report on the study of growth and impact of investment in tanzania ...

2008 

Tanzania Investment Centre 

REPORT ON THE STUDY OF GROWTH AND 

IMPACT OF INVESTMENT IN TANZANIA

REPORT ON THE STUDY OF GROWTH AND 

2008 

Tanzania Investment Centre 

IMPACT OF INVESTMENT IN TANZANIA

The United Republic of Tanzania - Tanzania Investment Centre 

Ta b l e o f Co n T e n T s 

List of Abbreviations and Acronyms .......................................................................v 

LIST OF TABLES ......................................................................................................vii 

LIST OF FIGURES ...................................................................................................viii 

Executive Summary .................................................................................................ix 

Background and Context .................................................................................... ix 

Objectives ......................................................................................................... ix 

1. Scope of the study ...................................................................................... x 

2. Methodology ................................................................................................ x 

3. Key messages from the study .................................................................... xi 

4. Recommendations ...................................................................................xiii 

Acknowledgements .................................................................................................xv 

1.0 Introduction ........................................................................................................1 

1.1 Background .................................................................................................1 

1.2 Objectives and Rationale ............................................................................2 

1.3 Scope of Work .............................................................................................2 

1.4 Methodology ................................................................................................3 

1.4.1 Definition of Investment ....................................................................3 

1.4.2 Overall Approach ..............................................................................3 

1.4.3 Field Survey ......................................................................................4 

1.4.4 Data Analysis ....................................................................................5 

1.5 Organisation of the Report ..........................................................................5 

2.0 Trends and Magnitude of Foreign and Domestic Investment in Tanzania ... 7 

2.1 Trends and the Structure of Capital Formation ...........................................7 

2.1.1 Trends in Total Capital Formation .....................................................8 

2.1.2 Capital Formation by Public and Private Sector ..............................9 

2.1.3 Capital Formation by Type of Assets .............................................. 11 

2.1.4 Capital Formation by Sectors of the Economy ................................15 

2.2 Trends and the Structure of Foreign Direct Investment ...........................16 

2.2.1 Size and Growth of Foreign Direct Investment in Tanzania ............ 16 

2.2.2 FDI by Mode of Entry, Sectoral Distribution and Ownership ........... 18 

2.2.3 FDI by Country/Region of Origin .....................................................20 

2.2.4 Spatial Distribution of FDI ..............................................................22 

2.2.5 Portfolio Investments into Tanzania ................................................23 

2.3 Level of Domestic Direct Investment (DDI) ...............................................23 

2.3.1 Identification of Domestic Direct Investment (DDI) .........................23 

2.3.2 Relationship between Foreign and Domestic Investment ............... 25 

2.3.3 Literature Review ............................................................................26 

2.4 Policy Implications .....................................................................................28 

ii

3.0 Investments Adequacy in Relation to Development Goals .........................29 

3.1 Development Goals ...................................................................................29 

3.2 Link between Investment and Growth .......................................................29 

3.3 Tanzania’s Historical Experience on Investment and Growth ................... 31 

3.4 Explaining Tanzania’s Insignificant Linkage between 

Investment and Growth .............................................................................32 

3.5 Investment Adequacy ................................................................................35 

3.6 Raising Investment and Growth: What can be done? ...............................37 

3.6.1 Improving the Environment for Investment .....................................37 

3.6.2 Raising Investment Productivity and Sustaining Growth ............... 38 

3.6.3 Diversifying Sources of External Finance and Raising 

Effectiveness of Official Development Assistance ..........................40 

3.6.4 Mobilising Domestic Resources .....................................................41 

3.6.5 Making Further Progress in Tanzania Investor 

Roadmap-type Issues .....................................................................41 

4.0 Measures for Evaluating the Cost and Benefits of Investments 

made in Tanzania .............................................................................................45 

