The Nexus between digital competitiveness and Foreign Direct Investment inflows in East Africa Community Countries

Abstract

Empirical studies consistently indicate a positive correlation between Foreign Direct Investment and economic growth, particularly within developing nations. Nonetheless, the extent of FDI inflows is significantly shaped by a range of country-specific determinants, including the prevailing digital environment. Recent data reveal that although FDI inflows have risen in parts of Asia as well as Northern and Southern Africa, Eastern Africa has experienced a decline in such investments in recent years. In light of these declining FDI trends in Eastern Africa, and the critical importance of enhancing the region’s attractiveness to foreign investors to foster sustainable development, this study investigates the nexus between digital competitiveness and FDI inflows. Specifically, the research focuses on the dimensions of digital competitiveness: technology, knowledge, and future readiness. The study is theoretically underpinned by the Eclectic Paradigm and the New Growth Theory. Adopting a positivist research philosophy, the study employed a quantitative methodology to analyse the relationships among the selected variables. Using panel data from eight East African countries Kenya, Tanzania, Rwanda, Burundi, South Sudan, DRC, Uganda, and Somalia over the period 1990 to 2022, the study utilizes panel regression techniques to examine the relationship between digital competitiveness and FDI inflows. The study finds that strong digital knowledge, driven by education and research, significantly boosts FDI inflows in EAC countries, while digital technology use has a smaller impact. Additionally, improving regulatory quality can enhance investment attractiveness. Future digital readiness, supported by human capital and innovation, emerges as a key factor in increasing FDI in the region. Based on these findings, the study recommends that EAC member states strengthen their research and innovation ecosystems through a regional framework and a dedicated EAC Research and Innovation Fund. It also advocates for harmonized intellectual property protection laws and greater mobility for researchers. Furthermore, investment in regional digital infrastructure such as crossborder broadband connectivity and harmonized digital standards will be critical to reducing access gaps. Enhancing digital skills through targeted technical and vocational training, integrating digital literacy into education systems, and standardizing digital certifications are also essential. Reducing the cost and complexity of doing business, particularly through digital platforms and regionally aligned policies, will further attract FDI. Regional incentive schemes for digital startups can stimulate innovation and entrepreneurship. While EAC member states vary in their digital readiness levels, coordinated regional action offers a pathway to shared growth. By investing in research and human capital, improving infrastructure, aligning policies, and fostering a conducive business environment, the EAC can become a digitally integrated, future-ready bloc that is more attractive to foreign investors and poised for sustainable development.

Keywords: Digital Competitiveness, Foreign Direct Investment