Foreign Direct Investment and Export Performance: A VECM Based Empirical Evidence from Tanzania

Abstract

This study examines the long-run relationship between foreign direct investment (FDI) and export performance in Tanzania. The study is motivated by the continuing policy interest in using foreign investment to expand productive capacity, strengthen international competitiveness, and promote export growth. Annual time-series data covering 1980–2024 are analysed using the Augmented Dickey-Fuller unit-root test, Johansen cointegration technique, and Vector Error Correction Model (VECM). The empirical model includes exports, FDI, gross domestic product, exchange rate, and inflation. The cointegration results confirm the existence of stable long-run relationships among the variables. The VECM estimates show that FDI has a positive and statistically significant long-run relationship with exports, with a 1% increase in FDI associated with approximately a 0.214% increase in export performance. GDP also has a positive effect, while the exchange rate and inflation are negatively associated with exports. The findings suggest that FDI can contribute to Tanzania’s export expansion, but its effectiveness depends on broader productive and macroeconomic conditions. The study recommends policies that prioritise export-oriented and productivity-enhancing FDI, specifically in manufacturing, agro-processing, value addition, and other tradable sectors, while strengthening infrastructure, human capital, domestic linkages, and macroeconomic stability.