4.1 Introduction ...............................................................................................45 

4.2 Current Measures for Investment Approval ..............................................45 

4.3 Cost-benefit Measures .............................................................................47 

4.3.1 Social Benefit Measures .................................................................47 

4.3.2 Social Cost Measures .....................................................................48 

4.4 Calculating the Social Cost-Benefit Measures (Modus Operandi) ............ 49 

4.5 Post Investment Measures ........................................................................50 

4.5.1 Statutory Measures ........................................................................50 

4.5.2 Other Follow-up Measures ..............................................................50 

4.6 Recommendations for Addressing the Key Remaining Constraints ....... 51 

4.6.1 Becoming more Pro-active in Promoting Local Investments .......... 51 

4.6.2 Further Promotion of Foreign Investments ....................................52 

4.6.3 Taking Advantage of Bilateral Investment Treaties .........................52 

4.6.4 Improving Prospects for Technology Transfer .................................52 

4.6.5 Improving the linkages between SMEs and existing investors. ...... 53 

4.6.6 Facilitating the Creation of Employment .........................................53 

4.6.7 Protecting the Environment .............................................................54 

4.6.8 Facilitating and Servicing Existing Investors ...................................54 

4.6.9 Undertaking more regular follow-up of investors ............................54 

5.0 Investment Impact Analysis ...........................................................................55 

5.1 Impact on Economic Growth .....................................................................55 

5.2 Impact on Balance of Payments ...............................................................57 

5.2.1 Impact on Exports/Imports ..............................................................57 

iii Report on the Study of Growth and Impact of Investment in Tanzania

5.2.2 Impact on the Balance of Payments ...............................................61 

5.3 Investment Impact on Government Revenue ............................................62 

5.4 Impact of Investment on Savings Level ....................................................65 

5.4.1 Introduction .....................................................................................65 

5.4.2 Trends in Government and Private Savings ...................................65 

5.4.3 Improving Savings Mobilisation ......................................................66 

5.5 Investment Performance and Profitability .................................................67 

5.6 Impact on Employment Generation ...........................................................69 


5.6.2 Investment and employment creation .............................................70 

5.6.3 Employment Impacts through Linkages with the 

Rest of the Economy .......................................................................76 

5.7 Impact on Human Resources Development .............................................77 


5.7.2 Development of Human Resources ...............................................77 

5.8 Impact of Investment on Technology Transfer ..........................................79 


5.8.2 Tanzania’ Experience ......................................................................80 

5.8.3 Transferring Business Skills and Working Styles ............................80 

5.8.4 Examples of Technology Transfer in Selected Sectors ................... 81 

5.8.5 Technology Transfer-through Imports of Capital Goods ................. 82 

5.9 Impact of Investment on Entrepreneurial Growth ......................................83 

5.9.1 Entrepreneurship Growth ................................................................83 

5.10 Community and Neighbourhood Impact ....................................................86 

5.11 Illustrative Cases of Some of the Performing Investments ......................89 

5.11.1Tanzania Cigarette Company (TCC) ...............................................90 

5.11.2Kioo Limited Company (KLC) .........................................................91 

5.11.3Mission Mikocheni Health and Education Network (MMHEN) ........ 92 

5.11.4Standard Chartered Bank Tanzania (SCBT) ..................................93 

5.12 Cross-cutting Issues ..................................................................................96 

5.12.1 The Environment ............................................................................96 

5.12.2 The Gender Dimension ..................................................................97 

5.12.3HIV/AIDS .........................................................................................99 

5.12.4Regional Integration Initiatives ......................................................100 

5.13 Policy Implications ...................................................................................101 

6.0 Conclusions and Recommendations ..........................................................104 

6.1 Key Conclusions .....................................................................................104 

6.2 Recommendations .................................................................................106 

References .............................................................................................................109 

Appendices ............................................................................................................ 113 


