Journal of Finance and Investment Analysis

The Mediating Effect of Ease of Doing Business on the Relationship between Economic Integration and Foreign Direct Investment in the East African Community

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  • Abstract

    Developing countries rely on foreign direct investment (FDI) in order to promote economic development because of their typically low levels of national savings. However, low levels of FDI are still a big concern for poor countries. Regional economic integration is often considered a means to improve member countries’ attractiveness to FDI. From the available anecdotal evidence, the East African region ranks as one of the poorest recipients of FDI in the world. This study sought to establish the mediating effect of Ease of Doing Business on the relationship between economic integration and FDI. The research employed an explanatory research design. East African Community was the unit of analysis consisting of Kenya, Tanzania, Uganda, Rwanda and Burundi. Empirical data analysis used path analysis (a causal procedure). The quarterly time series data used spanned the period 2001 – 2015. The study established that formation of an economic bloc leads to more attraction of FDI into a region. However, it is also found that for more effective attraction of FDI there must be a conducive business environment (Ease of Doing Business) within the integrating region. Among the key policy implications, it is recommended that, EAC should make concerted efforts to deepen the integration by taking measures that would intensify intraregional trade; that there is need to improve investment climate, including having a business regulatory environment that is conducive for the modernization of the regional economy and attract FDI; More precisely there should be: reconciliation of the regional trade regime and border procedures within the EAC, lowering the transportation costs, scaling down on the effort, time, and funds businesses spend to conform with regulations, eradication of corruption, and safeguarding of property rights.

    JEL classification numbers: F30, P45
    Keywords: Economic Integration, Ease of doing business, foreign direct investment, mediation, East African Community