Determinants of Foreign Direct Investment in Tanzania.

Ngarama, Mohamed Haruna (2025) Determinants of Foreign Direct Investment in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

Tanzania has continued to experience relatively low levels of Foreign Direct Investment (FDI) despite various efforts to attract international investors. This study was conducted to investigate the key factors influencing FDI in Tanzania, focusing specifically on the impact of market size, trade openness, and macroeconomic policy. The study employed a descriptive research design and used secondary timeseries data spanning from 1990 to 2021. Data were collected from reputable sources including the World Bank and Bank of Tanzania. To analyze the relationship between the selected variables and FDI inflows, correlation analysis and multiple regression techniques were applied. Diagnostic tests, including multicollinearity, heteroscedasticity, and unit root tests, were conducted to ensure the validity and reliability of the model. The findings reveal that both trade openness and macroeconomic policy have a statistically significant positive impact on FDI in Tanzania. Specifically, an increase in trade openness and improvements in macroeconomic policy are associated with increases in FDI inflows. However, market size was found to have an insignificant effect on FDI during the study period. These results suggest that foreign investors place more importance on stable economic policies and access to international trade than on the size of the domestic market. The study concludes that improving macroeconomic stability and enhancing trade openness are crucial strategies for increasing FDI in Tanzania. It recommends that the government adopt policies that promote a favorable investment climate, maintain fiscal and monetary discipline, and remove barriers to international trade in order to attract and sustain foreign investment. Keywords: Foreign Direct Investment, Economics, Market Size, Trade Openness

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