Determinants of Foreign Direct Investment in Tanzania: Co-integration and Error Correction Model Analysis

Abstract

This study identifies the determinants of foreign direct investment in Tanzania over the period spanning from 1970 to 2012. In order to investigate the determinants, the study utilizes time series analysis employing the multiple regression analysis. The study tests for unit root using Augmented Dickey Fuller (ADF) test and co integration test using Engle-Granger residuals co integration test and Johansen co integration test to affirm if the variables are co integrated. Furthermore, the study estimate long run and short run coefficients using Error Correction Model (ECM). Generally speaking, empirical results suggest that gross domestic product (GDP), openness and inflation rates are main determinants of FDI in Tanzania. Moreover, results further reveal that variables are adjusting to long run equilibrium at the speed of 53 percent per annum. Also structural break in long run suggest stable contributions of these variables in FDI in Tanzania. Thus, in this context, Tanzanian government ought to earmark GDP, openness and inflation rates as crucial variables in attracting FDI in Tanzanian economy. However, it should be clear that not only these variables are essential for determining FDI in Tanzania but these variables have significant contributions as per adjusted R-square since have 70 percent of power in explaining FDI inflow in Tanzania.

Keywords: Determinants of foreign direct investment, Error correction model, Foreign direct investment, Tanzanian foreign direct investment.