Trade and Foreign Direct Investment in Tanzania: Do they Matter for Economic Growth?

Abstract

This paper analyses the effect of trade and foreign direct investments (FDI) on Tanzania’s economic growth using time-series data from 1970 to 2019. All the variables are found to be integrated of order one, I (1). The study applies the cointegration test and a VECM accordingly. The Johansen test underscores the presence of two co-integrating equations, which confirms the long-run associations between variables. The VECM demonstrates the presence of a long-run relationship running from FDI, TRD, and EXR to GDP growth. While the Wald test reveals the presence of short-run causality running from FDI and TRD to GPD; however, there is no short-run causality from EXR to GDP. The study concludes that there is a positive relationship between the explanatory variables and economic growth. Therefore, the Tanzanian government should encourage exports to realize the potential effects of trade and FDI on economic growth.

Keywords: trade, FDI, economic growth, time-series, Tanzania

JEL Classification: O4, F1, FE