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.
Key words: FDI; Sectoral composition; Agricultural sector; Mining sector and Manufacturing sectorJEL: F23; F36; F43
Adewumi, S. (2006). The impact of foreign direct investment on growth in developing Countries: An African Experience. Jönköping International Business School Jönköping University Jonkoping University.
Adhikary, B.K. (2011). FDI, trade openness, capital formation, and economic growth in Bangladesh: a linkage analysis. International Journal of Business and Management, 6(1), 16-28. doi. 10.5539/ijbm.v6n1p16
Ainabor, AE, Shuaib, I.M. & Kadiri, A.K. (2014). Impact of Capital Formation on the Growth of Nigerian Economy 1960-2010: Vector Error Correction Model (VECM), School of Business Studies, Readings in Management and Social Studies, 1(1): 132-154
Alfaro, L. (2003). Foreign direct investment and growth: does the sector matter? Working Paper, Harvard Business School.
Akulava, M. & Vakhitova, G. (2010). The impact of FDI on firm’s performance across sectors: evidence from Ukraine. BEROC Working Papers, No. 10.
Anderson, C.L. (1987). The production process: inputs and wastes. Journal of Environmental Economics and Management, 14(1), 1-12. doi. 10.1016/0095-0696(87)90001-5
Anuwar, S. & Nguyen, L.P. (2009). Foreign direct investment as a conduit for technology transfer: the case of Vietnam. 38th Australian Conference of Economists, No. 1402.
Aitken, B.J. & Harrison, A.E. (1999). Do domestic firms benefit from direct foreign investment? evidence from venezuela. American Economic Review, 89(3), 605-618. doi. 10.1257/aer.89.3.605
Aykut, D. & Sayek, S. (2007). The role of the sectoral composition of FDI on growth, in L. Piscitello & G.D. Santangelo (eds.), Do multinationals feed local development and growth? (Amsterdam: Elsevier).
Baily, M.N. & Gersbach, H. (1995). Efficiency in manufacturing and the need for global competition. Brookings Papers on Economic Activity: Microeconomics: 307-47.
Bank of Tanzania (BoT) (2013). Annual report (2012/13). Directorate of Economic Research and Policy, Bank of Tanzania.
Barro, R.J. (1991). Economic growth in cross section of countries. The Quarterly Journal of Economics, 106 (2): 407-443. doi. 10.2307/2937943
Blomsrtom, M., Lipsey, E.R. & Zejan, M. (1992). What explain developing country growth. Cambridge: National Bureau of Economic Research.
Blomström, M. & Kokko, A. (2003). The economics of foreign direct investment incentives. EIJS Working papers 168. Stockholm, Sweden.
Buckley, J. P., Clegg, J. & Wan, C. (2006). Inward FDI and host country productivity: evidence from China’s electronic industry. Transnational Corporations, 15(1), 13-37.
Caves, R. (1974). Multinational firms, competition, and productivity in host-country markets. Economica, 41(162), 176-193. doi. 10.2307/2553765
Chen, Y. & Démurger, S. (2002). Foreign direct investment and manufacturing productivity in China. CEPII Research Project on the competitiveness of China’s economy.
Chaudhry, I.S., Ayyoub, M. & Imran, F. (2013). Does inflation matter for sectoral growth in pakistan? Pakistan Economic and Social Review, 51(1), 71-92
Chandana, C. & Nunnenkamp, P. (2008). Economic reforms, FDI, and economic growth in India: a sector level analysis. World Development, 36(7), 1192-1212. doi. 10.1016/j.worlddev.2007.06.014
Collier, P. & Dercon, S. (2009). African agriculture in 50 years: smallholders in a rapidly changing world. Paper presented at the Expert Meeting on How to Feed the World in 2050, FAO, Rome, 24-26 June.
Dollar, D. & Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7(3), 195-225.doi. 10.1023/A:1020139631000
De Silva, N., Malaga, J. & Johnson, J. (2013). Trade liberalization effects on agricultural production growth: the case of Sri Lanka. Southern Agricultural Economics Association Annual (SAEA) Meeting, Orlando, Florida.
