Unpacking the Effect of Foreign Direct Investment on Tanzania’s Labor Market

Abstract

This study examines the impact of foreign direct
investment (FDI) on labor market dynamics in
Tanzania using a 34-year time series dataset
(1990–2023). Advanced econometric methods,
including the Autoregressive Distributed Lag
(ARDL) model, Johansen Co-integration tests are
employed to analyze long-term and short-term
effects of FDI on employment creation and
productivity. Results reveal a significant positive
long-term relationship, with a 1% increase in
FDI leading to a 0.305% rise in labor force
participation, while short-term findings highlight
persistent labor market growth influenced by past
employment levels. From a monetary policy
perspective, the findings recommend that
macroeconomic stability is critical to enhancing
FDI’s effectiveness. Policymakers should
prioritize maintaining low inflation, stable
exchange rates, and favorable credit conditions
to attract sustainable FDI inflows. Furthermore,
aligning monetary policy with fiscal strategies to
direct investments into labor-intensive and
productivity-enhancing sectors can amplify FDI’s
impact on job creation. Strengthening
institutional frameworks, improving
infrastructure, and promoting access to finance
for complementary domestic industries are
essential for leveraging FDI to achieve inclusive
economic growth. These insights provide
actionable guidance for optimizing FDI's role in
Tanzania's sustainable development trajectory