Empirical Research on Foreign Direct Investment and Economic Growth in Tanzania

Article DOI: https://doi.org/10.57017/jorit.v1.1(1).02

Author(s):

Vincent GIBOGWE School of Organisations, Economy and Society, Westminster Business School , University of Westminster, UK
Ayine NIGO School of Organisations, Economy and Society, Westminster Business School , University of Westminster, UK
Karen KUFUOR School of Organisations, Economy and Society, Westminster Business School , University of Westminster, UK

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.

© 2022 The Author(s). Published by RITHA Publishing. This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.

How to cite:

Gibogwe, V., Nigo, A., & Kufuor, K. (2022). Empirical Research on Foreign Direct Investment and Economic Growth in Tanzania. Journal of Research, Innovation and Technologies, Volume I, 1(1), 23-32. https://doi.org/10.57017/jorit.v1.1(1).02

References:

[1] Adam, A. M. (2018). Foreign direct investment and economic growth causal-nexus in economic community of west African states: evidence from spectral Causality. Business and Economic Horizons, 14(1),17-28. http://dx.doi.org/10.15208/beh.2018.2

[2] Ajide, K. & Raheem, I. D. (2016). Institutions-FDI nexus in ECOWAS countries. Journal of African Business, 17(3), 319-341. https://doi.org/10.1080/15228916.2016.1180778

[3]Akadiri, A. C., Gungor, H., Akadiri, S. S.& Bamidele-Sadiq, M. (2020). Is the causal relation between foreign direct investment, trade, and economic growth complement or substitute? The case of African countries. Journal of Public Affairs, 20(2), 1-12. https://doi.org/10.1002/pa.2023

[4] Akinwale, Y. O. & Grobler, W. C. (2019). Education, openness, and economic growth in South Africa: empirical evidence from VECM analysis. The Journal of Developing Areas, 53(1), 51-64. DOI: 10.1353/jda.2019.0003

[5] al Faisal, M. A. & Islam, M. S. (2022). The Impact of foreign direct investment on the economy of Bangladesh: a time-series analysis. Theoretical and Applied Economics, 20(11), 123-142. http://store.ectap.ro/articole/ 1584.pdf

[6] Amade, M. A., Mohammed, I., Ibisanmi, E. V., Owolabi A. T. & Joshua, U. (2022). Interaction between domestic investment, foreign direct investment and economic growth in Nigeria. Academic Review of Economics and Administrative Sciences, 15(2), 261–275. DOI: 10.25287/ohuiibf.904346

[7] Anh, D. D., Song, Y. & Li, M. (2021). The relationships between foreign direct investment, state-owned investment, private investment, import, export and economic growth in Vietnam. The Singapore Economic Review. https://doi.org/10.1142/S0217590821500314

[8] Antwi, S. & Zhao, X. (2013). Impact of FDI and economic growth in Ghana: A cointegration analysis. International Journal of Business and Social Research, 3(1), 64–74. https://ideas.repec.org/a/lrc/larijb/ v3y2012i1p64-74.html

[9] Asheghian, P. (2016). GDP growth determinants and foreign direct investment causality: the case of Iran. Journal of International Trade and Economic Development, 25(6), 897–913. https://doi.org/10.1080/ 09638199.2016.1145249

[10] Babalola, S. J., Adama, M., Mohd, S., Ehigiamusoe, K. U. & Onikola, H. (2018). Impact of foreign direct investment, Aid, and trade on economic growth in Nigeria. The Journal of Developing Areas, 53(4). DOI: 10.1353/jda.2018.0067

[11] Bekana, D. M. (2016). Determinants of foreign direct investment in Ethiopia. Time series evidence from 1991-2013. The Journal of Developing Areas, 50(1), 141-155. DOI:10.1353/jda.2016.0002

[12] Borensztein, E., de Gregorio, J. & Lee, J. W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45, 115–135. https://olemiss.edu/courses/inst310/Borensztein DeGLee98.pdf

[13] Chikalipah, S. & Makina, D. (2019). Economic growth and human development: Evidence from Zambia, Sustainable Development, 27(6), 1023 -1033. https://doi.org/10.1002/sd.1953

