Does Foreign Direct Investment promote Economic Growth and Female Self-Employment in Tanzania?

Abstract

This study investigates the causal relationship between Foreign Direct Investment (FDI), Economic Growth (GDP), and Female Self-Employment in Tanzania using annual time series data from 1991 to 2023. The objective is to assess whether FDI contributes to economic expansion and inclusive employment, particularly among women. Employing a Vector Autoregression (VAR) model, the analysis captures the short-run dynamic interactions among the selected macroeconomic variables. Unit root tests and lag selection criteria were used to ensure the robustness of the model. Granger causality tests were conducted to determine the direction of influence among the variables. The findings reveal that while GDP significantly drives FDI and final consumption expenditure, FDI does not have a short-run causal impact on GDP, indicating a growth-following rather than a growth-inducing role. Moreover, FDI shows no direct causal influence on female self-employment, suggesting that foreign investments have yet to translate into inclusive employment benefits. Female self-employment, in turn, exerts a negative influence on both consumption and FDI, highlighting structural limitations within Tanzania’s informal sector. The study concludes that while FDI responds positively to macroeconomic growth, it has not significantly contributed to grassroots employment or productive domestic linkages. The study recommends that FDI policy in Tanzania be restructured to promote stronger integration with local enterprises, particularly women-led businesses, through inclusive procurement, training, and credit access. Additionally, institutional mechanisms should be enhanced to ensure that FDI inflows support both economic and social development objectives.