An investigation of the determinants of domestic private investment in Zimbabwe, 1980-2015.

Abstract

Analyses of the sources of growth in developing countries revealed that a country’s growth comes from greater investment inter alia. The majority of countries that grow swiftly, invest a substantial portion of their GDP and contrarily, slow developing countries are those that fail to invest adequately. This present study investigates the determinants of Domestic Private Investment (DPI) in Zimbabwe over the period 1980- 2015. DPI is defined by the study as the difference between Gross Fixed Capital formation as a percentage of GDP and Foreign Direct Investment as a percentage of GDP. Overally, the study finds that in the long run, the quality of both economic and political institutions, inflation, bank credit to the private sector and GDP growth have a significant negative relationship with DPI while the interaction between political and economic institutions has a positive relationship with DPI. Results of the study indicate that Zimbabwe is a unique case, hence orthodox economic theory is unable to explain certain phenomena observed over the 35 year period. In order to boost DPI in Zimbabwe, there is need to facilitate formulation of positive expectations by economic agents, defined by Keynes as “animal spirits” as these determine investment decisions undertaken by investors. The determinants of investment suggested by neoclassical theory provide necessary but not sufficient conditions for increasing DPI in Zimbabwe. The establishment and strengthening of quality of institutions is shown by the study as central to setting the stage and putting in place a conducive environment for increasing DPI in Zimbabwe. Keywords: DPI, expectations, institutions