[14] Dada, J. T. & Abanikanda, E. O. (2022). The Moderating Effect of Institutions in Foreign Direct Investment Led Growth Hypothesis in Nigeria. Economic Change and Restructuring, 55, 903–929. https://doi.org/10.1007/s10644-021-09332-w

[15] de Mello, L. R. Jr. (1999). Foreign direct investment-led growth: Evidence from time series and panel data. Oxford Economic Papers, 51(1), 133-151. https://www.jstor.org/stable/3488595

[16] Dritsaki, M., Dritsaki, C., Adamopoulos, A. (2004). A causal relationship between trade, foreign direct investment and economic growth for Greece. American Journal of Applied Sciences, 1(3), 230–235. https://thescipub.com/pdf/ajassp.2004.230.235.pdf

[17] Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. European Economic Review, 48, 285–306. https://doi.org/10.1016/ S0014-2921(02)00264-7

[18] Esso, L. J. (2010). Long-run relationship and Causality between foreign direct investment and growth: evidence from ten African countries. International Journal of Economics and Finance, 2(2), 168–177. 10.5539/ijef.v2n2p168

[19] Fedderke, J.W., & Romm, A.T. (2006). Growth impact and determinants of foreign direct investment into South Africa, 1956–2003. Economic Modelling, 23, 738–760. https://doi.org/10.1016/j.econmod. 2005.10.005

[20] Gammoudi, M. & Cherif, M. (2016). Capital account openness, political institutions and FDI in MENA region: an empirical investigation. Journal of Economic Development, 41(2), 53-76. 10.35866/caujed.2016.41.2.003

[21] Grossman, G. M. & Helpman, E. D. (1991). Trade, knowledge spillovers and growth. European Economic Review, 35(2-3), 517–526. https://doi.org/10.1016/0014-2921(91)90153-A

[22] Hsiao, F. S. & Hsiao, M. C. (2006). FDI, exports, and GDP in East and Southeast Asia-panel data versus time-series causality analyses. Journal of Asian Economics, 17(6), 1082–1106. https://doi.org/10.1016/j.asieco.2006.09.011

[23] Huynh, H. T. N., et al. (2021). Productivity spillover from FDI to domestic firms across six regions in Vietnam. Emerging Markets Finance & Trade, 57(1), 59–75. https://doi.org/10.1080/1540496X.2018.1562892

[24] Ibrahim, M. & Acquah, A. M. (2021). Re-examining the causal relationships among FDI, economic growth and financial sector development in Africa. International Review of Applied Economics,35(1), 45–63. 10.1080/02692171.2020.1822299

[25] Ilesanmi, K. D. and Tewari, D. D. (2017) Energy consumption, human capital investment and economic growth in South Africa: A vector error correction model analysis. OPEC Energy Review. https://onlinelibrary.wiley.com/doi/abs/10.1111/opec.12094

[26] Keho, Y. (2015). Foreign direct investment, exports, and economic growth: Some African evidence. Journal of Applied Economics and Business Research, 5(4), 209 - 219.

[27] Lucas, R. E. Jr. 1988. On the mechanics of economic development. Journal of Monetary Economics, 22, 3-42. https://doi.org/10.1016/0304-3932(88)90168-7

[28] Mahmoodi, M. & Mahsmoodi, E. (2016). FDI, exports and economic growth: Evidence from two panels of developing countries. Economic Research (Ekonomska Istraživanja), 29(1), 938–949. https://doi.org/10.1080/1331677X.2016.1164922

[29] Makhoba, B. P., Kaseeram, I. & Greyling, L. (2019). Assessing the Impact of fiscal policy on economic growth in South Africa. African Journal of Business and Economic Research, 14(1), 7 – 29. https://doi.org/ 10.31920/1750-4562/2019/v14n1a1

[30] Mankiw, G. N., Romer, D. & Weil, D. N. (1992). A Contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407-437. https://doi.org/10.2307/2118477

[31] Malikane, C. & Chitambara, P. (2017). Foreign direct investment, democracy, and economic growth in Southern Africa. African Development Review, 29(1), 92–102. https://doi.org/10.1111/1467-8268.12242

