Determinants of Private Investment in Tanzania: 1970-2015

Abstract

This study provides an empirical analysis of the macroeconomic factors that affect private investment decisions in Tanzania. Theory and empirical literature is reviewed in an effort to identify a private investment function for the period 1970 to 2015. The results suggest that private investment is determined by aggregate demand as measured by output. In addition, there is evidence that the crowding in effect of public investment and credit flow to the private sector has positive impact on capital accumulation, while external debt and inflation have had negative effects. Since time series data can bring spurious regression results, we avoid this by testing for stationarity and co-integration prior to estimation of the model. The results of the ECM model suggest that private investment is co-integrated with the suggested variables. In terms of policy, the results suggest the importance of inflation control, development of credit markets and public investment as economic policy instruments for private investment growth in Tanzania.