The effects of foreign direct investment on unemployment rate in Uganda

Abstract

Uganda faces high youth unemployment due to rapid population growth, inadequate skills, and reliance on low-productivity sectors, leading to poverty, school dropouts, and underemployment (Bbaale, 2014), with significant social costs such as exploitation and unrest (Egessa et al., 2021a). The overall unemployment rate was around 2.94% in 2024. However, unemployment, particularly among those aged 15-24, is significantly higher, with estimates ranging from 64% to 70%. Therefore, the main purpose of this study was to investigate the effect of foreign direct investment (FDI) flows on the unemployment rate in Uganda. Specifically, the study examined the effect of FDI inflows on the unemployment of Uganda in the presence of institutional quality factors such as control of corruption, political stability, and governance effectiveness. The study employed the quantitative research design, which aimed at utilizing time-series data for the period between 1990 to 2023. The data source was the World Development Indicators file of the World Bank. Guided by Okun’s law of controlling unemployment through aggregate demand, the study embraced the job-matching theory, which explains the process by which workers and employers find suitable matches in the labor market, focusing on the alignment of worker skills and employer requirements. The study performed data analysis at three different levels: univariate, bivariate, and multivariate. The univariate involved descriptive statistics, the bivariate involved the Pearson correlation coefficient, while the multivariate case involved the estimation of the OLS multiple linear regression model. Before the estimation of the model, the study ran the stationarity test, the cointegration test, and the Granger causality test to evaluate a better model. The findings showed that foreign direct investment, economic growth, and a stable political environment all helped reduce unemployment in Uganda, while rapid population growth made the problem worse. Most importantly, when different aspects of governance, such as fighting corruption, maintaining political stability, and ensuring effective public institutions improved together, they had the greatest impact on reducing unemployment. To respond to these challenges, Uganda focused on attracting job-creating investment, invested in training and education to prepare its growing population for the workforce, and improved governance through coordinated efforts. A combined strategy that linked economic progress with strong institutions was essential for creating long-term employment opportunities.