An investigation of the determinants of foreign direct investment inflows to Tanzania

The study investigates the factors that drive Foreign Direct Investment inflows to Tanzania using time series data for the period of 44 years (1970-2013). This study applies Ordinary Least Square (OLS) method to investigate how market size, GDP growth, trade openness, macroeconomic stability (inflation, returns on investment and exchange rate) and infrastructure development impact Foreign Direct Investment inflows to Tanzania. The analysis tests the hypothesis that market size, exchange rate, GDP growth, trade openness, country„s level of rate of return on investment and infrastructure development have positive effect on FDI inflows to Tanzania. It also tests whether the inflation has a significant negative effect on FDI inflows to Tanzania or not.The results based on the Engle Granger cointegration framework provide evidence that market size, infrastructure and openness are significant drivers of Foreign Direct Investment inflows to Tanzania while macroeconomic instability (inflation) has found to be negative and significant related to FDI inflows of Tanzania. Other factors such as rate of return on investment, exchange rate and GDP growth have found to be insignificantly impacting FDI inflows. The findings implicate that, when fiscal and monetary policies are geared towards improving GDP of the country to amplify the market size, FDI inflows will be enhanced significantly. Second, trade liberalization which ensures that trade reforms are credible and not subject to reversal improves FDI inflows significantly. Third, when inflation rate is low maintained in Tanzania, increase in FDI inflows should be expected.