Contribution of foreign direct investment to trade performance in Tanzania

Many developing countries including Tanzania have been receiving a lot of Foreign Direct Investment (FDI) but trade performance is still unsatisfactory and the extent FDI contributes to trade performance is not well known. This study examines the contribution of FDI to trade performance in Tanzania using gravity model. Specifically this study analyzes the complementary link of relationship between FDI, and export and FDI and import. The analysis is carried out using Ordinary Least Square method. The study found that, the relationship between FDI and export flows and the relationship between FDI and import flows are not complement. This study concludes that, FDI plays an important role in stimulating import than export in the country. To improve export performance for the Tanzania economy, extra efforts need to be devoted to address the supply side constrains to improve the quality of export products so that the outcomes can have a direct influence on export activities. More incentives and encouragement should be provided to the FDI that can impact export, diversification and value addition for the major export products. Furthermore, there is an urgent need for identification of all potentials in specific areas for new investments that will create linkages with various sectors of the economy, especially value addition through agro-processing. New constructions and improvements in existing infrastructure such as roads, railways and utilities (electricity, water, internet network, etc) would be a positive step towards attracting investment in the potential areas.