1

PERFORMANCE AND CHALLENGES FACING UGANDA INVESTMENT

AUTHORITY IN ENHANCING ECONOMIC GROWTH THROUGH

PROMOTING FOREIGN DIRECT INVESTMENTS.

BY

NAME : RUHENI CYRUS

REG NO : 04/K/3924/EVE

STUDENT NO: 204002428

Dissertation submitted in partial fulfillment of the requirement for

the award of the degree of Bachelor of Arts in Economics of

Makerere University.

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DECLARATION

I, RUHENI CYRUS declare that this piece of work is original and has never been

submitted to any university or other learning institution for any academic award or

elsewhere for publication.

Signature: ………………….

RUHENI CYRUS

Date: ……………………….

Signature: ………………….

Dr ADAM MUGUME (Supervisor)

Date: ………………………

3

DEDICATION

This piece of work is dedicated to my beloved mum Miss Jane Wairimu Ruheni.

Thanks for the many sacrifices you made to get me this far. May God bless you

abundantly. I also dedicate this piece to the late and family Aunt Eunice, Uncle Dan,

and Cucu.

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TABLE OF CONTENT

Declaration……………………………………………………………………………………………………..………..…2

Dedication………………………………………………………………………………………..........................3

Table of content………………………………………………………………………………………………………….4

List of Tables ………………………………………………………………………………………………………………6

Acknowledgement……………………………………………………………………………………………………...7

Acronyms /Abbreviations…..……………………………………………………………………………………….8

Abstract………………………………………………………………………………………...…........................9

CHAPTER ONE

i.Background of the study……………………………………………………………………………………………..….10

1.1 Statement of the problem…………………………………………………………………………….…….15

1.2 Purpose of the study……………………………………………………………………………………….….15

1.3 Specific objective………………………………………………………………………………………………..15

1.4 Significance of the study…………………………………………………………………………………..16

1.5 Scope of the study……………………………………………………………………………………………..16

1.6 Limitations…………………………………………………………………………………………………….…….16

CHAPTER TWO

ii.Literature

Review……………………………………………………………………………………………………………………....17

2.1 Motives of Foreign Direct Investments…………………….........................................18

2.2 Benefits of attracting Foreign Direct Investments……………………………………………...19

CHAPTER THREE

iii.Methodology……………………………………………………………………………………………………………………22

3.1 Introduction………………………………………………………………………………………………………………22

3.1.1 Research design…………………………………………..……………................................22

3.1.2 Study area……………………………………………………………………………………..……………..22

3.1.3 Population and sample size……………………………………...................................22

3.1.4 Sampling…………………………………………………………………...................................22

3.2 Data collection…………………………………………………………..…………………………………………..…23

3.2.1 Questionnaire method……………………………………………....................................23

3.2.2 Personal interviewing…………………………………..…………………………………………….….23

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3.3 Data collection instruments…………………………………….………………………………...23

3.3.1Question guide………………………………………………………................................23

3.3.2 Interview guide…………………………………………………….................................24

3.3.3 Content analysis………………….……………..…….………..................................24

3.4 Quality control…………………………….………………………..…………………………………….24

3.5 Data analysis and presentation……………………………..………………………………….25

3.5.1 Editing…………………………………………………………………..................................25

3.5.2 Coding…………………………………………………………………..................................25

3.5.3 Tabulation…………………………………………………………………………………………………26

3.6 Ethical issues…………………………………………………………..………………………………….26

3.7 Research procedure…………………………………………..……………………………………….26

3.8 Research variable…………………………………….………………………………………………….27

3.8.1 Measurement……………………………………………………….................................28

3.8.2 Data analysis and presentation…………………………………….………………..............27

CHAPTER FOUR

iv.Data Presentation and interpretation…………………….……………………………………..………………30

4.1 Other findings…………………………………………………..………………………….…………………………36

CHAPTER FIVE

v.Recommendation……………………………………………..………………………………………………………………38

5.1 Conclusion…………………………………………………….………………………………………..………………..40

QUESTIONNARE…………………………………………………………..............................................41

REFERENCE……………………………………………………………………………………………………………………..44

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LIST OF TABLES

Table 1: Annual summary of totals for licensed projects per year.

Graph1: Foreign Direct Investments trends for Uganda

Table 2: Country of Origin

Table 3: Sector of Business

Table 4: Means of Company Registration

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ACKNOLEDGEMENT

The successful completion of this work leaves me indebted to many whose

generous assistance, guidance and cooperation facilitated its realization. I wish to

recognize the significant role played by Dr. James Muwanga and my supervisor Dr.

Adam Mugume for assistance, guidance and supervising my piece of work to its

completion. To my friends John, Kevin and George, I humbly thank you for your

invaluable suggestions and inspiring support.

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ACRONYMS/ ABBREVIATONS

BAT-British American Tobacco.

COMESA- Common Market for East and South African States.

EAC-East African Community

FDI- Foreign Direct Investment.

GDP-Gross Domestic Product

IPA- Investment Promotion Agencies.

KIA- Kenya Investment Authority.

MNC- Multinational Corporations.

R&D- Research and Development.

UIA- Uganda Investment Authority.

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ABSTRACT

This paper examines the performance and challenges that face Uganda investment

authority (UIA) in enhancing economic growth through attracting Foreign Direct

Investments (FDI’s). The poor record of FDI’s in Africa is attributed to Factors such

as macroeconomic instability, low growth, weak infrastructure, poor governance,

inhospitable regulatory and ill-conceived investment promotion strategies. The

study looks into these factors among others that limit the flow of foreign

investments in Uganda.

This report stresses the need for an effective policy framework that embraces

foreign investments. It also argues on the need to pay more attention on the

infrastructure, energy, and improvement of relations with existing investors and

offer them incentives to assist in marketing domestic investment opportunities to

potential foreign investors.

