THE EXTENT TO WHICH FOREIGN DIRECT INVESTMENT (FDI) CONTRIBUTE TO THE GROWTH OF HOST ECONOMIES: EVIDENCE FROM TANZANIA

Abstract

The classical assertion that inward Foreign Direct Investment (FDI) spurs growth of the host economy has led Tanzania into designing and offering lucrative investment incentive packages to attract FDI. As a result, a big number of such FDI undertakings have been flowing into the country for decades. However, it is unclear to what extent such huge inflows of FDI contribute to Tanzania’s economic growth. This article examines the extent to which inward foreign direct investment contributes to the economic growth of Tanzania. Using Ordinary Least Square (OLS) estimation techniques, the 1990‑2013 period macroeconomic time series data on appropriately chosen dependent and independent variables were regressed. Findings show FDI has positive but insignificant contribution towards the country’s economic growth for the period under consideration. This is contrary to the FDI‑led growth conventional thinking. Nevertheless, higher FDI concentration in mining and manufacturing sectors but least in agriculture and tourism sectors that bear wide linkages across sectors of the economy may be an explanation for such overall weak contribution. Other variables included in the regressed model appear to behave variously towards economic growth. Human capital stock has the most significant positive coefficient. Domestic capital formation and financial system/capital market efficiency have positive coefficient but not as significant as human capital stock. Inflation rate and government expenditure are found to have negative impact on the economy. The findings imply that a country has to consider human capital stock as central to all its economic growth and development strategies. Also, there must be deliberate effort to improve policies and other necessary measures to attract, target and channel FDI to sectors bearing higher potential for growth and trickle-down effects, preferably agriculture and tourism.