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The Effect of Foreign Direct Investment and Trade Openness on the Firms' Export Competitiveness and Products Diversification Among East African Community Members

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Trade and Investment in East Africa

Part of the book series: Frontiers in African Business Research ((FABR))

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Abstract

This chapter examines the effect of Foreign Direct Investment (FDI) and trade openness on competitiveness and diversification among East African Community (EAC) members. Unlike previous studies, we investigated this issue in the emerging region of EAC. This chapter uses fixed and random effects panel estimates from 2010 to 2019, inclusive. We find that the effect of FDI on a firm’s export competitiveness and trade diversification is positive and statistically significant. However, the effect of trade openness is positive and statistically significant for export diversification but insignificant for export competitiveness. Results are robust to the alternative dependent variable, control variables, specifications and estimation methods. Policy reforms to improve economic freedom, technological development, and strengthening the inter-relationship of the domestic sector with FDI and trade openness are required to improve export competitiveness and diversification.

Authors are thankful to Peter van Bergeijk and Binyam Afewerk Demena of Erasmus University, International Institute of Social Studies for technical guidance in carrying out the research work. The study was financially supported by Research on Poverty Alleviation (REPOA), the African Caribbean and Pacific Group of States (ACP Group) of this project, grant number FED/2019/408-112

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Notes

  1. 1.

    https://www.tralac.org/news/article/8618-eastern-africa-s-manufacturing-sector-promoting-technology-innovation-productivity-and-linkages.html, accessed on 10-August 2020.

  2. 2.

    According to this definition, export competitiveness encompasses both quantitative and qualitative factors such as quality of exports, capacity for technological innovation and degree of product specialization. However, these factors are difficult to measure in quantitative terms.

  3. 3.

    South Sudan was not be included due to unavailability of enough data from 2010 to 2019.

  4. 4.

    The lists of these variables were sourced from databases such as World Development Indicators (WDI) https://data.worldbank.org/indicator accessed on 20th, 23rd March, 2021. UNCTAD https://unctad.org/statistics accessed on 19th, 20th March 2021. Heritage foundation https://www.heritage.org/index/about accessed on 20th March 2021. UNIDO https://stat.unido.org/ accessed on 20th and 21st March 2021.

  5. 5.

    FDI stock used to serve the purpose of robustness test.

  6. 6.

    We also use sample size for the period 2009-2018 and the results remain the same (positive and significant) to conserve the space we have not reported here. The results are available upon request.

  7. 7.

    We also use sample size for the period 2009-2018 and the results remain the same (positive and significant).

  8. 8.

    We ignore the results of RE model when the EF become negative and statistically significant in columns (3) and (4) as the Hausman test supported FE effect model.

  9. 9.

    We ignore the results of Random Effect model which show negative and statistically significant as our Hausman test prefer Fixed Effect model.

  10. 10.

    The EAC report used only trend analysis of industrial competitiveness within EAC unlike our study.

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Authors and Affiliations

  1. Institute of Tax Administration, Po Box 9321, Dar-es-Salaam, Tanzania

    Masoud Mohammed Albiman

  2. Muslim University of Morogoro, Morogoro, Tanzania

    Huda Ahmed Yussuf

  3. Zanzibar University (ZU), Tunguu, Zanzibar, Tanzania

    Issa Moh’d Hemed

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  1. Masoud Mohammed Albiman
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  2. Huda Ahmed Yussuf
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Correspondence to Masoud Mohammed Albiman .

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Editors and Affiliations

  1. International Institute of Social Studies, Erasmus University Rotterdam, The Hague, The Netherlands

    Binyam Afewerk Demena

  2. International Institute of Social Studies, Erasmus University Rotterdam, The Hague, The Netherlands

    Peter A.G. Van Bergeijk

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Albiman, M.M., Yussuf, H.A., Hemed, I.M. (2022). The Effect of Foreign Direct Investment and Trade Openness on the Firms' Export Competitiveness and Products Diversification Among East African Community Members. In: Demena, B.A., Van Bergeijk, P.A. (eds) Trade and Investment in East Africa. Frontiers in African Business Research. Springer, Singapore. https://doi.org/10.1007/978-981-19-4211-2_9

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