The Effect of Foreign Direct Investment Inflows on Manufacturing Sector Performance in Developing Countries: Empirical Evidence From Tanzania

Abstract

This study intended to examine the effect of FDI inflows on the manufacturing sector in Tanzania from the period of 1990 to 2021. The study was guided by several specific objectives which were; to examine the short-run dynamics between FDI and the manufacturing sector growth in Tanzania. The second was to investigate the long-run relationship between FDI and the manufacturing sector growth in Tanzania and the last was to assess the granger causes between FDI and Manufacturing sector growth in Tanzania. The researcher employed time series data with a sample of 32 observations. Data in this study were collected from the World Bank Development Indicator from 1990 to 2021 for all the study variables. The researcher performed the ARDL bound test to examine whether the series are co-integrated or not. The analysis proved that there is the existence of a long-run equilibrium between the variables. The analysis of the long-run coefficient was undertaken and the findings show that; there is the existence of a positive and significant relationship between FDI inflows and manufacturing value added in Tanzania. In such a way that, in the long run, a 1 unit increase in FDI inflows in Tanzania will lead to a 0.701 unit increase in manufacturing value added in the country, holding other factors constant. The result of the Granger causality test indicated that there is a bi-directional causal relationship between FDI and MVA in Tanzania. The researcher therefore recommended that; the government, through the Tanzania Investment Centre (TIC), should create policies efficiently to attract manufacturing FDI since it’s believed to increase the performance of the manufacturing sector in the country. Also, considerable care should be exercised by policy formulators, including entities such as the Ministry of Finance and the Parliament, in defining the preferred types of Foreign Direct Investment (FDI) a country seeks to attract. Selective attention to the nature of FDI is essential, as certain forms may engender competition with domestic enterprises, potentially leading to the crowding-out of domestic firms.