iv

li s T o f ab b r e v i aT i o n s a n d aC r o n y m s 

AIDS - Acquired Immune Deficiency Syndrome 

BITS - Bilateral Investment Treaties 

BOT - Bank of Tanzania 

BRELA - Business Registration and Licensing Authority 

CAER - Consulting Assistance on Economic Reform 

CDTT - Centre for the Development and Transfer of Technology 

CEDAW - Convention on Elimination of all forms of Discrimination Against Women 

CEM - Country Economic Memorandum 

CGE - Computable General Equilibrium 

COMFAR - Computer Model for Feasibility Analysis and Reporting 

COSTECH - Commission for Science and Technology 

CUTS - Consumer Unity and Trust Society 

DANIDA - Danish International Development Agency 

DDI - Domestic Direct Investment 

EIA - Environmental Impact Assessment 

ESRF - Economic and Social Research Foundation 

FDI - Foreign Direct Investment 

FR - Financial Rules 

STL - Sunflag Tanzania Ltd 

GDP - Gross Domestic Product 

GFCF - Gross Fixed Capital Formation 

HIPC - Highly Indebted Poor Country 

HIV - Human Immuno-deficiency Virus 

ICOR - Incremental Capital Output Ratio 

IDA - International Development Association 

IFC - International Finance Corporation 

ILO - International Labour Organisation 

IMF - International Monetary Fund 

IPI - Institute of Production Innovation 

IIRT - International Investors Round Table 

KIDT - Kilimanjaro Industrial Development Trust 

KTM - Karibu Textile Mills 

LDC - Least Developed Country 

MDGs - Millennium Development Goals 

MIGA - Multilateral Investment Guarantee Agency 

MKUKUTA - Mkakati wa Kukuza Uchumi na Kupunguza Umasikini Tanzania 

MNEs - Multinational Enterprises 

MWATEX - Mwanza Textile Mills 

v Report on the Study of Growth and Impact of Investment in Tanzania

NBC - National Bank of Commerce Limited 

NBCL - Nyanza Bottling Company Limited 

NBS - National Bureau of Statistics 

NDC - National Development Corporation 

NEMC - National Environmental Management Commission 

NSSF - National Social Security Fund 

ODA - Official Development Assistance 

ODI - Overseas Development Institute 

OECD - Organisation of Economic Cooperation on Development 

PERs - Public Expenditure Reviews 

PPP - Public-Private Partnership 

PRS - Poverty Reduction Strategy 

R&D - Research and Development 

SADC - Southern Africa Development Community 

SIDO - Small Industries Development Organisation 

SME - Small and Medium Enterprises 

TBL - Tanzania Breweries Limited 

TBs - Treasury Bills 

TIC - Tanzania Investment Centre 

TIRDO - Tanzania Industrial Research and Development Organisation 

TNCs - Transnational Corporations 

TNSRC - Tanzania National Scientific Research Council 

TRA - Tanzania Revenue Authority 

TTCL - Tanzania Telecommunication Company Limited 

UK - United Kingdom 

UNCTAD - United Nations Conference on Trade and Development 

UNIDO - United Nations Industrial Development Organisation 

URT - United Republic of Tanzania 

USA - United States of America 

USAID - United States Agency for International Development 

UTT - Unilever Tea Tanzania Limited 

VAT - Value-Added Tax 

VOIL - Vegetable Oil Industries Limited 


vi

lisT of Tables 

Table 2.1: FDI stock in Tanzania 1999-2004 .........................................................................16 

Table 2.2: Stock and flow of FDI by Regional Destination, 1998 - 2004 (US$ million) ..........21 

Table 3.1: Investment and Growth in Selected Countries .....................................................29 

Table 3.2: Investment and Growth in Tanzania......................................................................32 

Table 3.3: Sources of Growth in Tanzania .............................................................................32 

Table 3.4: Roadmap on Institutional Facilitation of Investment .............................................42 

Table 5.1: Tanzania Exports (US $ Million) ............................................................................55 

Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms ..............................55 

Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms .........................56 

Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms .....................................57 

Table 5.5: Investment-related Income tax .............................................................................58 

Table 5.6: Investment-related Value-added tax .....................................................................59 

Table 5.7: Investment-related revenue from Customs ...........................................................60 

Table 5.8: Performance of Large Taxpayers (2003-2004) .....................................................64 

Table 5.9: Profitability of some investments (2002-2004) ......................................................65 

Table 5.10: Actual Investment Created Employment by Sector and 

Categorisation for Mainland Tanzania (2001-2003) ..............................................67 

Table 5.11: Trends in Total Actual Employment of Selected Firms ..........................................70 

Table 5.12: Network of Suppliers of Raw Materials and Other Inputs .....................................79 

Table 5.13: TCC Performance .................................................................................................90 

Table 5.14: Kioo Limited Performance ....................................................................................91 

