An Investigation of Macroeconomic Determinants of Domestic Private Investment Evidence from East Africa

This study mainly emphasized on the determinants of domestic private investment in East Africa region with the panel data set from the period of 2000- 2012. Based on Econometric findings in which it supports fixed effect model estimation over other methods of procedure confirmed that domestic private investment affected by different parameters: precisely, macroeconomic factors including variations in output and real per capita growth, fiscal and monetary policy and exchange rate movement in the economy are the main factors for the variability of domestic private investments across different times. The estimated result of various macroeconomic variables and other policy related features are estimated and has influenced the performance of domestic private investment in the region. This finding also presents pooled OLS outcomes to see the disparity from FE estimation which is preferred from RE model. Hence, domestic private investment has positively associated with real GDP growth, financial development as availability of credit to the private sector in percentage of GDP creates a favorable environment for investment activity and has a virtuous effect through more investment, more profit and stimulates further investment opportunities and boost economic growth. The effect of human capital development capture by school enrollment (primary) also has a positive effect on the development of domestic private investment in the region. On the contrary, instable macroeconomic environment; in the presence of inflationary pressure, high external debt, fluctuation in terms of trade, real exchange rate movements; and public investment, real interest rate, and the level of freedom index exhibits an unfavorable effect on the domestic private investment performance in the region. In addition, FDI doesn’t have statistical significant impact in level form but the logged effect of domestic private investment negatively and significantly associated with it. Thus, improving macroeconomic environment through adjusting fiscal policy in lowering budget deficits and minimizing public debt creates right trajectory; and in the same way through the monetary channel control of inflation and reduces the real interest rates believes to create stimulating and rewarding effect for domestic private investment activities in the region.