RITHA Publishing Research, Innovation and Technologies – Hub for Academics Journal of Research, Innovation and Technologies https://doi.org/10.57017/jorit.v1.1(1).02 © RITHA, 2022 23 Empirical Research on Foreign Direct Investment and Economic Growth in Tanzania Vincent GIBOGWE Ayine R.S. NIGO Karen KUFUOR School of Organisations, Economy and Society, Westminster Business School 1 , University of Westminster, UK Abstract Tanzania has continued to experience an unprecedented increase in Foreign Direct Investment (FDI) inflows for the past three decades. Using a vector error correction model (VECM) on data on Tanzania for the 1980–2020 period, we find the bi-causality between economic growth and FDI net inflows in the short and long run. The results imply that in Tanzania, FDI is associated with an increase in income; at the same time, economic growth leads to FDI eventually and stirs movements in FDI. In addition, our results show a strong (positive) relationship between the variables, which means that foreign direct investments (FDI) significantly impact the country's financial inflows. We believe that a well-developed and productive local capacity will eventually benefit from FDI. Nonetheless, this is only possible through the provision of incentives to foreign firms so that they may provide positive spill overs to other sectors. Keywords: foreign direct investment; economic growth; absorptive capacity; human capital; market liberalization. JEL Classification: O19; O47; O55; F63. Introduction Most countries have experienced growth in foreign direct investment (FDI) inflows after liberalizing trade (Bekana 2016, Sehleanu 2017) and following the adoption of economic reforms (Vogiatzoglou and Thi 2016). Tanzania made massive efforts to make economic reforms and liberalize its trade. Despite lingering structural constraints and deficiencies, these measures have impacted FDI inflows (Gammoudi and Cherif 2016). Tanzania's net inflows (Figure) increased from US$387.8m in 1990 to US$ 17,152.9 m in 2020, and as per Figure 2, after a drastic drop in the 1980s, FDI flows to Tanzania had an uphill trend in the 1990s and 2000s. Figure 1. Tanzania: FDI stock net inflows in US$m, 1990-2020 Figure 2. Tanzania: FDI as a % of GDP 1980-2020 Using data on Tanzania from 1980 to 2000, this paper applies a vector error correction model (VECM) to establish whether FDI inflow generates synergies in boosting economic growth and whether economic growth (expressed as the annual growth rate of the real GDP per capita) has any influence on FDI net stock inflows in USD. Literature Review The traditional neoclassical approach, based on Solow's (1956) growth model and the augmented neo- classical growth model of Mankiw et al. (1992), that extended the Solow model, emphasizes the importance of investment (in physical capital) as a driver of economic growth. With a lower savings rate, growth is achieved partly through foreign investment; FDI as fixed capital is assumed to directly affect economic growth by contributing to 1 309 Regent St., London W1B 2HW, United Kingdom. 387.8 387.8 399.8 419.8 469.8 619.8 681.4 760.0 1 714.7 1 989.1 2 780.9 2 867.2 2 939.3 3 590.3 3 954.3 4 438.8 4 827.2 5 950.1 6 945.6 7 898.6 9 712.0 10 941.4 12 740.9 10 851.4 11 897.4 12 572.6 12 839.2 13 499.6 14 555.6 15 546.2 16 231.1 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 -2 -1 0 1 2 3 4 5 6 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020