Assessing the Impact of Foreign Direct Investment on the Manufacturing Sector in Developing Countries: Empirical Evidence from Tanzania
DOI:
https://doi.org/10.59645/abr.v16i2.198Keywords:
Foreign Direct Investment, Manufacturing sector, Performance, TanzaniaAbstract
The present study aimed to investigate the impact of foreign direct investment (FDI) inflows on the manufacturing sector's performance in developing countries, focusing on Tanzania. Using a non-experimental explanatory research design and a quantitative approach with time series data, the study aims to generalize the results to the entire population. A sample size of 32 annual observations from 1990 to 2021, sourced from international organizations, was employed. Data analysis involved multiple linear regression using the Ordinary Least Squares (OLS) method. Diagnostic tests addressed potential time series data issues, and STATA software facilitated econometric techniques. Findings indicate a significant positive correlation between FDI and manufacturing value added (MVA) in Tanzania. The ARDL bounds test established a long-term equilibrium relationship between FDI, MVA, GDP, and the inflation rate. Notably, a 1.961 unit increase in MVA corresponds to a unit rise in real GDP, with a 0.08 unit decrease linked to a unit increase in inflation. The error correction model shows a 0.66 percent adjustment from short-run to long-run equilibrium. Granger causality results suggest a bi-directional causal effect between MVA and FDI, with MVA causing FDI. Diagnostic tests confirm the model's stability, normality, and absence of serial correlation or heteroscedasticity. In conclusion, the study highlights FDI's positive role in propelling manufacturing sector growth in Tanzania, contributing to economic development and employment generation. Recommendations for Tanzanian policymakers include creating a conducive environment for FDI in the manufacturing sector, emphasizing policies to ease business operations, encourage technology transfer, and address inflationary pressures.
References
ADB (2019). African Economic Outlook 2019. Oxford. Oxford University Press.
Adejumo, A. V. (2013). "Foreign Direct Investment and Manufacturing Sector in Nigeria," African Journal of Business Management, 7(16), 1478-1487.
Aitken, B. J., & Harrison, E. (1999). "Do domestic firms benefit from direct foreign investment? Evidence from Venezuela," The American Economic Review, 89(3), 605-618.
Aitken, B.J. and Harrison, E. (1999). "Do domestic firms benefit from direct foreign investment? Evidence from Venezuela", The American Economic Review, Vol. 89, pp. 605-618.
Blomström, M. and Wolff, E. (1994). "Multinational corporations and productivity convergence in Mexico", in Baumol, W. and Nelsonet Wolff, R.E. (Eds), Convergence of Productivity: Cross-National Studies and Historical Evidence, Oxford University Press, Walton Street.
Blomström, M., & Wolff, E. (1994). "Multinational corporations and productivity convergence in Mexico," in Baumol, W., & Nelsonet Wolff, R.E. (Eds), Convergence of Productivity: Cross-National Studies and Historical Evidence, Oxford University Press, Walton Street, pp. 223-241.
Chakraborty, C. and Nunnenkamp, P. (2008). "Economic reforms, FDI, and economic growth in India: a sector level analysis", World Development, Vol. 36 No. 7, pp. 1192-1212.
Chakraborty, C., & Nunnenkamp, P. (2008). "Economic reforms, FDI, and economic growth in India: a sector level analysis," World Development, 36(7), 1192-1212.
Chen, Z., Geiger, M., & Fu, X. (2015). "Sub-national institutional safeguards, investment climates, and FDI: Evidence from a non-linear world," Journal of World Business, 50(2), 294-307.
Das, B. K. (2007). Theories of foreign direct investment. Gauhati University.
Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31.
Duran, J. J., & Ubeda, F. (2005). The investment development path of newly developed countries. International Journal of the Economics of Business, 12(1), 123-137.
Ekienabor, B., & Sunday, O. O. (2016). "Foreign direct investment, economic growth, and political stability in African countries," Journal of Economic Studies, 43(1), 59-76.
Ekienabor, B., & Sunday, O. O. (2016). [Title of the Source, if available], [Publisher or URL, if available].
Eze, O. R., & Nkalu, N. C. (2019). "An Empirical Investigation of the Impact of Foreign Direct Investment on the Nigerian Manufacturing Sector (1981-2015)," International Journal of Innovative Research and Advanced Studies, 6(11), 16-25.
Javorcik, B. S. (2004). "Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages," The American Economic Review, 94(3), 605-627.
Javorcik, B.S. (2004). "Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages", The American Economic Review, Vol. 94 No. 3, pp. 605-627.
Lipsey, R. E. (2001). Interpreting developed countries’ foreign direct investment. In Investing Today for the World of Tomorrow: Studies on the investment process in Europe (pp. 285-325). Berlin, Heidelberg: Springer Berlin Heidelberg.
Masron, T. A., & Hassan, M. K. (2016). "US foreign direct investment (FDI) and manufacturing sector in Malaysia," Asian Academy of Management Journal, 21(1), 89-110.
Masron, T.A. and Hassan, M.K. (2016). "US foreign direct investment (FDI) and manufacturing sector in Malaysia", Asian Academy of Management Journal, Vol. 21 No. 1, pp. 89-110.
Mwang'onda, D. L., & Mwaseba, D. L. (2018). "The impact of foreign direct investment on economic growth in Tanzania: A case study of the manufacturing sector," Journal of Development and Agricultural Economics, 10(8), 243-253.
