Impact of foreign direct investment and exports on economic growth in Tanzania: a co-integration and Error Correction Model (ECM) analysis

Abstract

This article investigates the impact of exports and foreign direct investments on economic growth in Tanzania. This study utilizes secondary data from the Ivan Kushnir’s Research Centre database and the National Bureau of Statistics in Tanzania for the period spanning from 1970 to 2012. Furthermore, the study examined the unit root test using the Augmented Dickey Fuller test and co-integration test using Engle-Granger residuals co-integration test and Johansen co-integration test. Thereafter it employed error correction model to examine the impact of exports and foreign direct investments (FDIs) on economic growth in Tanzania. The empirical results reveal that variables are non-stationary at level and stationary at first difference. Again, all variables are found to be co-integrated, implying that all have long-run relationship and variables adjusting to the long-run equilibrium at the speed of 23 percent per annum. Further results shows that exports have significant impact on economic growth in Tanzania, whereas foreign direct investments have negative impacts on economic growth in Tanzania. Therefore, from the obtained empirical results, particularly on foreign direct investments, the government ought to check the proper type of foreign direct investments between brown and green FDIs in boosting the economy. Furthermore, FDI sectoral examination is important rather than general impacts on the economic growth.

Keywords: exports, economic growth in Tanzania, foreign direct investments, error correction model