Concerted efforts are also needed at the national, regional, and international levels

to attract significant investment inflows to Uganda and improve the prospects for

sustained economic growth and development. This will also put Uganda on the map

given the current wave of globalization through the world intensifying the

competition for FDI’s among developing countries.

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CHAPTER ONE

1.0 BACKGROUND OF THE STUDY.

Performance of Foreign Direct Investment in Uganda can be examined under three

regimes namely post independence up to 1970 to 1985 and 1986 to date. The

initial period witnessed increasing FDI the second declining and near death of FDI

and the third the resurrection of FDI.

In the 1960s the Uganda government’s policy was supportive of industrial

development and the Uganda industrial Act of 1963 promoted both local and foreign

investment (promotion) Act of 1964 provided legal protection for Foreign Direct

Investment (FDI) against compulsory acquisition by the state and guaranteed rights

to repatriate capital, interest and dividends.

In 1970 the government displaced the British and Asian control of the commercial

and industrial sectors, increased its own shares from 51-60% in the major

manufacturing companies .In 1971, Idi Amin overthrew the civilian government

.The Britons and Asians were expelled from the country and foreign assets and

businesses were expropriated .In 1977 the military government tried to revive the

FDI inflow through the 1977 investment decree that exempted foreigners from

paying import duty and sales taxes on plant and machinery for approved

enterprises. However these were not retroactive exemptions and did not apply to

investments under US$ 571,000. Although the military government was overthrown

in 1979 there was little FDI in Uganda 1980-85.

The government elected in 1986 took over an economy that had been reduced to

ruins because of prolonged periods of economic mismanagement, political and

social instability .GDP had declined by 40% from 1971-86 representing an annual

decline of 10% per annum.

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Government had also a strong hand in trade and commerce through parastatals.

Annual revenues collections were only 4% of GDP compared to 15% of government

expenditure.

This represents an 11% fiscal deficit. The economic recovery programme of 1987

aimed at correcting the macro-economic imbalances, elimination of inefficiencies in

production and distribution of goods and services, reviving the role of the private

sector in economic growth and attracting Foreign Direct Investments. The

government under took further macro economic reforms in 1990 and 1991 the

investment code replaced other decrees and laws leading to the establishment of

Uganda Investment Authority (UIA).

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UGANDA INVESTMENT AUTHORITY: ANNUAL SUMMARY OF TOTALS FOR

LICENCED PROJECTS.

Planned Investment from 3028 listed projects (us$):8,683,278,603

Total Planned Employment: 287,191

Source UIA.

Year No. of Projects Planned Inv(USD) Planned

Employment

1991 6 10,483,500 0,446

1992 108 270,523,618 9,045

1993 187 392,004,605 17,263

1994 232 302,057,804 21,259

1995 279 508,493,526 20,140

1996 226 561,063,719 20,107

1997 183 460,170,168 13,561

1998 102 313,040,591 7,188

1999 66 188,350,292 4,293

2000 89 297,084,364 8,490

2001 117 187,170,130 14,302

2002 151 830,187,713 13,392

2003 160 349,607,199 19,180

2004 189 429,114,400 17,046

2005 293 931,787,131 29,608

2006 428 1,669,965,613 48,654

2007 196 982,174,500 23,217

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Since UIA’s inception there has been a variation in the flow of foreign Direct Investments as depicted in the graph below.

FDI TRENDS

6

108

187

232

279

226

183

102

66

89

117

151160

189

293

428

196

10

50

100

150

200

250

300

350

400

450

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

YEARS

NO

. OF

LIC

ENSE

D P

RO

JEC

TS

Series1Series2

Between 1991 and 1995 the number of projects increased steadily at an annual

average of 33%. After 1995 there has been a downward trend in the number of

projects licensed. Reasons for these trends in the number of licensed projects are;

The upward trend during the early years was due to

o The aggressive image building by UIA resulting in new projects.

o Rush by potential investors for virgin sectors (where existing

investment was then minimal)

o Relative stability (economic, political or otherwise) in comparison to

other regional member states.

o Rush by speculative (footloose) investors whose main motive was to

reap from the tax holiday regime and

o Liberalized economy without serous competition from neighbors.

Uganda was always ahead of her neighbors in liberalizing

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b) The number of projects licensed per year started declining especially 1996-

1999 subsequently after the peak due to;

Economic reforms by regional states creating competition

Abolition of tax holidays causing some investors to implement projects

without UIA’s license.

New cases of unrest in the great in the great lakes region.

Reduced enthusiasm in joining established players in different sectors (fear

of competition)

International economic recess especially in Asia (previously high targeted

source of investments.

Insufficient utilities e.g. power, telecommunications and infrastructure that

cannot sustain new investments.

El-nino effects which adversely affected the little infrastructure (mainly

roads) that there was thus affecting supply arrangements for investors and

the initial upward trend of actual investments was largely due to expansions

(on existing projects) in an environment quite familiar for investors. Later

however there was a decline mainly due to the gestation period of projects

and the unpredictable investment climate.

C. later projects licensed per year were on an upward trend though at a slow pace

between 2000- 2003 however 2004 -2006 there was a rapid increase in the

number licensed projects. This attributed to a number of factors mainly attributed

to

Investment incentives

Prospects of regional integration that attracted foreign investors in the intent

of benefiting from a large market.

Adoption of a privatization of government owned enterprises such as Uganda

commercial bank, New Vision Printing and Publishing Company.

Political stability

Increase in UIA’s funding by government especially

15

D) The number of licensed projects declined at an alarming rate in 2006/2007.

This was a result of

1. Power crisis that hindered production.

2. High fuel costs

3. Increase in fees on work permits for foreign employees from Ugshs

135,000/= to US$ 1000.

4. High domestic debts by government that discouraged FDIs’ due to high

cost of borrowing.

