Empirical Research on Foreign Direct Investment and Economic Growth in Tanzania

Abstract

Tanzania has continued to experience an unprecedented increase in Foreign Direct Investment (FDI) inflows for the past three decades. Using a vector error correction model (VECM) on data on Tanzania for the 1980–2020 period, we find the bi-causality between economic growth and FDI net inflows in the short and long run. The results imply that in Tanzania, FDI is associated with an increase in income; at the same time, economic growth leads to FDI eventually and stirs movements in FDI. In addition, our results show a strong (positive) relationship between the variables, which means that foreign direct investments (FDI) significantly impact the country's financial inflows. We believe that a well-developed and productive local capacity will eventually benefit from FDI. Nonetheless, this is only possible through the provision of incentives to foreign firms so that they may provide positive spill overs to other sectors.