Assessment of foreign direct investment in the East African Community

Abstract

The study aimed to assess the determinants and implications of foreign direct investment in the East African Community. Two specific objectives were examined for this research. The researcher used secondary data that the World Bank collected over the years. This study was a time series analysis; Nelson`s regression analysis method was used in finding the determinants of foreign direct investment. The results were presented in the form of graphs, bars, and tables. Results should that, over time, there was an observed general increase in savings, gross domestic income, gross domestic income per capita, exchange rate, labour force, and remittance rate. There was a negative trend over time for the inflation rate and agricultural productivity. Lastly, for the foreign direct investments, there was an increase in 2015 and then a decrease after that to 2020 From the Pearson correlation measure of the association at a 5% significance level, foreign direct investments had a statistically significant relationship with only the inflation rate, which was strong and negative. Furthermore, from the linear regression analysis, foreign direct investment had a significant relationship with the inflation rate, labour force and remittances rate at a 5% significance level. A unit increase in the dollar inflation rate was observed to cause a 5.760 decrease in foreign direct investments keeping other factors constant, a unit increase in the labour force decreased the foreign direct investment by 14.20, holding other factors constant. Lastly, a unit increase in the remittances rate decreased the foreign direct investments by 8.227, keeping other factors constant. From the finding, it was noted that the inflation rate had a negative impact on foreign direct investment. This is because high inflation levels can lead to a depreciation of the local currency, risking reductions in the value of assets pegged to the local currency relative to foreign currencies. Additionally, the labour force and remittances also had a negative impact on foreign direct investment. The East African community should work on measures that regulate the inflation rate to a healthy one to attract foreign direct investments.