Does Sectoral FDI Enhance Export Earnings? The Tanzania Experiences

Using econometric estimation techniques, namely ordinary least square (OLS) and error correction model (ECM), this study attempts to measure the influence of sectoral FDI, flanked with other variables, on export earnings in Tanzania over the past three decades. It is found that sectoral FDI stock leads to mixed export results depending on sectoral capital intensiveness, investment adequacy and targeting. While mining and tourism lead the pack in terms of export earnings, the duo’s GDP contribution is least among four major economic sectors, hence coined “Vehicles for Export Earnings Flight–(VEEF)”. Agriculture, opposed to tourism and mining, leads in terms of GDP contribution despite its lowest FDI stock. It is also found that while tourism registered slightly higher export earnings in 2007 than mining, the former had just a fifth of FDI stock in mining. Manufacturing is second to mining in FDI stock although it ranks lowest with agriculture in terms of export earnings. This suggests weak linkages and integration within and between FDI laden sectors and the rest of the economy, hence the dominance of unprocessed or low value-added exports.

The above can be explained, among others, by the existing loose investment policy that allows full repatriation abroad of foreign investors’ locally accumulated capital and earnings. As a result, the trickle-down effects of FDI gains to the general economy have remained low
principally due to inadequate investments in the agricultural sector, poorly targeted FDI in manufacturing and less than proportionate tourism and mineral rents accruing to the domestic economy. Given the situation, FDI policies and laws should therefore be reviewed so that objectives and targets of FDI are consistent with and integral part of, the country’s broader strategic development mission. This would entail building a competitive and sustainable value-added export sector with elements of joint domestic and foreign venture ownership, hence the transfer of capital and diffusion of key skills, knowledge and technology to indigenous producers, processors and exporters.

This paper was published in Business Management Review, Vol.12(1): 33-63, January – June 2008, University of Dar es Salaam Business School. It was later presented at a Workshop by the Virtual Institute (Vi) of the United Nations Conference on Trade and Development (UNCTAD) on The Teaching and Research of Economic and Legal Aspects of International Investment Agreements (IIAs), Kampala Uganda, 10-14 November 2008.