[32] Menyah, K., Nazlioglu, S., & Wolde-Rufael, Y. (2014). Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach. Economic Modelling, 37. https://doi.org/10.1016/j.econmod.2013.11.044

[33] Mohamed, M. R., Singh, K. S. J. & Liew, C. Y. (2013). Impact of foreign direct investment & domestic investment on economic growth of Malaysia, Malaysian Journal of Economic Studies, 50(1), 21-35. https://mjes.um.edu.my/index.php/MJES/article/view/2866

[34] Mongale, I.P., Mashamaite, T. & Khoza, N. (2018). Household savings, financing, and economic growth in South Africa. Business and Economic Horizons, 14(1): 105 - 116. http://dx.doi.org/10.15208/beh.2018.9

[35] Morshed, N. & Hossain, M. R. (2022). Causality analysis of the determinants of FDI in Bangladesh: Fresh evidence from VAR, VECM and Granger Causality approach. Business Economics, 2(64), https://link.springer.com/article/10.1007/s43546-022-00247-w

[36] Nadar, A. (2021). Impact of FDI on GDP per capita in India using Granger causality. Munich Personal Repec Archive (MPRA). https://mpra.ub.uni-muenchen.de/106826/

[37] Onuoha, F. C., Okonkwo, I. C., Okoro, P. & Okere, K. (2018). The causal relationship between foreign direct investment (FDI) and the macro-economy of selected West African countries: panel ARDL/Granger causality analysis. African Research Review, 12(1), 140–163. DOI: 10.4314/afrrev.v12i1.15

[38] Opoku, E. V. O., Ibrahim, M. & Sare, Y. A. (2010). Foreign direct investment, sectoral effects and economic growth in Africa, International Economic Journal, 33(3), 473–492. https://doi.org/10.1080/10168737. 2019.1613440

[39] Pradhan, K. C. (2016). Does remittance drive economic growth in emerging economies: Evidence from FMOLS and Panel VECM. Theoretical and Applied Economics, 23(4), 57-74. https://ideas.repec.org/a/agr/ journl/vxxiiiy2016i4(609)p57-74.html

[40] Ramirez, M. D. (2011). Is Foreign direct investment productive in the Latin America Case? A Panel Co-Integration Analysis, 1980–2002. The International Trade Journal, 25(1), 35-73. https://doi.org/10.1080/ 08853908.2011.532041

[41] Romer, P. (1986). Increasing returns and long-term growth. Journal of Political Economy, 94(5), 1002-1037. https://doi.org/10.1086/261420

[42] Romer, P. (1990). Endogenous technological change. Journal of Political Economy, 98(5), 71-102. https://doi.org/10.1086/261725

[43] Sehleanu, M. (2017). Empirical study on the determinants of FDI inflows to Romania. Annals of Faculty of Economics, Tome XXVI, 2, 142 - 153. https://ideas.repec.org/a/ora/journl/v1y2017i2p143-152.html

[44] Solow, R. M. (1956). A Contribution to the theory of economic growth. The Quarterly Journal of Economics, 7(1), 65-94. https://doi.org/10.2307/1884513

[45] Sothan, S. (2017). Causality between foreign direct investment and economic growth for Cambodia. Cogent Economics & Finance, 5(1), 1277860-127. https://doi.org/10.1080/23322039.2016.1277860

[46] Sothan, S. & Zhang, X. (2017). Causality between FDI and economic growth for Cambodia. Cogent Economics & Finance, 5(1). https://doi.org/10.1080/23322039.2016.1277860

[47] Temiz, D. & Gokmen, A (2014). FDI inflow as an international business operation by MNCs and economic growth: an empirical study on Turkey. International Business Review, 23(1), 145–154. https://doi.org/10.1016/j.ibusrev.2013.03.003

[48] Vogiatzoglou, K., & Thi, N.P.N. (2016). Economic openness and economic growth: A cointegration analysis for ASEAN-5 countries. The European Journal of Applied Economics, 13, 10–20. 10.5937/ejae13-11311

[49] Zhang, K. H. (2000). Human capital, country size, and north-south manufacturing multinational enterprises. Economia Internazionale (International Economics), 53(2): 237–260. https://ideas.repec.org/a/ris/ ecoint/0251.html