Investment and Economic Growth: An Empirical Analysis for Tanzania

Abstract

Abstract. This paper analyzes the causal effect between domestic private investment, public investment, foreign direct investment and economic growth in Tanzania during the 1970-2014 period. The modified neo-classical growth model is used to estimate the effect of investment on economic growth. Also, the economic growth models based on Phetsavong & Ichihashi ( 2012 ), and Le & Suruga ( 2005 ) are used to estimate the crowding out effect of public investment on domestic private investment on one hand and foreign direct investment on the other hand. In the same way, the crowding out effect of foreign direct investment on domestic private investment is estimated. A correlation test is applied to check the correlation among independent variables, and the results show that there is very low correlation suggesting that multicollinearity is not a serious problem. Moreover, 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 model has no signs of misspecification and that, the residuals are serially uncorrelated, normally distributed and homoskedastic. Broadly, the empirical results show that the domestic private investment and foreign direct investment play an important role in economic growth in Tanzania. Besides, a revealed negative, albeit weak, association between public and private investment suggests that the positive effect of domestic private investment on economic growth becomes smaller when public investment-to-GDP ratio exceeds 8-10 percent. Similarly, foreign direct investment tends to marginally reduce the impact of domestic private investment on growth. These results suggest that public investment and foreign direct investment need to be considered carefully in order to avoid a reduced positive impact of domestic private investment on growth. Domestic saving may be promoted to encourage domestic investment for economic growth. Keywords. Public investment, Domestic private investment, FDI, Crowding out effect, Economic growth. JEL. F21, F43, O40, O47 .