Behavior and Determinants of Private Investment in Uganda

This study examines the factors that influence private investment behaviour in Uganda for the period 1980-2012. We estimate the private investment behavior model. First, the time series properties of the variables is examined using the Augmented Dickey-Fuller and Philips-Perron unit root tests and then the co-integration tests among the study variables is undertaken using the Johansen (1988) procedure. The specified private investment function is estimated. The results reveal a positive influence of GDP, foreign aid inflows and public expenditure on the behaviour of private sector investments activities in the long-run. In addition, public debt servicing, exchange rate volatility and inflationary uncertainty negatively influence private sector investments in the long-run. Furthermore, the estimated adjustment coefficient has a positive and significant effect on private investments thus indicating the divergence between the actual and desired levels of private sector investment activities within a particular period. Based on the findings of this study, we suggest that government should improve on economic performance by promoting the agriculture and industrial productivity, increase foreign resource mobilization, and reduce the bank interest lending rates to make loans affordable to potential investors. Also government should ensure macroeconomic stability by minimizing volatility and inflation uncertainty by minimizing money supply and government expenditures. Furthermore, government needs to reduce on the unproductive foreign borrowings by committing borrowed funds to set up productive ventures or build complimentary infrastructures to support private sector investment activities.