Causality Nexus of Foreign Direct Investment and Economic Growth in Tanzania: An Empirical Investigation
Keywords:
Foreign Direct Investment, Gross Domestic Product, Autoregressive Distributive Lag Model, ,Economic Growth
Abstract
This paper sought to examine the causality nexus of Foreign Direct Investment (FDI) and Economics Growth in Tanzania. Specifically, the research aim to assess the impact of FDI to manufacturing, agricultural and service sectors. Moreover, the study employed time series data from 1993 to 2023. FDI inflow is always considered an important economic growth catalyst in developing economies. Neoclassical growth theories proposed that FDI enhances economic growth by augmenting capital stock and technology. According to the neoclassical models, FDI does not enhance the long-run growth rate but instead is related to the output level. Autoregressive Distributed Lags (ARDL) models was employed to determine the long-run and causal relationship between variables of interest in all three models of the study. The findings of the manufacturing output model suggest that FDI has positive and statistically significance effect to manufacturing sector in both short run and long run. In agriculture and service sector models only short run estimation was captured due to lack of co-integration pattern among variables. The findings indicated a positive and statistical significant unidirectional causality running from FDI to both agricultural and service sectors output. Based on the findings of the study the policy implication is that Tanzania should emphasize FDI-led growth policies to enhance sustainable economic growth to realize the desired economic objectives at the macro level.
References
Ababio, J.O. M., Aboagye, A. Q. Q., Barnor, C., & Agyei, S. K., “Foreign and Domestic Private Investment in Developing and Emerging Economies: A Review of Literature”. Cogent Economics & Finance, 10(1), 2022.
Adam, A. M., “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, 2018.
Aga, A. A. K., The impact of foreign direct investment on economic growth: A case study of Turkey 1980–2012. International Journal of Economics and Finance, 6(7), 71–84, 2014.
Agbloyor, E. K., Gyeke-dako, A., Kuipo, R., & Abor, J. Y., “Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions”. Thunderbird International Business Review, 58(5), 479–497, 2016.
Agrawal, G., Foreign direct investment and economic growth in BRICS economies: A panel data analysis. Journal of Economics, Business and Management, 3(4), 421–424, 2015.
Akadiri, A. C., Gungor, H., Akadiri, S. S. & Bamidele-Sadiq, M., “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), 1-12,2020.
Al Faisal, M. A. & Islam, M. S., “The impact of Foreign Direct Investment on the Economy of Bangladesh: a time-series analysis”. Theoretical and Applied Economics, 1(63), 123-142, 2022.
Amade, M. A., Mohammed, I., Ibisanmi, E. V., Owolabi A. T. & Joshua, U., “Interaction between Domestic Investment, Foreign Direct Investment and Economic Growth in Nigeria”. Academic Review of Economics and Administrative Sciences, 15(2), 261–275, 2022.
Ayenew, B. B., “The Effect of Foreign Direct Investment on the Economic Growth of Sub-Saharan African Countries: An Empirical Approach”. Cogent Economics & Finance, 10(1), 2022.
Babalola, S. J., Adama, M., Mohd, S., Ehigiamusoe, K. U. & Onikola, H., “Impact of Foreign Direct Investment, Aid, and trade on Economic Growth in Nigeria”. The Journal of Developing Areas, 53(4), 2018.
Baiashvili, T., & Gattini, L., “Impact of FDI on Economic Growth: The Role of Country Income Levels and Institutional Strength”. EIB Working Papers, No. 2020/ 02, 978-92-861-4574-2, European Investment Bank (EIB), Luxembourg, 2020.
Barrell, R., and Pain, N., “Foreign Direct Investment, Technological Change, and Economic Growth within Europe,” The Economic Journal, 107(445), 1770-1786, 1997.
Barro, R., “Government Spending in a Small Model of Endogenous Growth”. Journal of Political Economy, 98(2), 103-25, 1990.
Borensztein, E., de Gregorio, J., & Lee, J-W., “How does Foreign Direct Investment affect Economic Growth?” Journal of international Economics, 45(2), 115-135, 1998.
Chenery, H. & Strout, A., “Foreign Assistance and Economic Development”. American Economic Review, 56(4), 679-733, 1996.