Table 5.15: Number of patients treated between 2002-2004 ..................................................92 

Table 5.16: Tax paid during the year ending December 31 2004 ............................................94 

Table 5.17: Additional list of some of best performing enterprises ..........................................95 

vii Report on the Study of Growth and Impact of Investment in Tanzania

lisT of fIGURES 

Figure 2.1: Capital Formation as a % of GDP (Current Prices) ................................................9 

Figure 2.2: Relative Importance of Public and Private Investment ......................................... 11 

Figure 2.3: Value of Capital Formation by Types of Assets .....................................................12 

Figure 2.4: Structure of Capital Formation by Types of Assets ...............................................12 

Figure 2.5: Structure of Capital Formation by Components of Building Works .......................14 

Figure 2.6: Structure of Capital Formation by Components of Other Works...........................14 

Figure 2.7: Structure of Capital Formation by Components of Other Works...........................15 

Figure 2.8: Capital Formations by Kind of Economic Activity 1989-2002 ...............................15 

Figure 2.9: Capital Formation by Kind of Economic Activity as % of Total 1989-2002 ............16 

Figure 2.10: FDI Inflows into Tanzania, 1990-2004...................................................................17 

Figure 2.11: Foreign Direct Investment Inflows by Sector 1990-2003 ......................................19 

Figure 2.12: Sectoral Distribution of FDI Projects in Tanzania 1999-2001................................19 

Figure 2.13: Number of FDI projects in Tanzania 1990-2004 by Country of Origin ..................21 

Figure 2.14: Investment by Country of Origin, Leading countries 1990-2004 ...........................21 

Figure 2.15: Identification of Domestic Private Investment .......................................................24 

Figure 2.16: Trends in the Foreign and Domestic Private Investment ......................................25 

Figure 2.17: FDI as a Share of Total Capital Formation ............................................................27 

Figure 3.1: Real GDP Growth and Investment (1965-2004) ...................................................32 

Figure 5.1: FDI, DDI and Growth of Real GDP .......................................................................57 

Figure 5.2: Tanzania Exports (US $ Million) ............................................................................58 

Figure 5.3: Trends in Exports/Imports of Selected Agricultural Firms (1999-2004) ................59 

Figure 5.4: Trends in Exports/Imports for Manufacturing Firms ..............................................60 

Figure 5.5: Investment-related Income Tax .............................................................................62 

Figure 5.6: Investment-related Value-added tax revenue .......................................................63 

Figure 5.7: Revenue from Customs ........................................................................................64 

Figure 5.8: Tanzania Savings, 1990-2003 (Percentage of GDP) ............................................66 

Figure 5.9: Actual employment of TIC approved foreign affiliates in Tanzania, 

by industry, 2001-2004 .........................................................................................74 

Figure 5.10: Trends and Structure of Tanzania’s Imports (CIF) ................................................83 

Figure 5.11: Percentage Distribution of Investor Donations to Communities- 1998-2004 ........87 

Figure 5.12: Value of Investor Donations to Communities -1998-2004.....................................88 


viii

Background and Context 

ex e C u T i v e su m m a r y 

In 1996 the government of Tanzania reviewed the investment policy of 1990 and in 1997 a new 

investment law replaced the previous investment law of 1990 in order to streamline investment 

incentives and make the TIC a “one-stop-centre” for investment facilitation and promotion. In 

response, in the last decade, Tanzania has achieved significant progress in attracting the much 

needed investment especially Foreign Direct Investment (FDI). The question is whether the level 

of investment attained is adequate to achieve the national development goals and what kind of 

investment is most beneficial and what the most cost-effective and socially harmonious ways to 

stimulate investment are. Although a majority of investment in both developed and developing 

countries are domestic, many developing countries face the challenge of developing domestic 

investments in the context of very low levels of domestic savings rates. This poses a major 

challenge in investment promotion programmes. 

Investment policy has a number of challenges to address. First, how to make the investment 

promotion and facilitation policies more efficient and effective. Second, determining the appropriate 

balance between efforts to promote foreign as opposed to domestic investment. Third, whether 

the benefits from promoting FDI outweigh the associated social costs. Finally, how best to deploy 

the benefits of FDI to achieve the country’s development goal. Addressing these challenges 

requires reliable information and statistics about the nature, structure and impact of investment 

on the economy. 

