Foreign direct investment inflow and the economic growth nexus in Tanzania

Abstract

PurposeA shortage of investment capital is one of the main issues facing most developing economies, including Tanzania. Policymakers, economists, and governments in these countries have been debating how to overcome this obstacle and improve economic growth through foreign direct investments (FDI). The present study endeavors to examine the relationship between FDI and economic growth in Tanzania during the period of 1991–2021. The analysis considers financial development, capital formation, and labor force involvement as intermediation variables.Design/methodology/approachThe study uses time series data to estimate an autoregressive distributed lag (ARDL) model, as well as Granger causality tests to investigate the relationship between the variables under study.FindingsThe findings show a long-run co-integration between the studied variables. However, only FDI and labor input have a significant impact on gross domestic product (GDP) growth in both the short and long run. Bidirectional causality exists between FDI, labor input, and GDP growth in the short and long run.Practical implicationsThis study contributes to an understanding of the relationship between inbound FDI, labor input, and economic growth in Tanzania, as well as updating the government to improve its financial system to gain more from FDI inflows and hence boost growth-enhancing effects.Originality/valueThis study provides insight into the relationship between inbound FDI and economic growth in Tanzania, which is a critical policy concern in developing economies. Extant studies’ results remain controversial, and this is the first study in Tanzania to investigate the FDI-growth nexus, by considering financial development, capital formation, and labor input simultaneously.