Foreign direct investment and growth in Tanzania : roles of the domestic financial system and human capital
Recent theoretical and empirical literature suggests various links through which foreign direct investments (FDI) exert positive impact on economic growth. It is argued that FDI will have a positive effect on domestic economic growth under certain circumstances. Some proponents of FDI and growth have emphasized on the role of the level of technological advancement and human capital while others have focused on the level of the development of the domestic financial system. In the former case, the literature suggests that better trained people will easily acquire technologies introduced with FDI inflows and spread it to the rest of the economy while in the later case, it suggests that a well developed domestic financial system enhances efficient allocation of financial resources and therefore it is a pre-condition for FDI to positively contribute to economic growth. In this paper, both propositions are investigated. The paper examines whether Tanzania has sufficiently developed its financial system and invested in human capital adequately to enhance its FDI absorptive capacity and let it contribute positively to economic growth for the period 1970 -2006. The study uses bounds testing approach of cointegration within the framework of Autoregressive Distributed Lag (ARDL) developed by Peresan et al. (2001) also used by Fosu and Frimpong (2006); and Khan (2007). An ARDL estimation technique follows three main steps. After testing for unit roots, an Ordinary Least Square (OLS) model is estimated in order to test for the existence of long-run relationships between the variables by conducting F-test for joint significance of the coefficients of lagged levels of variables.
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