Objectives 

The main objective of this study is to evaluate the growth and impact of investment on the 

economy; to assess the role played by TIC in investment promotion and facilitation, and 

recommend measures for enhancing the favourable impact of investment for economic growth 

and poverty reduction. 

In this regard, the study makes three important contributions. First, it examines the available data 

and information to establish the magnitude, nature and trend of total investment in Tanzania, 

the key issue being the lack of accurate information on the magnitude of (particularly domestic) 

investment inTanzania. Second, the <strong>report</strong> assesses of the adequacy of recent levels of investment 

for achieving the national development goals relating to growth. Third, the study reviews the 

criteria used by TIC in evaluating the impact of investment and makes recommendation on the 

need for more robust criteria that incorporate the strategic need of promoting investment for 

enhancing growth and poverty reduction. Fourth, on the basis of the identified criteria, the study 

assesses the actual impact of the growth of investment in Tanzania so far. Finally, the study 

recommends on how the situation could be improved. 

ix Report on the Study of Growth and Impact of Investment in Tanzania

1. Scope of the study 

This study covered five issues: 

(i) 

(ii) 

(iii) 

(iv) 

(v) 

Providing the trends and magnitude of both local and foreign investment in Tanzania; 

Assessing the adequacy of investment level to meet the goals of Tanzania Development 

Vision 2025; 

Identifying measures for evaluating the cost and benefits of investments made in 

Tanzania; 

Evaluating the impact of investments, and 

Recommending measures for enhancing the impact of investment on Tanzania’s 

economic growth and poverty reduction. 

2. Methodology 

The overall approach taken aimed at adding value to the study by evaluating both primary 

and secondary data. The first task involved review of various documents and literature in both 

developing and developed countries to enrich and inform the study findings. In addition, the 

consultants involved a large number of stakeholders in discussions and reviews that aimed at 

soliciting information and opinions on investment issues. The stakeholders included government 

ministries and departments, research and academic institutions, the private sector, development 

partners and the civil society. In addition, extensive consultations were made with the client, i.e. the 

TIC management to review progress and share valuable information on the study. Fieldwork for 

this study was conducted during the first two weeks of December 2006. The consultants developed 

semi-structured interviews and questionnaires and made extensive field consultative sessions. 

Purposive sampling technique was used to obtain sectors and regions for interview. The sectors 

selected includeAgriculture (the mainstay of the economy), Manufacturing (the future of economic 

transformation and important destination of FDI), the Services sector (one of the largest recipient 

of FDI and SMEs particularly in tourism sectors), and the Mining sector (the largest recipient 

of FDI in Tanzania). Seven regions were targeted for the survey corresponding to the selected 

sectors, which were Morogoro, Iringa, Kilimanjaro, Arusha, Mwanza, Mara and Dar es Salaam. 

The study team interviewed and administered semi-structured questionnaires to over 75 local 

and foreign investments in these regions. The actual number of firms that fully responded to the 

interviews and filled in the questionnaires was 55 (about 75% response rate), out of which 49 (or 

about 90%) were based in the up country regions. 

Data processing and analysis included trend analysis, cost-benefit analysis causal effect analysis 

and impact assessment. The analysis was extended to policy adequacy and linkage assessment, 

at the macro and sectoral levels. Given the policy nature of the envisaged end product, the study 

adopted the triangulation approach, using the combination of the above-mentioned approaches 

to derive key conclusions. 


x

3. Key messages from the study 

(i) Achievements made in attracting investments are encouraging 

Between 1997 and 2007 TIC registered over 4,084 investments, of which 25.04 percent were 

foreign. TIC,BOT and NBS survey findings show that during the period 2001-2005, the stock 

of foreign private investments (FPI) in Tanzania continued to increase, growing at an annual 

average rate of 13.6 percent to USD 5,785.2 million in 2005. The share of FDI remains the largest 

in the total stock of FPI as it contributed 88.8 percent. Investors’ confidence in the Tanzanian 

economy is increasingly getting stronger. Equity from shareholders remains the major source 

of financing of FDI. This type of financing rose from USD 1,921.3 million (55.1 percent) to USD 

3,651.3 million (71.9 percent) in 2005. Sectors that benefited most from the increased inflows 

are: manufacturing, mining, services and tourism. Agriculture received less than 10 percent of the 

investments – in part due to unfavourable infrastructure that continues to retard this sector. 

