IMPACT OF MACROECONOMIC VARIABLES ON FOREIGN DIRECT INVESTMENT IN TANZANIA'S AGRICULTURAL SECTOR

Abstract

ABSTRACT Foreign direct investment (FDI) coming into a country is affected by the overall economic climate and is closely tied to actual economic activity. However, Tanzania's farming industry has traditionally struggled to attract enough FDI, even though it has great potential for growth. This is partly due to unstable economic conditions and a lack of trust from investors. This study investigated how key economic indicators, such as economic growth, borrowing costs, currency values and price increases, influence FDI flowing into Tanzania's farming sector. The study used a numerical research method with an approach designed to explain the relationships between these factors. Existing data covering 33 years (1990–2023) were gathered from various official sources, including the National Bureau of Statistics, the World Bank, the OECD, and the IMF. Basic statistical measures were used to summarize the data. Tests to check if the data was stationary over time (Augmented Dickey-Fuller and Phillips-Perron tests) were also performed. An analysis of how the variables move together over time (Johansen co-integration test) showed that there was a long-term connection between the economic indicators and FDI inflows. Following this, a specific statistical model (Error Correction Model or ECM) was used to determine both the long-term and short-term impacts of these indicators. The results indicated that economic growth, borrowing costs, and currency values were important factors in determining FDI levels. Price increases, on the other hand, had little to no significant impact. Economic growth proved to be the most important driver, suggesting that consistent economic expansion improves market size, infrastructure development, and investor confidence. Higher borrowing costs surprisingly had a positive effect on FDI, suggesting that investors are prepared to pay more for financing if they anticipate good returns. In contrast, a weaker currency discouraged FDI by increasing the costs of doing business and creating currency risks. The study concludes that fundamental economic factors, especially economic growth, access to financing, and stable currency values, are crucial in attracting FDI into Tanzania’s farming sector. It is recommended that government officials concentrate on maintaining a stable economy, encouraging economic growth, and putting in place financial policies that are appealing to investors in order to attract and maintain higher levels of FDI. The findings offer valuable information for government officials, investors, and researchers who are looking to increase FDI and improve agricultural development in developing countries