Impact of Foreign Direct Investment on Economic Growth in Eastern Africa

The nexus between foreign direct investment and economic growth has been widely debated in recent years. A fundamental challenge to the economies of developing countries in East Africa is how to achieve a sustainable increase in output over time. They have been attracting foreign direct investments to bridge the gaps between the domestically available supplies of savings and investment demands; generating foreign exchange; transferring technology; and enhancing job creation and human capital skills to achieve sustainable economic growth and development. This study examines the impact of foreign direct investment (FDI) on economic growth and its determinants in East African countries. Secondary data for 20 years for 14 Sub-Saharan Africa countries was collected from the World Bank’s World Development Indicator database, the World Governance Indicator and political Risk Services International’s Country Risk Guide database for the study. The study uses the dynamic generalized method of moment estimator for data analysis after conducting all the diagnostic tests. Empirical evidence shows that FDI has a positive and significant effect on economic growth in the region. The pairwise Granger causality test shows that there is unidirectional causality running from economic growth to FDI. However, while attracting FDI for promoting economic growth the countries need to take care of its nature and composition.