Macroeconomic Environment and Foreign Direct Investment: A VECM Analysis for Tanzania

Abstract

The objective of this study was to determine the influence of macroeconomic environmental factors on inward FDI in Tanzania. The study employed quantitative approach using time series data from 1980-2011. Phillip Perron Unit Root Test, Cointegration Test and Vector Error Correction Model were applied in the analysis. Gross Domestic Product (GDP), Trade and telecommunication were found to have positive and significant influence on FDI. Inflation as a measure of macroeconomic stability was found to have negative impact on FDI. Development in telecommunication technology appeared to be the most influential predictor of inward Foreign Direct Investment. It is recommended that, the central bank should ensure the uprightness of the financial system, as required by section 6 (1) of the bank Act (2006) so as to sustain the broad economic policy of the government and support sound monetary condition, financing agricultural projects to raise crop production so as to control food inflation in the country. The government should put more effort in implementing the Private Sector Development Strategy (PSDS) in order to create conducive environment for investment, improving road infrastructure and implementing competition law and policy in electric power supply industry so as to eliminate power shortage.