5. High production costs

1.1 STATEMENT OF THE PROBLEM

Uganda has maintained an exemplary trend in attracting FDI within Africa and this

has been mainly attributed to among other factors UIA’s aggressive marketing

campaign abroad, design and implementation of policies aimed at attracting FDI.

Despite these UIA still faces major challenges at competing globally for foreign

investments. Even with already existing incentives such as tax holidays a lot still

needs to be done if UIA is to remain competitive as far as attracting foreign

investment is concerned.

1.2 PURPOSE OF THE STUDY

The main purpose of the study is to find out the challenges faced by UIA in

enhancing economic growth through promotion of foreign direct investments. It

also seeks to find out if UIA has exploited to the maximum all available

opportunities and if not why is it the case.

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1.3 SPECIFIC OBJECTIVE

1) To find out ways in which to improve performance and address challenges

facing UIA.

2) To assess the impact of UIA’s Investment Promotion Strategy.

3) To propose strategies that will enable UIA achieve the objective of enhancing

increased economic growth.

1.4 SIGNIFICANCE OF THE STUDY

The study is meant to enlighten academic institutions and policy makers among

other stakeholders on the performance and factors that limit UIA’s efforts in

attracting foreign investments. It is also expected to come up with suitable policy

recommendations that will make UIA competitive as well as achieve its vision of

making Uganda a world class investment destination.

1.5 SCOPE OF THE STUDY

The study will cover the period of 1996-2006; it will mainly focus on the

performance and constraints that face UIA in promoting FDI. Emphasis will be

placed on UIA as well some of the (UIA) licensed foreign investors. Reference will at

some point be made on other investment promotion agencies regionally that

compete for similar foreign direct investments opportunities with Uganda such as

Kenya Investment authority

1.6 LIMITATIONS OF THE STUDY

The researcher faced the following problems while carrying out the study.

i. Some respondents did not return the questionnaires.

ii. High financial costs mainly transport, and printing.

iii. Some of the respondents were uncooperative.

iv. Failure to access relevant information due to bureaucratic procedures.

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CHAPTER TWO

2.0 LITERATURE REVIEW

This chapter looks at an over view of foreign direct investments and their motives

as well as impacts to the host and home economies, the participation of investment

promotion agencies in attracting and promoting foreign investments in their

respective countries basing on existing literature.

FDI plays a central role in the process of economic development. In contrast the

traditional growth framework where technological change was left as unexplained

dependence of growth rates on the state of technology relative to the rest of the

world, thus growth rates in developing countries are in part explained by the “catch

up” process in the level of technology. In a typical model of technology diffusion the

rate of growth of developing country depends on the extent of adoption and

implementation of new technologies that are already in use in leading countries.

E.Borensztein purports that FDI can take place through a variety of channels that

involve transmission of ideas and new technologies. Imports of high technology

products and adoption foreign technology and acquisition of foreign human capital

are important conduits for diffusion of technology. Besides these channels FDI by

Multinational Corporations (MNCs) is considered to be a major channel for the

access to advanced technologies by developing countries.

Some recent work on economic growth has highlighted the role foreign direct

investment in the technological progress of developing countries. Findlay (1978)

postulates that foreign direct investment increases the rate of technological

progress. In the host country through a “contagion effect” from the more advanced

technology, management practices among others used by foreign firms.

Bo Sodersten views that although such investments may be made by

individuals/partnerships, most FDI is undertaken by enterprises and the longer part

of that by Multinational Enterprises.

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2.1 MOTIVES OF FOREIGN DIRECT INVESTMENTS

The main motive is to earn high returns abroad (possibly resulting from high growth

rates Abroad) more favorable tax treatment or greater availability of infrastructure)

and to diversify risks. Research has found out that with strong orientations, either

through exports or through production and or sales facilities are more profitable

and have much smaller variability in profits than purely domestic firms.

The big question is why nations can’t borrow from other nations or at home make

real investments in their own nation rather than accept direct investments from

abroad. After all residents of a nation are familiar with local condition and thus at a

competing advantage with respect to foreign investors. Several explanations to this

exist and they include: Most important large corporation (usually in monopolistic

and oligopolistic markets) often have some unique production knowledge or

managerial skill that can easily and profitably be utilized abroad. Over which

corporations wish to retain direct control, hence firms’ make direct investments

abroad. This involves horizontal integration or the production of differentiated

products that is also produced at home e.g. IBM which has a particular technology

which it wants to retain direct control but which it can easily duplicate abroad to

secure foreign markets better (by adoption to local conditions)than through exports

IBM in this case may want to license foreign producers simply because it wants to

retain complete control over its trade secrets and patents to ensure consistent

quality and service. Even if IBM was willing to license it would not be feasible in the

view of rapid rate of technological innovation in the field. The situation is basically

the same for General Motors, Toyota etc.

The other reason for FDI is to obtain control of a needed raw material and hence

ensure uninterrupted supply at the lowest possible cost. This is referred to as

vertical integration and was the form of most direct investments in developing

nations for instance British American Tobacco (BAT) and some mineral rich

countries.

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Vertical integration involving MNC’s can also go forward into ownership of sales

distribution networks abroad as is the case in most auto mobile producers .There is

also the need to avoid tariffs and other restrictions other nations impose on imports

or take advantage of various government subsidies to encourage FDI.

Also to enter foreign oligopolistic markets so as to share in the profits to purchase a

promising foreign firm to avoid its future competition and the possible loss of export

market or because only a large foreign multinational corporation can obtain the

necessary financing to enter the market.

Regional distribution of FDI around the world also seems to depend on geographical

proximity or established trade relations.

