Empirical Analysis of Foreign Direct Investment on Economic Growth: Evidence from the East African Community

Abstract

This paper empirically examines the impact of foreign direct investment on economic growth in the East Africa Community throughout 1970-2017. The study used Pedroni test of cointegration for testing long-run relationship and VECM to inspect the long- run and short-run Granger causality between FDI and economic growth. The paper confirmed the integration of order one among the variables at the first difference. The results from Pedroni cointegration and VECM found that FDI is statistically significant and positively associated to economic growth in East Africa Community country members. The gross capital formation also is affirmative and statistically noteworthy connected to economic progress in the region, while inflation and Population growth were found as statistically significant and negatively correlated with economic, and thus, government final consumption expenditure and trade respectively are negatively and positively statistically insignificant. The VECM Granger causality exploration discovered the bi-directional Granger causality between GDP per capita and population growth rate; FDI and population growth rate, and gross capital formation and population growth. As well, unidirectional Granger causality was found among some variables. On the policy perspective, the study recommended the EAC members to strengthen the foreign direct investment policy through inducements to investors, availability of basic infrastructure, and establishment of the better macroeconomic environment.