Ciobanu, A. M., The impact of FDI on economic growth in case of Romania. International Journal of Economics and Finance, 12(12), 1–81, 2021.
Dougherty, C., Introduction to Econometrics, Oxford University Press, 2011.
Findlay, R., "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, 92(1), 1-16, 1978.
Gibogwe, V., Nigo, A. R., & Kufuor, K., “Foreign direct investment and economic growth in Tanzania”. Munich Personal RePEc Archive, 2022.
Grossman, G., and Helpman, E., Innovation and Growth in the Global Economy, MIT Press, MA, 1991.
Gupta, S., Yadav, S. S., & Jain, P. K., “Absorptive Capacities, FDI and Economic Growth in a Developing Economy: A Study in the Indian Context”. Journal of Advances in Management Research, 19(5), 741–759, 2022.
Helpman, E., The Mystery of Economic Growth. Harvard University Press, MA, 2004.
Ibrahim, M., & Acquah, A. M., “Re-examining the causal relationships among FDI, Economic Growth and Financial Sector Development in Africa”. International Review of Applied Economics, 35(1), 45–63, 2021.
Keho, Y., “Foreign Direct Investment, Exports, and Economic Growth: some African Evidence”. Journal of Applied Economics and Business Research 5(4): 209-219, 2015.
Mahmoodi, M. & Mahmoodi, E., "FDI, Exports and Economic Growth: Evidence from two Panels of Developing Countries." Economic Research-Ekonomska Istraživanja 29 (1): 938–949, 2016.
Mankiw, N.G., Romer, D. & Weil, D.N., “A Contribution to the Empirics of Economic Growth”. The Quarterly Journal of Economics, 107(2), 407-437, 1992.
Masanja, C., “The Extent to which Foreign Direct Investment (FDI) contribute to the Growth of host Economies: Evidence from Tanzania”. Business Management Review, 21(1), 1–22, 2018.
Messaoud, B., & Teheni, Z. E. G., “Business Regulations and Economic Growth: What can be explained?”. International Strategic Management Review, 2(2), 69–78, 2014.
Mwakabungu, B.H & Kauangal, J., “An Empirical Analysis of the relationship between FDI and Economic Growth in Tanzania”. Cogent Economics & Finance, 11:1, 2023.
Nadar, A., “Impact of FDI on GDP per capita in India using Granger causality”. Munich Personal Repec Archive (MPRA), 2021.
Nguyen, H. H., “Impact of Foreign Direct Investment and International Trade on Economic Growth: Empirical Study in Vietnam”. The Journal of Asian Finance, Economics and Business, 7(3), 323–331, 2020.
Odhiambo, N. M., “Foreign Direct Investment and Economic Growth in Kenya: An Empirical Investigation”. International Journal of Public Administration, 45(8), 1–12, 2021.
Olorogun, L. A., Salami, M. A., & Bekun, F. V., “Revisiting the Nexus between FDI, Financial Development and Economic Growth: Empirical Evidence from Nigeria”. Journal of Public Affairs, 22(3), 2020.
Onuoha, F. C., Okonkwo, I.C., Okoro, P., & Okere, K., “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, 2018.
Rao, D. T., Sethi, N., Dash, D. P., & Bhujabal, P., “Foreign Aid, FDI and Economic Growth in South-East Asia and South Asia”. Global Business Review, 24(1), 31–47, 2023.
Reza, S. M., Fan, H., Reza, T., & Wang, B., “The Impact of Foreign Direct Investment inflows on Economic Growth: Evidence from Bangladesh”. Journal of Business and Retail Management Research, 12(2), 212–223, 2018.
Romer, P. M., “Endogenous Technological Change,” Journal of Political Economy, 98(8), 71-102, 1990.
Romer, P.M., “Increasing Returns and Long Run Growth”. Journal of Political Economy, 94 (5), 1002-1037, 1986.
Sarker, B., & Khan, F., “Nexus between Foreign Direct Investment and Economic Growth in Bangladesh: An Augmented Autoregressive Distributed Lag Bounds Testing Approach”. Financial Innovation, 6(1), 1–18, 2020.
Siddikee, M. N., & Rahman, M. M., “Foreign Direct Investment, Financial Development, and Economic Growth Nexus in Bangladesh”. The American Economist, 66(2), 265–280, 2021.