2.2 BENEFITS OF ATTRACTING FOREIGN DIRECT INVESTMENTS The benefits of attracting inward investment into a country or region are both well

known and significant. They include:

I.Job creation

By providing additional capital to host country, FDI can create new employment

opportunities resulting in higher growth .It can also increase employment indirectly

through increased linkages with domestic firms. More specifically the location of

foreign firm in a host country generally leads to the establishment of domestic firms

that provide an input to it thereby increasing the demand for labor. Aaron (1999)

provides evidence on the positive impact of FDI on employment in developing

countries.

II.Technology transfer.

Foreign firms make significant investments in R&D consequently they tend to have

superior technology relative to firms in developing countries. FDI gives developing

countries cheap access to new technologies and skills thereby enhancing local

technological capabilities and their ability to compete on world markets. Blomstorm

and Kokko (1998) provide a survey on the literature on FDI and technological

transfer.

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III.The generation of increased exports.

This is through integration into the global economy hence openness to FDI

enhances international trade thereby contributing to integration into the host

country into the world economy (Morrsset, 2000).

IV.Raising skills of local manpower.

Through training of workers and learning by doing ,FDI raises the skills of local

manpower thereby increasing technological .The idea enhances productivity of the

labor force is supported by empirical evidence suggesting that workers in foreign

owned enterprises are more productive than those in domestic owned enterprises(

Harrison 1996)

V.Source of capital formation.

FDI is seen as an important source of capital formation particularly when the capital

base is low. Capital inflow is seen as a way of creating a surplus in the capital

account of the balance of payments or to make up for the deficit on the current

account. Consumer Unity and Trust Society (CUTS) points out that there have been

cases where FDI have not led to capital formation but rather crowded out domestic

investment

VI.Improved competitiveness of domestic firms.

Because inward investment offers significant benefits to an Economy, nations and

regions compete intensely to attract it. Over the last two decades the process of

attracting inward investment has changed fundamentally. As the full benefits of

inward investment have been realized and the global environment has altered to

foreign investment easier, countries and regions have adopted more competitive

strategies to attract investment. As a consequence, countries/regions have been

marketing themselves as bundles of tangible and intangible benefits.

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Typical tangible offerings by nations include locational benefits such as rent-free

factory accommodation, and access to sophisticated infrastructures. On the other

hand, intangible benefits include the brand image of the country (including the

quality of life for residents), and the nature and depth of pre and post investment

services offered to the potential investor.

As attracting inward investment has become more competitive, the nature and

intensity of prospecting has changed dramatically. For example, the number of

regional and national Investment Prospecting Agencies (IPA’s) has increased

considerably. There are approximately 2500 national/regional/sub-regional IPA’s

Obtaining hard data on the effectiveness of IPA’s is difficult because of their

competitive nature. However, Wells and Wint (1990) estimated that the net present

value of proactive investment prospecting was $4 for every $1 expended an

attractive return on investment. These authors also determined some broad

requirements for successful investment prospecting, including:

i. The provision of pertinent information that permits MNE’s to compare

and contrast international locations

ii.Promotional activity aimed at achieving product differentiation of the

host country

iii. Using industry, company knowledge to present a value proposition to

prospective and, perhaps, reluctant investors

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CHAPTER THREE

3.0 METHODOLOGY

3.1 Introduction

This chapter presents survey methodology that was used in carrying the study .It

covered the proposed research design, study area, population and sample, data

collection procedures and instruments, data analysis quality control and ethical

issues involved in data collection and processing.

3.1.1 Research Design

The study was conducted through cross sectional survey design using both

quantitative and qualitative methods. The combination of the two enabled the

researcher to obtain better findings.

3.1.2 Study Area

The study area was mainly in Uganda Investment Authority in Kampala Uganda,

located along Kampala road in the city centre. It also involved Foreign Direct

enterprises located in Kampala

3.1.3 Population and Sample size

The study population comprised of foreign investors licensed by UIA and the top

management of Uganda Investment Authority .The researcher used a size of 30

respondents due to resource and time constraints .The enterprise list of the foreign

investors was drawn from UIA.

3.1.4 Sampling

The study employed stratified sampling to select the sample. “The stratified

sampling technique refers to identifying sub-groups in the population and their

proportions, and then selecting them randomly from each sub-group to form a

sample. The purpose was to ensure equitable representation of the population in

the sample” says (Enon, 1998:14).

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3.2 Data collection methods

In order to get quality information, various data collection methods were used.

These methods included the following:

3.2.1 Questionnaire method

The researcher used open-ended questions to which respondents answered directly

by filling in or ticking where appropriate. The questionnaires were both structured

and unstructured. This method was used because; it gave freedom to the

respondents to decide on the aspects like; form, detail and length of the answer.

The questionnaires were personally administered to the respondents.

3.2.2 Personal interviewing

The main method of data collection was personal interviewing; the researcher

located the respondents in their places of work, and set appointments to meet

them. The researcher visited UIA thus enabling him to have the opportunity to have

a face-to-face conversation to probe, prompt and exchange opinions with the

management. It also enabled the researcher to collect first-hand information.

Answers to questions asked during the interview were recorded through writing.

This method is considered appropriate for the study as it answers most questions

that the researcher cannot easily find answers to when alternative methods are

used.

3.3 Data collection instruments

The researcher used the following research instruments.

3.3.1 Questionnaire guide

This entailed a series of direct closed and open ended questions designed purposely

to get answers from the respondents. This instrument was intended to give the

respondents an opportunity to choose the most appropriate answer. Since the

respondents were mainly I top management of the various foreign direct

enterprises, the questionnaire sought information on:

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1. Registration and licensing process of foreign investments and the challenges

faced.

2. Competitiveness and effectiveness of UIA.

3. Challenges investors face in Uganda

3. Investors recommendations

This method is significant in that it catered for varying views and experiences from

different respondents. It was also preferred because it provided a quick means of

obtaining data, and eased analysis of responses statistically and also provided wide

coverage.

