The Impact of FDI in Tanzania's Manufacturing Sector: An Autoregressive Distributive Lag Approach

Abstract

This paper sought to analyze the impact of Foreign Direct Investment (FDI) on manufacturing sector output in Tanzania, using Manufacturing Value Added (MVA) as a proxy. FDI has emerged as a pivotal force in driving manufacturing sector development on a global scale, particularly in the context of developing countries. The study applied an Autoregressive Distributed Lag (ARDL) model utilizing annual data covering the period 1990-2024, to assess the long-run relationship, while the Error Correction Model (ECM) was used to capture short-run dynamics. Additionally, Granger causality tests were employed to determine the directional influence between FDI and manufacturing sector output. The findings indicate a significant positive long-run relationship between FDI and manufacturing sector output, suggesting that FDI plays a vital role in enhancing Tanzania's industrial output. In the short run, FDI’s impact is less pronounced, but still positive. Granger causality results revealed a bi-directional causality between MVA and FDI, implying that improvements in the manufacturing sector can attract more FDI and consequently raise the economy’s output and overall income. The study recommends targeted FDI policies that focus on strengthening local manufacturing capabilities, improving human capital, and facilitating technology transfer to sustain long-term industrial growth.

Keywords: ARDL Model, Foreign Direct Investment, GDP, Inflation Manufacturing Sector.