Solow, R.M., “Technological Change and the Aggregate Production Function,” Review of Economics and Statistics, 39(8), 312-320, 1957.
Taylor, L., “Gap Models”. Journal of Development Economics. 45(1), 17-34, 1994.
Taylor,
R. S., “Foreign Direct Investment and Economic Growth. Analysis of Sectoral Foreign Direct Investment in Tanzania”. African Development Review, 32(4), 699–717, 2020.
Yimer, A., “The Effects of FDI on Economic Growth in Africa”. The Journal of International Trade & Economic Development, 32(1), 2–36, 2023.
Adam, A. M., “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, 2018.
Aga, A. A. K., The impact of foreign direct investment on economic growth: A case study of Turkey 1980–2012. International Journal of Economics and Finance, 6(7), 71–84, 2014.
Agbloyor, E. K., Gyeke-dako, A., Kuipo, R., & Abor, J. Y., “Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions”. Thunderbird International Business Review, 58(5), 479–497, 2016.
Agrawal, G., Foreign direct investment and economic growth in BRICS economies: A panel data analysis. Journal of Economics, Business and Management, 3(4), 421–424, 2015.
Akadiri, A. C., Gungor, H., Akadiri, S. S. & Bamidele-Sadiq, M., “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), 1-12,2020.
Al Faisal, M. A. & Islam, M. S., “The impact of Foreign Direct Investment on the Economy of Bangladesh: a time-series analysis”. Theoretical and Applied Economics, 1(63), 123-142, 2022.
Amade, M. A., Mohammed, I., Ibisanmi, E. V., Owolabi A. T. & Joshua, U., “Interaction between Domestic Investment, Foreign Direct Investment and Economic Growth in Nigeria”. Academic Review of Economics and Administrative Sciences, 15(2), 261–275, 2022.
Ayenew, B. B., “The Effect of Foreign Direct Investment on the Economic Growth of Sub-Saharan African Countries: An Empirical Approach”. Cogent Economics & Finance, 10(1), 2022.
Babalola, S. J., Adama, M., Mohd, S., Ehigiamusoe, K. U. & Onikola, H., “Impact of Foreign Direct Investment, Aid, and trade on Economic Growth in Nigeria”. The Journal of Developing Areas, 53(4), 2018.
Baiashvili, T., & Gattini, L., “Impact of FDI on Economic Growth: The Role of Country Income Levels and Institutional Strength”. EIB Working Papers, No. 2020/ 02, 978-92-861-4574-2, European Investment Bank (EIB), Luxembourg, 2020.
Barrell, R., and Pain, N., “Foreign Direct Investment, Technological Change, and Economic Growth within Europe,” The Economic Journal, 107(445), 1770-1786, 1997.
Barro, R., “Government Spending in a Small Model of Endogenous Growth”. Journal of Political Economy, 98(2), 103-25, 1990.
Borensztein, E., de Gregorio, J., & Lee, J-W., “How does Foreign Direct Investment affect Economic Growth?” Journal of international Economics, 45(2), 115-135, 1998.
Chenery, H. & Strout, A., “Foreign Assistance and Economic Development”. American Economic Review, 56(4), 679-733, 1996.
Ciobanu, A. M., The impact of FDI on economic growth in case of Romania. International Journal of Economics and Finance, 12(12), 1–81, 2021.
Dougherty, C., Introduction to Econometrics, Oxford University Press, 2011.
Findlay, R., "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, 92(1), 1-16, 1978.
Gibogwe, V., Nigo, A. R., & Kufuor, K., “Foreign direct investment and economic growth in Tanzania”. Munich Personal RePEc Archive, 2022.
Grossman, G., and Helpman, E., Innovation and Growth in the Global Economy, MIT Press, MA, 1991.
Gupta, S., Yadav, S. S., & Jain, P. K., “Absorptive Capacities, FDI and Economic Growth in a Developing Economy: A Study in the Indian Context”. Journal of Advances in Management Research, 19(5), 741–759, 2022.
Helpman, E., The Mystery of Economic Growth. Harvard University Press, MA, 2004.
Ibrahim, M., & Acquah, A. M., “Re-examining the causal relationships among FDI, Economic Growth and Financial Sector Development in Africa”. International Review of Applied Economics, 35(1), 45–63, 2021.
