The Impact of Foreign Direct Investment (FDI) on Economic Growth in Eastern Africa: Evidence from Panel Data Analysis

Abstract

This study has analyzed the impact of Foreign Direct Investment (FDI) on Economic growth in 14 Eastern Africa countries by employing 34 years (1980-2013) panel data, using dynamic GMM estimators after checking for autocorrelation and model specification tests. Developing countries have been attracting FDI attempting to reduce resource gaps, technology gap, unemployment and trade deficits. However, unlike classical growth theories, the empirical studies sought inconclusive effect of FDI on growth. The findings confirm that FDI has positive and marginally significant effect of FDI on economic growth, the rate of economic conditional convergence at 5%, absence of significant crowding out effect moving from FDI to domestic investment, interdependence of domestic investment and trade openness in the sub-region. Thus, I conclude that FDI is a key deriver of economic growth and a catalyst to economic conditional convergence in Eastern Africa; so, the subregion need to attract more FDI by improving investment environment, strengthening regional integration, developing human capital and basic infrastructure, and promoting export-oriented investment.