3.3.2 Interview guide

The researcher interviewed members of management who are not in the position

to fill questionnaires. This provided answers directly to the researcher in response

to the questions asked.

The researcher’s aim was to come up with a clear picture of the situation from the

management of UIA, unlike the questionnaire, which limits the respondent to the

formulated questions.

3.3.3 Content analysis

Documentary sources were used to gather data. The method provided the

researcher with sufficient information. Old and new journals were utilized to assess

UIA’s performance and find out the challenges facing UIA in enhancing economic

growth trough promotion of FDIs’. The information materials and or documents of

UIA were consulted in order to obtain some information to supplement information

gathered through other sources.

3.4 Quality control:

The researcher endeavored to avoid bias in the study. In this regard structured

questionnaires were designed and pre-tested. The researcher utilized the following

tactics.

ii.. Triangulation of the research methods

The researcher used more than one method in data collection.

25

These included interviewing and questionnaire methods.

iiii.. Triangulation of respondents

Various respondents were also included in the study. These included the

management of UIA. The study was purely academic and aimed at providing

academic knowledge in the field of investments in Uganda.

iiiiii.. Pre-testing

Pre-testing the instrument was carried out so as to ensure that questions in the

instrument are clear to ensure that the questionnaire and interview guide held the

same meaning to all respondents. Also during pre-testing the researcher was able

to identify sensitive, provocative, unclear or biased questions that were corrected or

omitted.

3.5 Data analysis and presentation.

Qualitative data obtained from the study was coded and grouped into themes that

emerge and matched according to the objectives of the study. Ideas, opinions and

recommendations by individuals were also summarized in tabular form and figures.

Comparisons of the objectives and ideas lead to findings and interpretation of

findings of the study.

3.5.1 Editing

Mugenda (1999:120) refers editing as the process of checking for errors and

omissions in the data collected in order to ensure accuracy, uniformity and

completeness. This will ensure that the research instruments bear clear, logical and

comprehensive responses. The researcher will begin by looking over each

completed questionnaire by searching for incomplete questions and answers where

the questions were misunderstood.

3.5.2 CODING

This is the process of classifying responses to questions into meaningful categories

in order to bring out their most essential pattern. It involves the development of

coding frame, which will be the full set of all answer categories into which all the

survey data will be classified. The answers will be got from the open ended and

closed questionnaires. (Enon, 1998:92)

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3.5.3 Tabulation

Tabulation stage follows editing and coding in data processing. It entails counting

and adding all answers to particular questions in the whole research sample. It is

guided by the coding frame. The tabulation involves the process of allocating

responses using tally marks manually and then computing the frequency

distribution of the codes followed by calculating the number of elements in each

code which will be done by adding tallies together, and calculating their

percentages.

Finally, the researcher will compile statistical tables from the coded answers by

taking the number of respondents for each code and their percentages out of the

total sample.

3.6 Ethical issues

This study was carried out under inter-institutional collaboration arrangements

between Makerere University, Kampala and Uganda Investment Authority.

Respondents were protected by keeping the information obtained confidential and

their consent will be sought before revealing any information. Anonymity of

respondents was through use of numbers or pseudo names. The information

collected was utilized strictly for learning purposes.

3.7 Research procedure.

Permission to conduct the research was obtained from relevant authorities’

concerned that is a letter of authorization from the dean of the Faculty of

Economics and Management to introduce the researcher to Uganda Investment

Authority. Questionnaires were distributed to selected respondents and the purpose

of the study was to explain the areas to be visited. Appointments by those to be

interviewed were made and interviews carried out and responses subsequently

recorded. The researcher then analyzed the data using descriptive methods of

narration

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3.8 Research variables

Economic Growth = ƒ (Investment)

Where; I is Foreign Direct Investment

The dependant variable is economic growth and Foreign Direct Investment (I) the

independent variable.

Whereas

I= ƒ(S,Y,L,Рs,Inf,G,M,N,B,P,Π)

The independent variables are;

ii.. Savings (S),

iiii.. Income (Y),

iiiiii.. Productivity of labor (L),

iivv.. Political stability (Ps),

vv.. Infrastructure (Inf),

vvii.. Administration bureaucracy (G),

vviiii.. Global market competition (M),

vviiiiii.. Markets which are in their nascent stages (N)

iixx.. Investor perceptions (P)

xx.. Inflation (Π).

3.8.1 Measurement of research variables

Economic growth is the dependant variable of investment. In this study more

emphasis was on foreign direct investments. So as to encourage FDI inflows the

government needs to create and promote a conducive environment for investments

by ensuring that the above variables hold a positive relationship.

3.8.2 Data analysis

Foreign Direct Investment (I) is assumed to be a function of the variables that

include, savings(S), income (Y), productivity of labor (Ps), infrastructure (Inf),

administrative bureaucracy (G), global market competition (M) ,

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Markets of which are in their nascent stages (N) , credibility of the bilateral

relations with foreign states, investor perceptions (P),inflation (Π). These factors

influence foreign direct investments positively or negatively.

The savings level (S) will be assumed to influence FDI either positively or

negatively. When the savings level is high this leads to increased foreign direct

investments due to the availability of credit implying a positive relationship. On the

other hand when the savings level is low in a given economy FDI’s tend to shy

away from such economies.

Income (Y) will be assumed to influence FDI’s either positively or negatively. In this

case when income levels are high in a given economy this will translate into high

purchasing power amongst households thereby attracting foreign direct

investments .Whereas when the income levels are low income level will relate

negatively to FDI. Infrastructure is expected to have a positive or negative

relationship with FDI’s. Many respondents considered the state of physical

infrastructure as not conducive for competitive business they mainly emphasized

road on poor road network, power shortages that led to increased costs and

reduced production this implies that poor infrastructure is negatively related to

Foreign Direct Investments.

