The effects of foreign direct investment on economic growth in Uganda

Abstract

Foreign direct investment (FDI) is a critical ingredient in the economic growth of a country. However, despite rising FDI inflows, GDP growth remains below the target envisaged by the national development agenda, raising concerns about its effectiveness. The key objective of this study was to examine the effect of FDI on economic growth in Uganda. The specific objectives of the study were to examine the short-run and long-run effects of FDI on economic growth in Uganda. The study is grounded in endogenous growth theory and builds on Casadio et al. (2012) by employing a neoclassical production function where output is determined by labor and capital, as described in Solow’s (1956) growth model. Accordingly, the Autoregressive Distributed Lag (ARDL) model was employed as the estimation method using annual data (1992–2022) from the World Bank, given that the Augmented Dickey-Fuller (ADF) test confirmed the variables to be integrated of order I(0) and I(1), with no I(2), and cointegration among the variables was established using the ARDL bounds testing approach. Empirical results showed that; In the short run, current FDI had a positive but insignificant effect (elasticity 0.373), In the long run, FDI showed a negative but statistically insignificant effect on economic growth. The study recommends prioritizing quality FDI in key sectors aligned with national goals. This includes FDI with a strong skill component that promotes technology transfer, skills development, productive employment, and sustainable practices. Additionally, emphasis should be placed on encouraging the reinvestment of profits within the host economy rather than full repatriation. Reinvested profits enhance domestic capital formation, strengthen linkages with local enterprises, and support the expansion of productive capacity. Subject keywords; Economic growth, Foreign direct investment, Uganda