Determinants of domestic private investment in east Africa: A panel data analysis

Abstract

This study examines the determinants of domestic private investment in East Africa using panel data obtained from World Development Indicators and World Governance Indicators over the period 1996 to 2020. Panel Autoregressive Distributed Lag (ARDL) technique was adopted to examine the short-run and long-run macroeconomic and institutional determinants of domestic private investment. The study findings show that both macroeconomic (trade openness, real interest rate, inflation rate, government expenditure, financial development, and foreign direct investment) and institutional factors (political stability, control of corruption, voice and accountability) play an important role in determining private investment in East Africa. The study recommends policies that are anchored on fostering domestic private investment such as the creating a conducive environment for investors aimed at attracting private investors through establishment of sound economic infrastructure such as roads and electricity as well as social infrastructure such as health facilities that are perceived to facilitate domestic private investment. Furthermore, policies to encourage full participation of individuals in freely electing their governments, freedom of expression, freedom of association, and free media should be accentuated and reinforced to maintain a politically stable environment for investment. Finally, in ensuring good governance that facilitates domestic investment, the East African countries should strengthen governance aimed at promoting peace and stability, ensuring the constant provision of the quality of public services, quality of civil services, and degree of independence from political pressure by aligning measures that guarantee corruption free environment which in the end, enhances the growth of the domestic private investment. Keywords: East Africa; Panel ARDL; Domestic Private Investment