Complex administrative bureaucracy (G) is expected to have a negative relationship

with foreign direct investments. It is assumed that high administrative bureaucracy

slows down decision making process, encourages corruption thereby hindering the

inflow of FDI’s hence there exists a negative relationship between FDI and

bureaucracy.

High global market competition (M) tends to have a negative relationship with FDI’s

for instance the cost of production is high due to a number of factors such as poor

infrastructure, low labour productivity high cost of inputs among other factors thus

FDI’S fear taking the risk of investing in Uganda given the stiff competition from

other global markets that face low production costs such as china and India.

29

Narrow markets will relate negatively whereas wide markets will relate positively

with FDI’s .Foreign investors seek high returns on their investments within the

shortest time possible. This means that narrow markets cannot guarantee such

returns given the investment. This is evident from the regional trade blocks that

Uganda has joined that have attracted FDI’s into Uganda so as to benefit from the

wide East African Community (EAC), Common Market for East and Southern Africa

(COMESA).

Bilateral relations (B) are expected to have a positive and negative relationship with

Foreign Direct Investments. An economy that enjoys good bilateral relations with

foreign states will in most cases have an upper hand when it comes to FDI inflows.

On the contrary where bilateral relations are not cordial or non existent this leads

to a negative relationship.

Investor perception (P) will be assumed to influence FDI either positively or

negatively. In this regard when foreign investors perceive a given country or region

as not conducive for investment due to past history among other factors the n there

will be little or no FDI inflows into such economies or regions.

Inflation (Π) will have a negative relationship with Foreign Direct Investments. An

economy with high inflation levels say double digit inflation will tend to limit a

country’s ability to attract Foreign Direct Investments. Recent trends based on

African data suggest that countries with high inflation level attract less FDI’s.

(Onyeiwa and Shrestha 2004)

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CHAPTER FOUR

4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION

This chapter, findings are presented analyzed and discussed .The chapter is divided

into three parts namely: general information (section A), licensing and registration

(section B) and performance and competitiveness (section C).

A total of 30 questionnaires were administered, 20(66.7%) questionnaires were

returned while 10(33.3%) were non response.

4.1 GENERAL INFORMATION

In this chapter, findings on the country of origin of investment, business sector and

scale of production were discussed.

Table 2 Country of origin of business.

Source: Research findings

Out of the 20 enterprises that responded 10(50%) were from Kenya (25%) from

India (10%) from Tanzania and 1(5%) from South Africa, Britain, and Burundi

respectively. Kenya recorded the highest percentage of enterprises/investments in

Uganda this could be attributed to positive prospects in the formation of the East

African community by most investors.

Country of origin of

Business

Number of companies percentage

Kenya 10 50%

South Africa 1 5%

Tanzania 2 10%

Britain 1 5%

Burundi 1 5%

India 5 25%

20 100%

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Table 2 Sector of business

Source: Research findings

The results show that manufacturing was the primary activity around Kampala

amongst most foreign investments accounting for 40 %( 8 enterprises) while

hospitality and the transport sector accounted for 20 %( 4 enterprises)

respectively, while media and the retail sectors accounted for only 10 %( 2

enterprises) respectively. Media and the retail sector were the least attractive

sectors in terms of foreign investments.

On the scale of production it was found that 65% (13 foreign enterprises) operate

on a large scale whereas 35 %( 7 foreign enterprises) operate on a small scale.

4.2 REGISTRATION AND LICENSING

When respondents were asked if they had any knowledge of the existence of UIA

85% (17 respondents) said they had knowledge about its existence while 15% (3

respondents) did not have any knowledge about it. However most foreign investors

were aware of UIA, this shows it has made a mark as far as marketing Uganda is

concerned.

Enterprises were also required to indicate how they had their companies registered

and licensed.

The results showed that 50 %( 10 enterprises) were registered and licensed

through UIA’s assistance. It’s also worth noting that enterprises registered through

UIA’s assistance accounted for the highest percentage.

Business sector Number of enterprises percentage

Hospitality 4 20%

Manufacturing 8 40%

Transport 4 20%

Media 2 10%

Supplies and retail 2 10%

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On the other hand 20 %( 4 enterprises) took the burden of registering their own

enterprises with the registrar of companies and some were facilitated by their

advocates. Investors who bought already existing companies accounted for 5%.

Table 3. Means of Company Registration

Source: Research Findings

When asked to state the difficulties that were faced during registration and

licensing process 50% of those who registered through UIA said the process was

smooth and satisfactory, 15% of those who registered through the registrar of

companies claimed not to have encountered any problems while on the other hand

10% said they were faced by a number of problems such as complex bureaucratic

procedures, harsh officials and unnecessary delays.

Those whose registration and licensing process was handled by advocates

accounted for 20% of the total number. Problems encountered in this category

mainly include;

i) High fees charged by their advocates for their services

ii) Unnecessary delays due to the long periods taken during registration.

Respondents were also interviewed about the effectiveness of UIA and the results

obtained indicated that 65% felt UIA was effective, 25% ineffective while 30% had

no idea about its effectiveness. Reasons for these were as follows;

Registration Number of companies percentage

UIA 10 50%

Registrar of companies 4 20%

Advocate 2 10%

Mergers and Acquisitions 4 20%

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Respondents attributed UIA’s effectiveness to the following factors

Good management.

UIA is credited with a competent management team which has successfully steered

the institutions activities. This has also seen Uganda ranked as an “above potential”

foreign investment destination.

Aggressive marketing campaigns.

This is through the inward missions organized by UIA and the foreign ones that UIA

officials attend to show case what Uganda has to offer. These are also

complemented by the various conferences held by other agencies abroad where UIA

briefs other stake holders and prospective investors about the any progress made

In making Uganda the preferred investment destination

Attractive Investment incentives.

Incentives are preferred by many IPA’s in their value proposition. Incentives tend to

cover the entire range of business activities and this has to a large extent

contributed to the effectiveness of UIA in as far as FDI’s are concerned.

