Assessing Foreign Direct Investment and Export Performance in Tanzania: A Granger Causality Analysis (1970-2011)

Abstract

The underlying purpose of this study was to investigate the causal relationship between foreign direct investment
(FDI) and export performance in Tanzania by using annual time series data from 1970 to 2011. All the time
series variables were not stationary at their level, but they became stationary and integrated of order one I(1)
after they were differenced once. The long run relationship between FDI and export was explored by using
cointegration analysis. Since the variables were co-integrated, Vector Error Correction Model (VECM) was used
as the estimation technique. Finally, Granger causality analysis revealed that there is long run bi-directional
causality between FDI and export. These results suggest that FDI is a good predictor of export, and also export is
a good predictor of FDI. Hence, FDI-led export growth and export-driven FDI could be necessary for Tanzania
to boost both its export sector and attract more FDI inflows.