 6

1.2 Problem Statement .................................................................................................................... 7

1.3 Objective of the Study............................................................................................................... 8

1.6 Hypothesis of the Study ........................................................................................................... 8

1.7 Significance and Motivation of the Study................................................................................. 8

1.8 Scope of the Study.................................................................................................................... 9

1.9 Organization of the Thesis........................................................................................................ 9

CHAPTER TWO ........................................................................................................................ 10

LITERATURE REVIEW.............................................................................................................. 10

2.0 Introduction............................................................................................................................. 10

2.1 Theoretical Literature.............................................................................................................. 10

vi

2.1.1 The basic conceptual framework ......................................................................................... 11

2.2 Empirical Literature ................................................................................................................ 17

2.2.1 Trends of FDI Inflow to Uganda.......................................................................................... 25

2.3 Research gaps.......................................................................................................................... 28

CHAPTER THREE .................................................................................................................... 30

METHODOLOGY........................................................................................................................ 30

3.0. Introduction............................................................................................................................ 30

3.1 Research design....................................................................................................................... 30

3.2 Model Specification ................................................................................................................ 30

3.2.1 Jarque -Bera Tests................................................................................................................ 31

3.2.2 Unit roots test ....................................................................................................................... 32

3.2.3 The Augmented Dickey-Fuller Tests................................................................................... 32

3.2.4 Phillip Perron Unit test......................................................................................................... 32

3.2.5 Co-integration Analysis ....................................................................................................... 32

3.2.6 Johansen Co-Integration....................................................................................................... 32

3.3. Diagnostic Tests..................................................................................................................... 33

3.3.1 Normality Test ..................................................................................................................... 33

CHAPTER FOUR....................................................................................................................... 34

PRESENTATION, INTERPRETATION AND ANALYSIS OF THE DATA........................... 34

4.0 Introduction............................................................................................................................. 34

4.1 Descriptive Statistics............................................................................................................... 34

4.2 Time Series Property of Data.................................................................................................. 35

4.3 Long run relationship between FDI and GDP growth ............................................................ 41

CHAPTER FIVE......................................................................................................................... 44

DISCUSSION OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS .................... 44

5.0 Introduction............................................................................................................................. 44

vii

5.1 Discussion of Findings............................................................................................................ 44

5.2 Conclusions............................................................................................................................. 45

5.3 Recommendations................................................................................................................... 46

5.4 Contribution to knowledge...................................................................................................... 47

5.5 Areas for Further Research ..................................................................................................... 48

REFERENCES............................................................................................................................ 49

APPENDIX I: DATA ................................................................................................................... 57