Stability.

Uganda continues to enjoy social and political stability of this plays a very important

role in determining whether investors will consider investing in the country.

Countries that experience civil unrest and political upheaval are unlikely to be

considered as viable investment destinations.

UIA’S ineffectiveness is attributed to the following factors;

High financial requirements.

The demand for high financial requirements by UIA limits the flow of foreign

investors. This is mainly because investors who fail to raise the required amount

cannot benefit from investment incentives

34

Lack of sufficient funds.

The institution lacks sufficient funds to run its activities smoothly. This means

alternative sources of funds have to be sought for instance from donor countries,

organizations this limits UIA’s effectiveness.

Long registration procedures.

The registration of enterprises in Uganda takes longer compared to other emerging

markets in the region such as Rwanda where registration and licensing takes only a

period of nine days. This factor poses as a threat to the attraction of FDIs’ in

Uganda.

PERFORMANCE AND COMPETITIVEMESS

Respondents had mixed reactions when they were asked to comment about

Uganda’s competitiveness and performance as far as attracting FDI’s is concerned

.in this regard 55%(11respondents)felt that UIA was competitive whereas 45%(9

respondents) did find it competitive. Mainly UIA’s lack of competitiveness was due

to a number of factors that posed as major challenges to investors. These include:

Power crisis.

The power problem has affected the production in most enterprises both domestic

and the foreign ones. This has led to loss of prospective investors to other markets.

its also important to note that the increase in the per unit costs of electricity erodes

away investors profits hence forcing them to increase their product prices this

makes such products uncompetitive given the presence of products from other

cheaper markets such as Kenya.

35

High fuel costs

Despite the continuous increase in world fuel prices, the high taxes on fuel in

Uganda works against the foreign investors tend to shy away from such markets.

Poor infrastructure

Due to the poor condition of the roads and an inactive rail network the access to

domestic and foreign markets are greatly hampered. This means the cost of doing

business in Uganda is too high thereby negatively affecting Uganda’s

competitiveness in terms of attracting foreign investments.

Insecurity in some regions:

Investors will always invest where the risks are lowest and their security as well as

that of their personnel is guaranteed. Contrary to these foreign investors will shy

away from such markets however lucrative they may be. Hence due the northern

region that has had many years of rebel attacks by the LRA, and the recent attacks

along Uganda’s boarder points with Congo deter FDI’s flow in Uganda.

High production costs

This was mainly attributed to the high electricity costs, transport costs, labor

training costs, and financial costs due to the high cost of borrowing. Such factors

tend to deter investors from investing in Uganda hence preferring other regional

markets where they incur cheaper costs of production.

Lack of appropriate skills:

The lack of the needed human resource domestically calls for training the locals

hence this over stretches the investors expenditure on training costs also the use of

expatriates means high costs since the costs of their services are too high. In such

instances investors will always avoid investing in Uganda.

36

Corruption

Weak law enforcement stemming from corruption. The lack of a credible

mechanism for the protection of property rights are major deterrents to FDI’s in

Uganda. Foreign investors prefer to make investments with very good legal and

judicial systems that guarantee security of their investments.

Customs offices in various busy border points work for limited time, due to this

factor raw materials, intermediate and finished goods some of which are on transit

to other markets take long at these boarder points while awaiting clearance than

they should if custom offices were to work 24 hours. This hinders business activities

especially in today’s global economy.

Unfair custom practice

Transport companies especially those ferrying passengers are often penalized high

amounts of money for transporting smuggled goods. When passengers realize that

custom officers have identified their smuggled goods they do not claim ownership

of their goods. As a result such company buses are impounded and only released

after paying heavy fines leaving the burden on the transport company.

4.3 OTHER FINDINGS

Narrow market

Relative to other regions of the world Uganda’s market is quite small accounting for

a mere population of 28 million. This makes it difficult for foreign investors to

exploit the economies of scale and so discourage entry.

Image of a conflict prone region

Most foreign investors perceive Africa as a region that characterized by high

incidence of wars, frequent military intervention in politics, religious and ethnic

conflicts. In a study carried out by Rogoff and Reinhart (2002) computed regional

susceptibility to war indices for the period 1960-2001.

37

They found that wars are likely to occur in Africa than in other regions. The regional

susceptibility to war index is 23.6% for Africa compared to 19.4% and 9.9% for

Asia and the Western Hemisphere respectively.

The lack of legal framework such as legislation and policy on unfair

competition.

Outdated legal framework and laws such as the bankruptcy law, law of contract,

and trade law. This factor was also emphasized by Dr Flora Musonda,

representative of EAC on a presentation about the “Challenges Facing Investment

Promotion” in during a regional meeting on investment promotion in East Africa.

Land problems

The lack of clear land policies on land ownership and land use has over the years

discouraged foreign direct investments in Uganda. Foreign investors mostly require

large tracts of land of which is not readily available leading to the giving away of

forests land, water catchment areas hence resulting to conflicts for instance the

recent Mabira forest give away that led to loss of life.

Communal land ownership has also made projects to take long before

implementation due to the lack of sufficient compensation to the land owners as

well reallocation.

38

CHAPTER FIVE

5.0 RECOMMENDATIONS AND CONCLUSIONS.

Infrastructure development

UIA should press for the need of initiating and encouraging the need for more

cooperation in infrastructure development for example in energy, rail, civil aviation,

post and telecommunications and the Lake Victoria Basin Development project. This

should not only at the national level but also regionally.

In the case of transport sector in Uganda a policy frame work that embraces private

sector participation should be adopted. For instance leasing out of roads to the

private sector. This will not only eliminate the burden of road maintenance on the

public sector but also revenues allocated to these sectors can be used to stimulate

growth in other sectors.

Increase UIA’s- funding.