(ii) …but more investment is required as well as increased productivity 

The current level of investment is not yet adequate for realising Tanzania’s Development Vision 

2025 goal of reducing poverty and promoting sustained development through GDP growth of over 

8 percent. The study, using historical data, finds insignificant relationship between investment 

and growth. The weak link is associated with low productivity of investment and inadequate 

complementary factors particularly lack of skilled human resources and poor infrastructure. 

However, the study has also established that this situation has changed for the better in recent 

years. Studies from other countries such as China, Japan, South Korea and Taiwan show that 

investments averaging 25-30 percent of GDP have been pivotal in their country’s fast economic 

growth. If Tanzania is to achieve its development goals, recent investment to GDP ratio has to 

be increased to at least 25 percent to achieve a growth rate of at least 8 percent. This entails 

making further economic improvements (e.g. in policy and institutional effectiveness) that will 

attract further both local and foreign investments. For instance, further liberalisation of foreign 

account may raise funds for investors to invest outside the country. 

(iii) TIC is a truly “one stop” centre that can greatly benefit foreign as well as domestic 

investors 

The overarching goal of Tanzania Investment Centre (TIC) is to facilitate and promote investment 

in Tanzania – thus facilitating economic growth and poverty alleviation. To a large extent, findings 

of this study indicate that TIC is making commendable progress. Stakeholders interviewed 

applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. Apart from 

promoting investment, TIC is also offering investor-friendly post-investment services. However, 

one major criticism on the way the investment promotion policy has been implemented is that TIC 

has not given sufficient attention to promoting domestic investment especially the SMEs. Many 

domestic stakeholders have the perception that the playing field is tilted in favour of FDI. 

xi Report on the Study of Growth and Impact of Investment in Tanzania

(iv) Robust criteria are required to evaluate impact of investment 

In evaluating the impact of investment on the economy, different criteria should be involved so as 

to examine the costs and benefits of investment. In addition to the conventional criteria such as 

employment and tax revenue generation, it is important to emphasise that the overall objective of 

promoting investment is to improve productivity and competitiveness of the Tanzania’s economy. 

For instance, one of the important criteria for evaluating the impact of foreign investment is the 

extent of linkages generated to the rest of the economy, and to the domestic investments in 

particular. The <strong>report</strong> also emphasises use of social cost benefit analysis in evaluating investment 

proposals so that social and environmental concerns are also mainstreamed in investment 

decisions. 

(v) Investments are having desirable impact … 

In examining the impact of investments at the community level, there are marked differences 

between the impact of foreign and that of local investment in terms of corporate responsibility. 

Foreign investment embraces the practice of corporate responsibility more than the local 

investment, and the former has further impacted favourably on the surrounding community, 

especially by improving the supply of public utilities and infrastructure. However, at a macro level, 

and in general terms, domestic savings are rising, jobs are being created and new skills are being 

learnt as a result of growth of both domestic and foreign investments. There is also evidence on 

transfer of technology and innovation, albeit slowly. Investments are also fostering entrepreneurial 

growth through forward and backward linkages, revamping exports and contributing towards 

community development and government tax revenue. 

Together with the solid achievements being made in fiscal and monetary management, 

investments are contributing towards the country’s economic growth - which is poised to grow by 

8-10 percent per annum in the next 2-3 years. Impressive impact has been apparent in certain 

areas and weak in others. For instance, while many of FDI and privatised firms have generated 

significant tax revenues to the government and modest employment opportunities, still impact on 

adding value, technology transfer (including R&D) and environmental conservation is relatively 

weak. Despite significant inflow of FDI and improvement in the business operating environment, 

the manufacturing sector is still struggling to improve productivity. Existing FDI in the agriculture 

sector has managed to bring about significant transformation both in terms of the performance 

of the particular commodity/sub sector (such as Floriculture) and in economic impact of the 

neighbouring community. 

