DETERMINANTS OF DOMESTIC INVESTMENT IN TANZANIA

Abstract

This study aimed at investigating the determinants of domestic investment in Tanzania. Specifically, the study sought to examine the effect of tax rate, economic growth, and interest rates on domestic investment in Tanzania. This study adopted a positivist research philosophy, emphasizing empirical evidence and quantifiable data to analyze the determinants of domestic investment in Tanzania. A quantitative research approach was used, enabling statistical analysis of variables such as tax revenue, economic growth, and interest rates. The explanatory research design facilitated a thorough investigation of cause-and-effect relationships. The study focused on mainland Tanzania, utilizing 39 years of time series data from 1984 to 2022, with data sourced from the National Bureau of Statistics (NBS). Statistical tools like STATA were used for data analysis, ensuring reliability and validity through diagnostic checks and ethical adherence to confidentiality protocols. The findings reveal that the Tax Rate, operationalized through its indicators (Tax Revenue as a Percentage of GDP, GDP Growth Annual, and Gross Fixed Capital Formation), exhibits a strong positive impact on domestic investment in Tanzania. A stable and moderate tax-to-GDP ratio (mean 6.311%, SD 0.639) reflects a manageable tax burden that fosters investor confidence and encourages capital reinvestment. Similarly, consistent GDP growth (mean 3.156%, SD 0.320) underscores the indirect role of effective tax policies in creating a predictable economic environment conducive to investment. Gross Fixed Capital Formation (mean 1.052%, SD 0.107) highlights steady reinvestment in infrastructure and physical assets, directly supporting long-term economic growth. Regression and ANOVA analyses further confirm that the Tax Rate significantly influences domestic investment, with an R² of 0.52, suggesting tax-related factors account for over half the variability in investment. This underscores the importance of well structured fiscal policies to stimulate economic activity and capital formation in Tanzania. Based on these findings, the study recommends that the government implement policies aimed at increasing tax revenue without overburdening businesses, as this can boost domestic investment. Additionally, fostering economic growth through supportive infrastructure, stable governance, and business-friendly policies is crucial for enhancing investment levels. Finally, efforts should be made to maintain stable and favorable interest rates to create a conducive environment for investors, ensuring long-term economic growth and sustainability