ABSTRACT
This paper analyzes the effect
of foreign direct investment (FDI) on agricultural sector in Tanzania. The
paper also examines the declining contribution of agriculture to real GDP
growth despite the fact that the sector employs more than 70 percent of the
total labour force. Annual time series data spanning from 1990 to 2015 are used
to test the significance of the relationship between FDI inflow and agriculture
value added-to-GDP ratio on one hand and FDI inflows and economic growth on the
other hand. Also, the relationship between agriculture value added and economic
growth rate is empirically examined. Variables such as gross fixed capital
formation, inflation rate, trade liberalization, real exchange rate and population
are considered as control variables. For the purpose of inference, the paper
employs classical linear regression model. Ordinary least squares methods are
used for estimation. The diagnostic tests including RESET regression errors specification
test, Breusch-Godfrey serial correlation LM test, Jacque-Bera-normality test
and white heteroskedasticity test reveal that the models have no signs of misspecification
and that, the residuals are serially uncorrelated, normally distributed and
homoskedastic. Interestingly, empirical results suggest that there is no significant
effect of FDI inflows on agriculture value added-to-GDP ratio in Tanzania
despite the fact that FDI inflows in economy have been outstanding particularly
in past two decades. Unsurprisingly, the results show that FDI inflows-to-GDP
ratio and real GDP growth rate are positively correlated. Notwithstanding,
agriculture sector, which constitutes the largest proportion of the total
labour force, contributes, on average, less than 30 percent, to total GDP. This
suggests that the sector is inefficient and therefore, effort towards
attracting more FDI aiming at improving productivity in agriculture sector,
which in turn may reduce poverty, is much needed.