Impact of foreign direct investment on economic growth

Abstract

This paper uses the Vector Error Correction Model (VECM) to analyze the impact of foreign direct investment (FDI) on Tanzania''s economic growth rate. This paper aim to ascertain if inflows of foreign direct investment impact positively or negatively, the real GDP growth rate in the long run. Time series annual data of relevant macroeconomic variables have been used from 1990 to 2020. The paper revealed a statistically significant positive association between real GDP growth rate and FDI inflow to GDP ratio. On the other hand, the study revealed a negative correlation between gross fixed capital formation to GDP ratio and the real GDP growth rate which may be caused by the current situation of public investment. In order to promote sustainable and inclusive economic growth in Tanzania, it is suggested in this paper that the government continues upgrading its policies regarding inward foreign direct investments, public investment, and the export sector.