Title: Effect Of External Debt On Foreign Direct Investment In The Eastern African Sub-Region Countries
Authors: Wabomba kadili, Benard Ojonugwa Anthony, Mutenyo John & Abuga Isaac Mokono
Volume: 9
Issue: 12
Pages: 120-130
Publication Date: 2025/12/28
Abstract:
: This study investigates the effect of external debt on Foreign Direct Investment in Eastern African Sub-Region Countries from 1990 to 2023. Despite sustained external borrowing aimed at bridging fiscal gaps and promoting growth, domestic investment and foreign direct investment (FDI) have remained subdued in the region. Using secondary panel data from 18 Eastern African Sub-Region Countries, the study employs a longitudinal research design and applies advanced econometric techniques, including the Pooled Mean Group (PMG) estimator, Panel ARDL, cross-sectional dependence tests, and cointegration analysis. Trend analysis reveals that external debt has risen sharply, particularly in Ethiopia, Kenya, and Mozambique, while FDI and domestic credit remain relatively stagnant. Empirical results indicate a significant long-run positive relationship between external debt and investment, suggesting that productive borrowing can stimulate capital formation. Conversely, debt servicing exerts a negative effect on FDI, highlighting the crowding-out effect of high repayment obligations. Diagnostic tests confirm the robustness of the models, with no evidence of autocorrelation or heteroskedasticity, and residuals are normally distributed. The findings align with the Debt Overhang and Crowding-Out theories, demonstrating that while external debt can enhance investment when managed prudently, excessive debt servicing undermines investor confidence and fiscal capacity. The study contributes to the literature by providing a comprehensive regional analysis of the debt investment nexus in East Africa, offering insights for policymakers on debt sustainability, investment promotion, and financial sector development. It recommends prioritizing productive borrowing, strengthening domestic financial intermediation, and implementing debt management strategies to foster sustainable investment growth.