Analysis of Foreign Direct Investment, Agricultural Sector and Economic Growth in Tanzania

Manamba Epaphra,Ales H Mwakalasya

doi:10.4236/me.2017.81008

Abstract

This paper analyzes the effect of foreign direct investment (FDI) on agricultural sector in Tanzania. The paper also examines the declining contribution of agriculture to real GDP growth despite the fact that the sector employs more than 70 percent of the total labour force. Annual time series data spanning from 1990 to 2015 are used to test the significance of the relationship between FDI inflow and agriculture value added-to-GDP ratio on one hand and FDI inflows and economic growth on the other hand. Also, the relationship between agriculture value added and economic growth rate is empirically examined. Variables such as gross fixed capital formation, inflation rate, trade liberalization, real exchange rate and population are considered as control variables. For the purpose of inference, the paper employs classical linear regression model. Ordinary least squares methods are used for estimation. The diagnostic tests including RESET regression errors specification test, Breusch-Godfrey serial correlation LM test, Jacque-Bera-normality test and white heteroskedasticity test reveal that the models have no signs of misspecification and that, the residuals are serially uncorrelated, normally distributed and homoskedastic. Interestingly, empirical results suggest that there is no significant effect of FDI inflows on agriculture value added-to-GDP ratio in Tanzania despite the fact that FDI inflows in economy have been outstanding particularly in past two decades. Unsurprisingly, the results show that FDI inflows-to-GDP ratio and real GDP growth rate are positively correlated. Notwithstanding, agriculture sector, which constitutes the largest proportion of the total labour force, contributes, on average, less than 30 percent, to total GDP. This suggests that the sector is inefficient and therefore, effort towards attracting more FDI aiming at improving productivity in agriculture sector, which in turn may reduce poverty, is much needed.

Highlights

foreign direct investment (FDI) has been shown to play an important role in promoting economic growth, raising a country’s technological level, creating new employment opportunities and offering a source of external capital in developing countries (Loungani & Razin [1])
A framework of analysis to determine the effects of FDI on agriculture on one hand, and the relationship between FDI and economic growth on the other hand, is formulated by considering all those factors that can potentially play a meaningful role in the determination of agriculture value added-to-GDP ratio and real GDP growth rate
This paper is confined to FDI inflows, agricultural agriculture value added as a percent of GDP and economic growth in Tanzania during the 1990-2015 periods

Summary

Introduction

FDI has been shown to play an important role in promoting economic growth, raising a country’s technological level, creating new employment opportunities and offering a source of external capital in developing countries (Loungani & Razin [1]). FDI works as a means of integrating developing countries into the global market place and increasing the capital available for investment, leading to increased economic growth needed to reduce poverty and raise living standards (Rutihinda [3] and Dollar & Kraay [4]). Over the 2000-2010 periods, FDI has contributed in excess of 20 percent to GDP in developing countries such as Brazil, Cambodia, Ghana, Tanzania and Thailand (FAO [5]). The lack of private and public investment has led to lower productivity growth rates and stagnant production in many developing countries (Heumesser & Schmid [6])

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Conclusion