The key message is that investment has had favourable impact generally on the economy 

and in the respective communities. However, the impact of investment is less robust given the 

means through which that impact occurs and the structural constraints that are characteristic 

of the economy. First, there are weak sectoral linkages in the economy and limited structure 


xii

of investment distribution. Second, the impact on the local community is rather ad hoc and 

voluntary depending on the discretion of large investors. Finally, the weak and rather ad hoc 

linkages between foreign and local investment demeans the trickle down effect of investment to 

the domestic economy and to SMEs in particular for broad based growth that is consistent with 

effective poverty reduction. 

4. Recommendations 

In order to amplify both the magnitude and impact of investment in Tanzania, ten important 

recommendations are made as follows. 

First, make further improvement in the investment climate, especially in the taxation area 

(multiplicity of taxes especially at local government level) and provision of infrastructure including 

competitive public utilities. 

Second, reduce further the cost of doing business to stimulate supply response at microlevel. 

This is important in order to complement the current achievements on macroeconomic and 

political stability by greater efforts to improve the investment climate. 

Third, solicit higher quality investments by targeting investment in value-adding and key 

sectors for growth. Experience with the promotion of mining sector reveals that targeting sectors 

is possible and can be effective. However, it has also revealed that problems of linkages with 

local suppliers end, communities can arise if no efforts made to promote such linkages. 

Fourth, promote domestic investment effectively in order to enhance synergy and 

complementarity between foreign and domestic investment and in particular between large and 

small enterprises. The study argues that the domestic investment has undisputable role and 

potential in enhancing growth and reducing poverty. To start with, a level playing field could be 

attained by extending incentives that are applicable to FDI to domestic and especially SMEs. In 

addition, options for special additional incentives to stimulate the development of SMEs should be 

explored. Promoting SME, type of investment may require selected interventions, but additional 

incentives could be provided to domestic investors that have demonstrated success particularly 

in key sectors for growth or and in the economically disadvantaged regions/locations. Greater 

engagement of TIC in promoting DDI would imply extending TIC services nearer to the local 

areas. 

Fifth, TIC is urged to undertake targeted promotion of investments internally and abroad 

based on thorough research. Market research-driven investment promotion tends to be more 

efficient in cutting costs of promotion and achieving more desirable investment outcomes. 

xiii Report on the Study of Growth and Impact of Investment in Tanzania

Sixth, make regular post-approval follow-up of investors. This will help in understanding 

whether the actual investments being undertaken in the country are in line with those approved 

and/or benefited from TIC incentives. In this way, it will be convenient to assess the beneficial 

impact investors bring to the nation as a whole and in accordance with plans and objectives of 

TIC. 

Seventh, improve investment after-care services through TIC zonal offices. TIC has been 

performing well in the area of investment after care services through its headquarters in Dar es 

Salaam. These after-care services are beneficial both to the investor and TIC in realising customeroriented 

investment promotion and support. It is suggested that the services be provided through 

TIC zonal offices in order to cut costs and increase efficiency in service provision. 

Eighth, improve human capabilities and encourage technology transfer as a precondition for 

enhancing productivity of investment and attaining the desired level of competitiveness. 

Ninth, Institute Presidential Investor Awards. Some investments make large contributions to 

the socio-economic development of the country, not only by creating much-needed jobs but also 

by having net resource inflows while fostering high linkages with the rest of the economy. It is 

recommended that outstanding investment performers be publicly recognised through bi-annual 

Presidential Awards that would be managed by TIC. 

Tenth, strengthen balance between social and private goals of investors in order to achieve 

the social goal of promoting investment. 


xiv

aC k n o w l e d g e m e n T s 

In 2006 TIC commissioned ESRF to conduct Research Study of Growth and Impact of Investment 

in Tanzania. The purpose of this study was to evaluate the growth and impact of investment on 

the economy; to assess the role played by TIC in investment promotion and facilitation, and 

recommend measures for enhancing the favourable impact of investment for economic growth 

and poverty reduction. 

While this is the first study of its kind, TIC intends to undertake it after every 5 years. Since the 

factors and parameters that lead to the conclusions change over time. 