De Sormeaux, A., & Pemberton, C. (2011) Factors Influencing Agriculture’s Contribution to GDP: Latin America and the Caribbean. Department of Agricultural Economics and Extension, The University of the West Indies, St. Augustine Campus, Trinidad and Tobago.
Dupasquier, C. & Osakwe, P.N. (2005). Foreign direct investment in Africa: performance, challenges and responsibilities. Journal of Asian Economics, 17(2), 241-260. doi. 10.1016/j.asieco.2005.07.002
Dunning, J.H. (1993). Multinational enterprises and the global economy. Harlow: Addison-Wesley.
Ebekozien, A., Ugochukwu, S.C., & Uchenna, O.P. (2015). An analysis of the trends of foreign direct investment inflows in the Nigerian construction sector. American International Journal of Contemporary Research, 5(1), 53-69.
Engle, R., & Granger, C. (1987). Co-Integration and error correction: representation, estimation, and testing. Econometrica, 55(2), 251-276. doi. 10.2307/1913236
Epaphra, M. (2016). Nonlinearities in inflation and growth nexus: the case of Tanzania. Journal of Economics and Political Economy, 3(3), 471-572.
Epaphra, M. & Massawe, J. (2016). Investment and economic growth: An empirical analysis for Tanzania. Turkish Economic Review, 3(4), xxx-xxx.
FAO, (2001). Agricultural investment and productivity in developing countries. Economic and social development paper 148. Rome, Italy: Food and Agriculture Organization of the United Nations.
FAO, (2012). Trends and impacts of foreign investment in developing country agriculture: Evidence from case studies. Food and Agriculture Organization of the United Nations, Rome, Italy.
FAO, (2014). Impact of foreign agricultural investment on developing countries: evidence from case studies. FAO Commodity and Trade Policy Research Working Paper No. 47.
Feldstein, M. (2000). Aspects of global economic integration: outlook for the future. NBER Working Paper No. 7899.
Findlay, R. (1978). Relative backwardness, direct foreign investment and the transfer of technology: a simple dynamic model. The Quarterly Journal of Economics, 92(1): 1-16. doi. 10.2307/1885996
Forountan, F. (1991). Foreign trade and its relation to competition and productivity in Turkish Industry. World Bank, Policy Research and External Affairs Working Papers WPS 604.
Fung, L. (2008). Large real exchange rate movements, firm dynamics, and productivity growth, Canadian Journal of Economics, 41(2),391-424. doi. 10.1111/j.1365-2966.2008.00468.x
Fung, L., & Liu, J. T. (2009). The impact of real exchange rate movements on firm performance: A case study of Taiwanese manufacturing firms, Japan and the World Economy, 21, 85-96. doi. 10.1016/j.japwor.2007.11.002
Harchaoui, T., Tarkhani, F., & Yuen, T. (2005). The effects of the exchange rate on investment: Evidence from Canadian manufacturing industries, Bank of Canada, WP 2005-22
Harris, R.G. & Kherfi, S. (2001). Productivity growth, convergence, and trade specialization in Canadian manufacturing. Working Paper No. 165, The Canadian Institute.
Hassine, N.B., Robichaud, V. & Decaluwe, B. (2010). Agricultural trade liberalization, productivity gain, and poverty alleviation: a general equilibrium analysis. Cairo, Egypt, Economic Research Forum Working Paper No. 519.
Hjalmarsson, E., & Österholm, P. (2007). Testing for cointegration using the Johansen methodology when variables are near-integrated, IMF Working Paper No. 07/141.
Hong, E. & Sun, L. (2007). Foreign direct investment and full factor productivity in China. RIETI Discussion Paper Series 07-E -022.
Ismail, R., Sulaiman, N., Abidin, S.H.T.Z. (2012). Globalisation and total factor productivity in the selected Malaysian construction sector. Prosiding Perkem VII, Jilid 1 (2012) 400-408
Jayanthakumaran, K. (2002). The impact of trade liberalisation on manufacturing sector performance in developing countries: a survey of the literature. Working Paper 02-07, Department of Economics, University of Wollongong.
Jhingan, M.L. (2006). Economic Development,New Delhi, Vrinda Publications (P) Ltd.
