EFFECT OF FOREIGN CAPITAL INFLOWS ON ECONOMIC GROWTH IN THE EAST AFRICAN COMMUNITY - 2009 to 2023

Abstract

Foreign capital inflows to developing nations continue to increase tremendously in recent times. For this reason, this study sought to inquire the relevance of foreign capital inflows through examination of literature linking foreign inflows to economic growth within the East African Community (EAC) over the timeframe 2009 to 2023. The overall objective was to investigate the relationship and significance of inflows of foreign capital on economic growth within the EAC region. The study applied economic growth (EG) as the dependent variable. Official Development Assistance (ODA), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI) and External Debt (ED) were employed as independent variables while Central Bank Base Interest Rates (CBBIR) as moderating variable for the reason that investors have to consider the cost of capital before making investment decisions. The specific goals were interrogating effects of ODA to economic growth, exploring the influence of FDI parallel to economic growth, ascertaining FPI outcomes on economic growth and investigating effects of ED on economic growth. This study further explored the moderating role of Central bank Base Interest Rates (CBBIR) in the relationship between inflows of foreign capital and economic growth in the region. Convergence (Catch-Up) theory anchored the study supported by the modern portfolio theory, theory of debt and the capital flow theory. Data was analyzed using the variable selection stepwise forward model along with measures of frequency, central tendency, dispersion and position as the main descriptive methods. EViews 14 software was employed for raw data manipulation and analysis. Results reveal that the foreign capital inflows taken as the predictive variables have no causal relationship to economic growth within the East African Community in the period under query. Again, the findings point to partial influence of CBBIR on the parallels linking individualized foreign capital inflows to economic growth within the East African Community. Foreign capital inflows may not have translated towards enhanced economic growth due to factors such as misallocation of resources, weak absorptive capacity and inadequate complementary investments in infrastructure. This suggests that influence of foreign capital inflows on economic growth is contingent on how effectively investments are integrated into a broader lucrative framework. This underscores the importance of diversifying foreign inflows into sectors with higher multiplier effects such as manufacturing and services which can create more jobs and foster innovation. By aligning foreign capital inflows with strategic development priorities, EAC countries can enhance its contribution to enhanced economic growth and transformation.