MODERATING ROLE OF TRADE OPENNESS ON FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH AMONG EAST AFRICA COMMUNITY COUNTRIES

Victoria Litali^1*, Gordon Opuodho¹ and Olanrewaju Fatoki¹

¹Department of Economics, Accounting and Finance,

Jomo Kenyatta University of Science and Technology, 6200-00200 Nairobi

Corresponding Author (^1*): This e-mail address is being protected from spambots. You need JavaScript enabled to view it

CITATION: Moderating Role of Trade Openness on Foreign Direct Investment and Economic Growth Among East Africa Community Countries. International Journal of Finance and Accounting. Vol. 11 (11) pp 1 – 18.

ABSTRACT

Foreign direct investment (FDI) is often seen as an important driver of economic growth in developing countries. This study examines the impact of FDI on economic growth in the East African Community (EAC) over 1974-2022 using panel data analysis. The EAC countries have implemented policy reforms and incentives aimed at leveraging FDI for growth and development. However, past empirical evidence has been inconclusive on the FDI-growth relationship in the region. The analysis employs vector error correction modeling (VECM) on annual data for 5 EAC members. The reason for using VECM is due to the potential presence of a cointegrating relationship among the variables under study. Cointegration refers to the long-run equilibrium relationship between non-stationary time series variables. Results indicate rising FDI inflows have had a significant negative effect on economic growth, contrary to theoretical arguments. A 1% increase in FDI as a percentage of Gross Domestic Product (GDP) reduced real GDP growth by 0.2 percentage points on average. Potential reasons include limited local absorptive capacity, preference for enclave sectors with few linkages like mining, and crowding out of domestic investment. The findings imply attracting more FDI alone may not accelerate growth for EAC countries. More strategic efforts like building human capital and institutions, coupled with the selectivity of FDI priority sectors, could yield better outcomes. The study highlights the need to re-examine investment incentive policies and complement FDI with wider reforms for maximizing positive spillovers. Further research could analyze differential impacts by sector and between intra-regional versus extra-regional FDI.

Keywords: Foreign direct investment; East African Community; Gross Domestic Product; Vector Error Correction Model; developing countries

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