Foreign direct investment and economic growth. Analysis of sectoral foreign direct investment in Tanzania

This paper assesses the role of foreign direct investment in economic growth by analyzing the contribution of sectoral external finance in Tanzania. Time series data from 1988 to 2017 and 1999 to 2017 for the general and sector‐specific foreign finance respectively is studied using time series econometrics techniques. More specifically, the autoregressive distributive lag bound test for cointegration and error correction model are employed to evaluate the impact of sector foreign direct investment on growth. The diagnostic tests suggest that our models are free from instability, nonnormality, misspecification, heteroscedasticity, and serial correlation. Estimated long‐ and short‐term coefficients show that the effect of the primary sector foreign direct investment is positive and statistically significant at the 10% and 5% significance levels, respectively. In contrast, that of the secondary and tertiary sectors is insignificant. The coefficient of the general foreign direct investment is found to be statistically insignificant. These results confirm that the type rather than the quantity of foreign direct investment may be more relevant in explaining economic growth. Other control variables exhibit their expected signs except that of openness to trade. Based on these findings, the study recommends more and strategic foreign direct investment incentives to the primary sector.