Johansen, S., & Juselius, K. (1988). Hypothesis testing for cointegration vectors with an application to the demand for money in Denmark and Finland. University of Copenhagen, Working Paper, No.88-05.
Jonsson, G. & Subramaniam, A. (2001). Dynamic gains from trade: Evidence from South Africa. IMF Staff Papers. 48(1), 197-224.
Kabelwa, G. (2003). Technology transfer and South African investment in Tanzania. Dar es Salaam: ESRF, Globalization and East Africa Working Paper Series No. 5.
Kabelwa, G. (2004). South African FDI in East Africa: the Case of Tanzania. Dar es Salaam: ESRF, Globalization and East Africa Working Paper Series No.10.
Kaming, P.F., Olomolaiye, P.O., Holt, G.D., & Harris, F.C. (1997). Factors influencing construction time and cost overruns on high-rise projects in Indonesia. Construction Mangement Economics, 15(1),83-94. doi. 10.1080/014461997373132
Kandilov, T. & Leblebicioğlu, A. (2011). The impact of exchange rate volatility on plant-level investment: evidence from Colombia, Journal of Development Economics, 94(2), 220-230. doi. 10.1016/j.jdeveco.2010.01.013
Katrina, L., John, P., & Athanasios, V. (2004). Foreign direct investment and economic growth in transition economies. South Eastern Europe Journal of Economics, 1, 97-11
Kendrick, J.W. (1993). How much does capital explain? In A. Szirmai, B. Van Ark & D. Pilat (Eds.), Explaining Economic Growth. Essays in Honour of Angus Maddison. Amsterdam: North Holland. 129-146.
Khaliq, A. & Noy, I. (2007). Foreign direct investment and economic growth: empirical evidence from sectoral data in Indonesia. Journal of Economic Literature, 45(1), 313-325.
Khor, M. & Hormeku, T. (2006). The impact of globalization and liberalization on agriculture and small farmers in developing countries: the experience of Ghana. TWN, Third World Network.
Kinoshita, Y. (2011). Sectoral composition of foreign direct investment and external vulnerability in Eastern Europe. Washington, D.C.: IMF., WP/11/123.
Kormendi, R.C., & Meguire P.G. (1985). Macroeconomic determinants of growth: Cross-country evidence. Journal of Monetary Economics, 16(2), 141-163. doi. 10.1016/0304-3932(85)90027-3
Krugman, P. (1979). Increasing returns, monopolistic competition, and international trade, Journal of International Economics, 9(4), 469-479. doi. 10.1016/0022-1996(79)90017-5
Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country regressions. The American Economic Review, 82(4), 942-963.
Lipsey, R. & Chrystal, A. (2003). Economics. 10th ed. Oxford University Press. New Delhi.
Longmire, J. & Morey, A. (1983). Strong dollar dampens demand for U.S. farm exports. Washington DC: U.S. Department of Agriculture, ERS For. Agr. Econ. Rep. 193.
Lotfalipour, R.M., Ashena, M., & Zabihi, M. (2013). Exchange rate impacts on investment of manufacturing sectors in Iran. Business and Economic Research, 3(2), 12-22 doi. 10.5296/ber.v3i2.3716
Luvanga, N. & Shitundu, J. (2003). The role of tourism in poverty alleviation in Tanzania: Research on Poverty Alleviation. Dar es Salaam: Mkuki na Nyota Publishers Ltd.
MacKinnon, J., Haug, G., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563-577. doi.10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R
Mahadevan, R. (2002). Trade liberalization and productivity growth in Australian manufacturing industries. Atlantic Economic Journal, 30(2), 172-187. doi. 10.1007/BF02299160
Mathiyazhagan, M. (2005). Impact of foreign direct investment on Indian economy: a sectoral level analysis. Institute of South Asian Studies Working Paper 6.
Miller, S. M., & Upadhyay, M.P. (2000). The effects of openness, trade orientation, and human capital on total factor productivity. Journal of Development Economics, 63(2), 399-423. doi. 10.1016/S0304-3878(00)00112-7
Msuya, E, (2007). The impact of foreign direct investment on agricultural productivity and poverty reduction in Tanzania. Kyoto University.
