The effect of foreign direct investment on economic growth in Uganda: a sectoral analysis

Abstract

This study examined the effect of Foreign Direct Investment (FDI) on economic growth in Uganda, with a focus on sectoral effects over the period 1984–2023. The main objective was to analyze the effect of FDI on aggregate GDP growth, with a more detailed analysis of its effects on agricultural, industrial, and services sector growth. The study employed the Seemingly Unrelated Regression (SUR) technique, which accounts for contemporaneous correlation among the error terms across the aggregate and sectoral equations. The key findings suggest that during the period under study, FDI did not significantly influence Uganda’s aggregate economic growth contemporaneously but exerted a positive lagged effect, and positively influenced the growth of both the industrial and services sectors, both contemporaneously and with a two-year lag. The latter effects suggest that FDI may take time to influence growth, possibly because foreign-invested projects require time to become operational and generate productive linkages. In relation to agricultural sector growth, FDI had a negative and significant contemporaneous effect, but its interaction with financial sector development was positive and significant both contemporaneously and with a two-year lag, underscoring the importance of domestic absorptive capacity in shaping sectoral outcomes. Overall, the findings indicate that the contribution of FDI to Uganda’s economic growth is sector specific, time-dependent, and conditioned by domestic factors. The study therefore highlights the need to strengthen financial sector development, labour capacity, and productive linkages between foreign and domestic enterprises to enhance the growth contribution of FDI.