Moderating the Role of Trade Openness on Foreign Portfolio Investment and Economic Growth among East Africa Community Countries

Abstract

Purpose: This study investigates the impact of foreign portfolio investment (FPI) on economic growth in East Africa using panel data for Kenya, Uganda, Tanzania, Rwanda, and Burundi from 1974-2022. Methodology: The analysis employs a panel vector error correction model to estimate the short and long-run effects of FPI on growth. The study relied on secondary data sources for the period 1974-2022 with an annual frequency, implying 49 years of data. Data on foreign investment variables and macroeconomic control variables were sourced from the World Bank database, National Statistical Bureaus, Central Banks, and Stock Exchanges of the respective countries. Findings: The results indicate that FPI significantly positively impacts economic growth in East Africa. A 1% increase in FPI inflows as a share of Gross Domestic Product (GDP) boosts annual real GDP growth by approximately 10.7% in the long run. The findings are robust to the inclusion of moderating variables like trade openness. Unique Contribution to Theory, Practice and Policy: The empirical analysis aimed to validate the Modern Portfolio Theory by examining if greater foreign portfolio investment flows contributed positively to economic growth in the East African region. The results lend support to policy efforts in East Africa to attract greater FPI through capital market reforms, regional integration, and macroeconomic stability. However, further developing financial markets and enhancing absorptive capacity is essential to leverage FPI more effectively for sustainable growth financing.