Mukherjee, C., White, H., & Wuyts, M. (1998). Econometrics and data Analysis for developing countries. Routledge, 2 Edition.
Noy, I. & Vu, T.B. (2007). Sectoral analysis of foreign investment and growth in the developed countries. University of Hawai at Manoa, Department of Economics, Working Paper 200725.
Nuzhat, F. (2009). Impact of foreign direct investment on economic growth in Pakistan. International Review of Business, Research Papers 5(5), 110-120
Nyankweli, E.M. (2012). Foreign direct investment and poverty alleviation: the case of Bulyanhulu and Geita gold mines, Tanzania. Africa Studies Centre, African Studies Collection, 44. Ipskamp Drukkers, Enschede,
Noorbakhsh, F., Paloni, A. & Youssef, A. (2001). Human capital and FDI inflows to developing countries: new empirical evidence. World Development, 29(9), 1593–1610. doi. 10.1016/S0305-750X(01)00054-7
Obiegbu, M.E. (2003). Effective project delivery in Nigerian construction industry: effective building procurement and delivery in Nigerian construction industry. Anambra: Rex Charles and Patrick Ltd.
Odhiambo, W., Nyangito, H., & Nzuma, J. (2004). Sources and determinants of agricultural growth and productivity in Kenya. Productive Sector Division Kenya Institute for Public Policy Research and Analysis, KIPPRA Discussion Paper No. 34.
Oghenekevwe, O., Olusola, O. & Chukwudi, U.S. (2014), An assessment of the impact of inflation on construction material prices in Nigeria. PM World Journal, 3(4), 1-22.
Ousmanou, N. & John C. (2011). Trade liberalization and productivity growth: firm-level evidence from Cameroon. The Journal of Developing Areas, 44(2), 279-302, doi. 10.1353/jda.0.0103
Oyediran, S.O. (2006). Modeling inflation dynamics in the construction sector of a developing economy. Shaping the Change XXIII FIG Congress, Munich, Germany.
Qifa, J. (2013). Analysis on the relationship between GDP and construction based on the data of UK and China. International Conference on Education Technology and Management Science (ICETMS), 1296-1299.
Pemberton, C. (2002). A population growth theory of rural development. in rural development challenges in the next century. Proceedings of the International Conference of ALACEA-The Latin American and Caribbean Association of Agricultural Economists, edited by Carlisle A. Pemberton, 214-227. Department of Agricultural Economics and Extension, UWI, St Augustine. Trinidad and Tobago.
Pender, J. (1999). Rural population growth, agricultural change and natural resource management in developing countries: a review of hypotheses and some evidence from Honduras. EPTD Discussion Paper No. 48. Environment and Production Technology Division, International Food Policy Research Institute.
Portelli, B. (2005). The role of foreign direct investment in the context of economic reform. evidence from Tanzania. Centre for Technology, Innovation and Culture University of Oslo.
Ramirez, J., & Villaverde, F. (2005). Estimating dynamic equilibrium economies: linear versus nonlinear likelyhood. Journal of Applied Econometrics, 20, 891-910. doi. 10.1002/jae.814
Reardon, T., & Gulati, A. (2008). The rise of supermarkets and their development implications: international experience Relevant for India. International Food Policy Research Institute, IFPRI Discussion Paper, No.00752.
REPOA, (2005). Tanzania poverty and human development report. The Research and Analysis Working Group. Mkuki na Nyota Publishers.
Rutaihwa, J., & Simwela, A. (2012). Econometric analysis of FDI in the mining sector to Tanzania’s export capacity. International Journal of Academic Research in Business and Social Sciences, 2(10), 174-191.
Rutihinda, C. (2007). Impact of globalization on small and medium size firms in Tanzania. ABR & TLC Conference Proceedings, Hawaii, USA.
Schultz, T.W. (1953). The economic organization of agriculture. McGraw-Hill, New York.
Schüpbach, J.M. (2014), Foreign direct investment in agriculture: the impact of out grower schemes and large-scale farm employment on economic well-being in Zambia. PhD Thesis, No. 22287 Eth Zurich.