Even though commitment of funds to UIA is laudable a lot still needs to be done it

should also be viewed against the commitment made by other agencies. This will

also reduce on the pressure on UIA officials who have to source for funds form

donors among other non-governmental agencies.

Solve the power crisis.

There should be a frame work to improve the generation and distribution of power at a lower cost. This calls for investment in the energy sector so as to eliminate the incessant power machinery breakdown and low capacity utilization. Establish liaison offices.

The setting up of effective liaison offices regionally and overseas usually for the

purposes of investment generating should be emphasized either as stand alone or

part of consulate or embassy .Though costly these offices play an effective role in

providing investor information of a given country or region.

39

Fight corruption

There should be advocacy for policies that make it easy to identify and punish

corrupt cases. This not only focus on the public sector only but also the public

sector.

Agency of constraint

Regional integration through the formation of regional groupings can also be used

to reduce the incidence of domestic policy reversals and improve the credibility of

economic policies in the region. In this case when national governments have a

credibility problem the regional groups can provide an external agency of restraint

on domestic policies.

Increase on the scope of national markets.

National markets can be increased through regional integration so as to help attract

investors currently constrained in part by the small size of the domestic markets in

the region. The successful conclusion on the formation of the East African

Community and by the membership of Rwanda and Burundi the EAC will constitute

the second largest market in Africa after Nigeria as well as access to COMESA and

SADC markets ,the EU markets and the USA through the AGOA initiative. Such a

wide market will therefore make Uganda and the EAC attractive as far as FDIs’ are

concerned.

Land Policy Formulation

UIA should advise government on the need of formulating an effective land policy

that will make it easier for investors to acquire land for their ventures hence

increase on investors’ confidence given the magnitude of the problem of acquiring

land for investment in Africa.

40

5.1 CONCLUSIONS.

As UIA aims at becoming the leading investment location in the world an application

of the best practice investment models and streamlined use of investment

procedures is vital. Policy recommendations must also aim at fulfilling a balance

between investment promotion, administrative simplicity and revenue generation.

The key is to filter the intensions of each group concerned and propose a reform

scheme that is based on the limited capacity of government, the desperate need of

optimizing revenue generation and yet fulfilling the goal of increasing FDI inflows

into Uganda. It’s in conformation to these requirements that UIA will attract FDI

inflows and thus facilitating growth of the economy.

41

QUESTIONEER

Dear Respondent,

This questionnaire has been designed with aim of collecting information that is

relevant for the analysis of the challenges and performance of Uganda Investment

Authority in enhancing economic growth through promoting Foreign Direct

Investment. It’s purely for academic purpose and your response will be treated

confidentially. I therefore request you to spare a few minutes of you valuable time

the answer the following as candidly as possible.

A. GENERAL INFORMATON.

Position held………………………………………………………….

Business Sector……………………………………………………

Country of origin of business………………………………

Scale of production………………………………………………

B. PROJECT REGISRATION AND LICENCING

1. Do you know of the existence of Uganda Investment Authority?

Yes No

2. Did UIA facilitate the registration and licensing of your company?

Yes No

42

3. If yes, how was the registration and licensing process? If no, how did you

register your company?

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………...

4. What difficulties did you face during registration and licensing of your company?

a) For companies that registered through UIA.

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

b) For companies that registered without UIA’s assistance.

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

5. Do you think UIA has been effective in marketing Uganda as a desirable

destination for Foreign Direct Investment?

Yes No

a) What reasons do you have for your answer?

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………..

43

C. PERFORMANCE AND COMPETITIVENESS.

6. In your own view is Uganda competitive in attracting FDI’s?

Yes NO

a) Give reasons for your answer.

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

7. What challenges is your company facing as far as investing in Uganda is

concerned.

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………..

8. What recommendations would you suggest UIA to adopt or advise

government on so as to enable it achieve its vision of making Uganda the

leading Foreign Direct Investment destination

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………

44

REFERENCE:

Aaron C. (1999) The Contribution of Foreign Direct Investments to poverty

alleviation. Washington, DC: Foreign Investment Advisory service.

Report: Private Sector Investment Survey 2003

E-Boreztein: FDI and Growth; A Journal for International Economics 1998

Harrison, A. (1996) Determinants and effects of foreign direct investments in

Coted’ivoire, Morocco and Venezuela. In M. Roberts and J.Tybout (Eds), Industrial

evolution in developing countries, micro patterns turn over, productivity and market

structure.

United Nations: Investment in Africa: Performance and Potential. New York and Geneva: Econews. 15 April 2003. Foreign Investment in SADC. USAID/Pretoria Investment and South Africa: A Comparison of Performance and Policy. India United Nations Conference on Trade and Development 2002. World Investment Report: Transnational Corporations and Export Competitiveness. New York and Geneva: United Nations UNECA, Economic Report on Africa 2002: Tracking Performance and Progress. Tandon, Y. 2002. Fallacies about the theory of FDIs: It’s ideological and methodological pitfalls. Harare, Zimbabwe: SEATINI Chatterjee, S. 2002. Foreign Direct Investment in developing countries: Some findings of the investment for development project. Seminar Paper. Morrisset, P. (2000) Foreign Direct Investment to Africa

45

Report: Regional meeting on investment promotion in East Africa

Overseas Developing Institute 1997. Foreign Direct Investment Flows to Low-Income Countries: A Review of the Evidence. Briefing paper. Chantal Dupassquier and Patrick n. Osakwe: foreign Direct Investments in Africa: Performance, Challenges and Responsibilities. Fosu A.K 2001: The Global Setting and African Economic Growth. Journal of African Economies. Onyeiwa, S and Shrestha H. (2004) Determinants of Foreign Direct Investments in Africa.Jounal of Developing Economies. Elbadawi I and Mwega, F (1997): Regional Integration and Foreign Direct Investments in Sub Saharan Africa

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