Foreign Direct Investment and Sectoral Performance in Tanzania

Although it may seem natural to argue that Foreign Direct Investment (FDI) can bridge the investment gap in developing countries’ economy, which in turn foster economic growth, this paper shows that the effect of FDI vary greatly across sectors. In fact, there is a lack of systematic evidence on the actual impact of FDI on the host country. An empirical analysis using time series data spanning from 1970 to 2015 and applying Error Correction Mechanism, suggests that FDI exerts a negative effect on agriculture value added. Unsurprisingly, FDI tends to have a positive effect on manufacturing, construction and transport, storage and communication sectors. Evidence from the mining sector is not clear despite the fact that the sector constitutes a substantial proportion of FDI inflows. The unexpected negative causal relationship between FDI inflows and agricultural sector in Tanzania could be because of the low level of FDI in the sector relative to other sectors. However, it is possible for FDI to be contributing to the GDP through manufacturing, construction and transport, storage and communication sectors and yet not increasing the welfare of the people in the country. Agriculture sector, which constitutes more than 70 percent of the total labour force, contributes, on average, less than 30 percent, in total GDP. Understandably, FDI in the agricultural sector can improve the welfare in the country than FDI in mining and manufacturing sectors. Given the importance of the subject, it is surprising to find that very little effort has been devoted to quantifying the sources of agricultural decline.