Shenkar, O. (2007). Foreign direct investment theory and application. [Retrieved from].
Shuaib, I. & Ndidi, N.D.E. (2015). Capital formation: impact on the economic development of Nigeria 1960-2013. European Journal of Business, Economics and Accountancy, 3(3), 23-40.
Ssekuma, R. (2011). A study of cointegration models with applications. Master’s Thesis, University of South Africa.
Stock, J.H. & Watson, M.W. (2007). Introduction to Econometrics. Pearson Education, Inc. Second Edition.
Strassmann, W.P. (1970). The construction sector in economic development. Scottish Journal of Political Economy, 17(3), 391–409. doi. 10.1111/j.1467-9485.1970.tb00715.x
Timmer, P. (1988). The agricultural transformation. In Chenery, H. and Srinivasan, T.N., (Eds.), Handbook of Development Economics, Vol.1. North-Holland, Amsterdam
Turin, D.A. (1978). Construction and development. Habitat International, 3(1-2), 33-45 doi. 10.1016/0197-3975(78)90032-2
Singaariya, M. R & Sinha, N. (2015). Relationships among per capita GDP, agriculture and manufacturing sectors in India. Journal of Finance and Economics, 3(2), 36-43.
Tanzania Investment Report, (2013). Reports on the Study of Foreign Private Investment. Dar es Salaam.
Tondl, G., & Fornero, J.A. (2008). Sectoral productivity and spillover effects on FDI in Latin America. Sidney: European Trade Study Group.
Topku, C. Y. (2010). FDI in the Indian construction industry. The Times, 7-8.
UNCTAD (2001). Trade and investment report. New York: The United Nations.
UNCTAD, (2009). World investment report 2009: Transnational corporations, agricultural production and development. New York and Geneva, United Nations Conference on Trade and Development.
UNCTAD, (2003). Word investment report 2003.United Nations Conference on Trade and Development. Geneva, Switzerland.
UNCTAD, (2004). Investment policy review: The United Republic of Tanzania. United Nations Conference on Trade and Development. Geneva, Switzerland.
UNCTAD, (2015a). World investment Report 2015 - reforming international investment governance. United Nations Conference on Trade and Development. Geneva, Switzerland.
UNCTAD, (2015b). Economic development in Africa: rethinking the role of foreign direct investment. United Nations Conference on Trade and Development. Geneva, Switzerland.
United Nations Conference on Trade and Development (2014). Economic development Africa Report. catalyzing investment for transformative growth in Africa, TD/B/61/4
United Nations Statistics Division, (2016). UNSD Statistical Databases, [Retrieved from].
United Republic of Tanzania, (2015), The Economic Survey. Dar es Salaam.
United Republic of Tanzania, (2014). The Economic Survey. Dar es Salaam.
United Republic of Tanzania, (2013). The Economic Survey, Dar es Salaam.
United Republic of Tanzania, (2012). The Economic Survey, Dar es Salaam.
URT, (2015). Tanzania mining industry investor’s guide 2015, The United Republic of Tanzania, Ministry of Energy and Minerals.
Voorpijl, R. (2011). FDI in Kenya: the gains and losses of foreign involvement. Redboud University Nijmegen.
Wangwe, S., Mmari, D., Aikaeli, J., Rutatina, N., Mboghoina, T., & Kinyondo, A. (2014). The performance of the manufacturing sector in Tanzania: challenges and the way forward. WIDER Working Paper, No. 2014/085, United Nations University World Institute for Development Economics Research, Helsinki
Wang, J.Y. & Blomström, M. (1992). Foreign investment and technology transfer: a simple model. European Economic Review, 36(1), 137-155 doi.10.1016/0014-2921(92)90021-N
World Bank, (2015). Tanzania -Mainland poverty assessment (Vol.2): Main report. Washington, D.C. World Bank.
Wooldridge, J.M. (2006). Introductory econometrics: a modern approach. Thomson South-Western.
Yan, Z., Yihong, T., & Findlay, C. (2010). Productivity effects of services trade liberalization: evidence from Chinese firm-level data. Annual RCIE Conference.
- There are currently no refbacks.
Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE - www.kspjournals.org
Copyright © KSP Journals