Analysis of the Short and Long-run Effects of Macroeconomic Variables on Foreign Direct Investment Inflows to Tanzania

Abstract

This study assessed the effect of macroeconomic variables on foreign direct investment inflows to Tanzania for the period 1970-2021. To do this, the time series data were analysed by the Co-integration test for the long-run relationship and the ECM model for the short-and long-run effects. The co-integration test suggests that there is a long-run relationship between government expenditure, inflation rate, external debt, interest rate, exchange rate, and foreign investment inflows. The results of the ECM reveal that government expenditure has a significant positive effect on short and long-run FDI inflows, while the inflation rate has a negative and statistically significant effect on short and long-run FDI inflows. Moreover, the interest rate, exchange rate and external debt variables have a negligible effect on FDI inflows. On the other hand, the proxy variable for government regime and economic reforms before 2015 revealed a positive and statistically significant effect on FDI inflows at 1% in the short run and 10% in the long run, while it had a negative and statistically insignificant impact on FDI inflows after 2015. The study recommends that the government should adequately allocate resources to economic activities to stimulate macro variables, which will attract more FDI and enhance steady economic growth in the short and long-run.