Determinants for Foreign Direct Investments in the Financial Sector in Tanzania.

Abstract

Attracting FDI is a very essential action in most of the developing and emerging economies. Investment environment must be favorable to attract as many foreign direct investors as possible. This study was conducted to assess the determinants of foreign direct investment into the financial sector in Tanzania. Specifically, the study used macroeconomic determinants that showed significance in most phenomenal cases of developing and emerging economies including exchange rate, inflation rate, economic growth and interest rate as of the literature. An Autoregressive Distributed Lags (ARDL) Model was employed on the time series data collected from the central Bank of Tanzania database spanning from 1995 – 2020. The study findings revealed that, exchange rate and inflation rate had a significant positive impact on FDI inflows in the long run which results into attracting foreign investors. But in the short run, none of the variables were significant in explaining the relationship studied. Therefore, exchange rate and inflation rate are the significant determinants for foreign direct investment in the financial sector in Tanzania. The study recommended to the Ministry of Finance and planning having a regular improvement on the macroeconomic policies and regulations or both monetary and fiscal policies that may influence the inflation rate. Furthermore, appropriate measures have to be taken in favor of Exchange rate stability which has for some decades been continuously depreciating.