Keho, Y., “Foreign Direct Investment, Exports, and Economic Growth: some African Evidence”. Journal of Applied Economics and Business Research 5(4): 209-219, 2015.
Mahmoodi, M. & Mahmoodi, E., "FDI, Exports and Economic Growth: Evidence from two Panels of Developing Countries." Economic Research-Ekonomska Istraživanja 29 (1): 938–949, 2016.
Mankiw, N.G., Romer, D. & Weil, D.N., “A Contribution to the Empirics of Economic Growth”. The Quarterly Journal of Economics, 107(2), 407-437, 1992.
Masanja, C., “The Extent to which Foreign Direct Investment (FDI) contribute to the Growth of host Economies: Evidence from Tanzania”. Business Management Review, 21(1), 1–22, 2018.
Messaoud, B., & Teheni, Z. E. G., “Business Regulations and Economic Growth: What can be explained?”. International Strategic Management Review, 2(2), 69–78, 2014.
Mwakabungu, B.H & Kauangal, J., “An Empirical Analysis of the relationship between FDI and Economic Growth in Tanzania”. Cogent Economics & Finance, 11:1, 2023.
Nadar, A., “Impact of FDI on GDP per capita in India using Granger causality”. Munich Personal Repec Archive (MPRA), 2021.
Nguyen, H. H., “Impact of Foreign Direct Investment and International Trade on Economic Growth: Empirical Study in Vietnam”. The Journal of Asian Finance, Economics and Business, 7(3), 323–331, 2020.
Odhiambo, N. M., “Foreign Direct Investment and Economic Growth in Kenya: An Empirical Investigation”. International Journal of Public Administration, 45(8), 1–12, 2021.
Olorogun, L. A., Salami, M. A., & Bekun, F. V., “Revisiting the Nexus between FDI, Financial Development and Economic Growth: Empirical Evidence from Nigeria”. Journal of Public Affairs, 22(3), 2020.
Onuoha, F. C., Okonkwo, I.C., Okoro, P., & Okere, K., “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, 2018.
Rao, D. T., Sethi, N., Dash, D. P., & Bhujabal, P., “Foreign Aid, FDI and Economic Growth in South-East Asia and South Asia”. Global Business Review, 24(1), 31–47, 2023.
Reza, S. M., Fan, H., Reza, T., & Wang, B., “The Impact of Foreign Direct Investment inflows on Economic Growth: Evidence from Bangladesh”. Journal of Business and Retail Management Research, 12(2), 212–223, 2018.
Romer, P. M., “Endogenous Technological Change,” Journal of Political Economy, 98(8), 71-102, 1990.
Romer, P.M., “Increasing Returns and Long Run Growth”. Journal of Political Economy, 94 (5), 1002-1037, 1986.
Sarker, B., & Khan, F., “Nexus between Foreign Direct Investment and Economic Growth in Bangladesh: An Augmented Autoregressive Distributed Lag Bounds Testing Approach”. Financial Innovation, 6(1), 1–18, 2020.
Siddikee, M. N., & Rahman, M. M., “Foreign Direct Investment, Financial Development, and Economic Growth Nexus in Bangladesh”. The American Economist, 66(2), 265–280, 2021.
Solow, R.M., “Technological Change and the Aggregate Production Function,” Review of Economics and Statistics, 39(8), 312-320, 1957.
Taylor, L., “Gap Models”. Journal of Development Economics. 45(1), 17-34, 1994.
Taylor,
R. S., “Foreign Direct Investment and Economic Growth. Analysis of Sectoral Foreign Direct Investment in Tanzania”. African Development Review, 32(4), 699–717, 2020.
Yimer, A., “The Effects of FDI on Economic Growth in Africa”. The Journal of International Trade & Economic Development, 32(1), 2–36, 2023.
Published
2024-08-02
How to Cite
Mnaku Honest Maganya. (2024). Causality Nexus of Foreign Direct Investment and Economic Growth in Tanzania: An Empirical Investigation. International Journal on Economics, Finance and Sustainable Development, 6(7), 72-82. Retrieved from https://journals.researchparks.org/index.php/IJEFSD/article/view/5299
Section
Articles
2.png)
