Exploring the Relationship between Foreign Direct Investment, External Debt Stock, and Economic Growth in Tanzania

Abstract

This study investigates the relationship between external debt stock, foreign direct investment (FDI), and economic growth in Tanzania to assess their dynamic effects and causal linkages from 1970 to 2023. The motivation stems from the critical role that external capital flows play in supporting Tanzania's economic development, particularly in rising debt levels and efforts to attract foreign direct investment. Using annual time series data, the study employs the Autoregressive Distributed Lag (ARDL) model to capture short-run and long-run dynamics, following stationarity confirmation through the Augmented Dickey-Fuller (ADF) test. The Bounds test results indicate no evidence of a long-run equilibrium relationship among the variables. However, the Granger causality analysis reveals that foreign direct investment (FDI) significantly influences economic growth and external debt, while no causal relationship between external debt and GDP has been detected. The findings suggest that external debt has a significant short-term positive impact on economic growth, while FDI consistently exerts a positive and significant effect. These results highlight the importance of promoting productive foreign investment and ensuring effective utilization of external borrowing to support sustainable economic growth. Policymakers are encouraged to prioritize FDI