Analysis of Foreign Direct Investment, Agricultural Sector and Economic Growth in Tanzania

Abstract

This paper analyzes the effect of foreign direct investment (FDI) on agricultural sector in Tanzania. The paper also examines the declining contribution of agriculture to real GDP growth despite the fact that the sector employs more than 70 percent of the total labour force. Annual time series data spanning from 1990 to 2015 are used to test the significance of the relationship between FDI inflow and agriculture value added-to-GDP ratio on one hand and FDI inflows and economic growth on the other hand. Also, the relationship between agriculture value added and economic growth rate is empirically examined. Variables such as gross fixed capital formation, inflation rate, trade liberalization, real exchange rate and population are considered as control variables. For the purpose of inference, the paper employs classical linear regression model. Ordinary least squares methods are used for estimation. The diagnostic tests including RESET regression errors specification test, Breusch-Godfrey serial correlation LM test, Jacque-Bera-normality test and white heteroskedasticity test reveal that the models have no signs of misspecification and that, the residuals are serially uncorrelated, normally distributed and homoskedastic. Interestingly, empirical results suggest that there is no significant effect of FDI inflows on agriculture value added-to-GDP ratio in Tanzania despite the fact that FDI inflows in economy have been outstanding particularly in past two decades. Unsurprisingly, the results show that FDI inflows-to-GDP ratio and real GDP growth rate are positively correlated. Notwithstanding, agriculture sector, which constitutes the largest proportion of the total labour force, contributes, on average, less than 30 percent, to total GDP. This suggests that the sector is inefficient and therefore, effort towards attracting more FDI aiming at improving productivity in agriculture sector, which in turn may reduce poverty, is much needed.