Outward looking foreign direct investment and its determinants in highly indebted Eastern African countries

Abstract

This study examines outward-looking foreign direct investment (FDI) and the determinants of four highly indebted low-income countries in East Africa. To achieve the stated objective, the study utilizes the pooled mean group (PMG) approach for panel data encompassing the period from 1990 to 2022. Additionally, bound testing and the autoregressive distributed lag (ARDL) model are applied to analyze time series data from individual countries within the sample. The panel PMG/ARDL estimation suggests that both market size and exchange rate have a significant positive impact on FDI inflows, both in the short run and the long run. Specifically, the time series analysis using ARDL estimation reveals that market size has a positive and significant impact on FDI inflows for both Rwanda and Tanzania, both in the long run and the short run. Furthermore, the association between the labor force and FDI inflows is positive only in the long run for Rwanda, while for Tanzania, it shows a positive association in both the short run and the long run. In terms of the availability of natural resources, the analysis indicates a positive impact in the short run but a negative association with FDI inflows in the long run, with the exception of a positive association with Rwanda in the long run. Additionally, external debt has a positive and significant impact on FDI inflows for Kenya, both in the short run and the long run. Based on the findings, the study recommends that policymakers should focus on policies and strategies that promote market expansion and create a larger consumer base. This can be achieved through initiatives such as market development programs, trade agreements, and regional cooperation.