We wish to thank ESRF for their efforts and time that they devoted to this work. We also wish 

to thank all stakeholders including MOA’s, individuals and NGO’s who in one way or the other 

participated in making contributions that led to the production of the final <strong>report</strong>. 

EXECUTIVE DIRECTOR 

TANZANIA INVESTMENT CENTRE 

xv Report on the Study of Growth and Impact of Investment in Tanzania


xvi

1.0 in T r o d u C T i o n 

1.1 Background 

The national investment policy of 1990 and Investment Code of 1990 were reviewed in 1996 

and 1997 respectively taking into account the new policy developments in the country as well 

as the experiences of TIC during the 1990-96 period. The thrust of the new legislation was to 

unify all investment incentives under the general financial system. The legislation provides the 

basis for Tanzania Investment Centre (TIC) to become the “primary agency of government to 

co-ordinate, encourage and promote investment in Tanzania and to advise the Government on 

investment policy and related matters”. In this regard, TIC has transformed itself into a “onestop 

centre” for investment facilitation and promotion, creating a positive climate for private 

investment, stimulating and attracting local and foreign investment and providing assistance to 

all investors. The revised policy and code included greater emphasis on promoting domestic 

capacities and encouragement of domestic entrepreneurship, export development, facilitation of 

new technology and enhancement of transparency in the legal framework and deregulation of 

investment processes. It further made improvements in providing more competitive incentives 

with a view to directing investments towards areas that are most crucial for Tanzania’s economic 

development. 

The review of the literature shows agreement that investment is critical for the growth process 

and hence social welfare (see Phillips et al. 2000). The question is what kind of investment is 

most beneficial and what are the most cost-effective and socially harmonious ways to stimulate 

investment? Although a majority of investment in both developed and developing countries are 

domestic, many developing countries face the challenge of developing domestic investments in 

the context of very low levels of domestic savings rates (Phillips et al. 2000:5). This poses a major 

challenge in investment promotion programs. Yet FDI tends to be subjected to political economy 

concerns when it involves governments making major concessions in order to compete for foreign 

investment, often provoking domestic debates on the balance and relationships between foreign 

and domestic investors. 

The above arguments imply that investment policy has a number of challenges to address. First, 

on how to make the investment promotion and facilitation policies more efficient and effective. 

Second, determining the appropriate balance between efforts to promote foreign as opposed to 

domestic investment. Third, addressing the balance between the benefits from promoting FDI 

and the associated social costs. Finally, on how best to deploy the benefits of FDI to achieve 

the country’s development goals. Addressing these challenges requires important information 

1 Report on the Study of Growth and Impact of Investment in Tanzania

and reliable statistics about the nature, structure and impact of investment on the economy. This 

study seeks out to address these concerns. 

1.2 Objectives and Rationale 

In the case of Tanzania, significant progress has been achieved in attracting FDI. This implies that 

the current investment (promotion) policy has been effective on the above first challenge. However, 

the promotion of FDI has not matched expectations of its perceived impact. To corroborate this 

concern, Kabelwa (2003) notes: “…debate on FDI in Tanzania has somehow neglected the role 

of foreign investment in the country. That is, whether foreign investment has met the country’s 

expectations and what impact it has on Tanzania’s economic development” (2003:18). Therefore, 

the issue that lies ahead is to ensure that attracting more FDI goes in tandem with the analysis of 

costs and benefits of this investment, which requires monitoring and evaluating of FDI. 

Monitoring and evaluating FDI in Tanzania is constrained by poor data. However, efforts by 

the Bank of Tanzania (BOT), Tanzania Investment Centre (TIC) and the National Bureau of 

Statistics (NBS) is commendable in putting together many sources of data and information in 

order to generate a more plausible data series. These efforts should also include establishing 

an effective mechanism for tracking private foreign investment in all its forms, and subsequently 

capital flight. In the case of domestic investment, two challenges are key for Tanzania in her 

effort to make investment policy more robust. First, given the structural features of Tanzanian 

domestic investment, what are the viable and effective policies (specific incentives or modalities) 

for promoting suitable domestic investment? Second, to what extent has domestic investment 

benefited from FDI in a way that will augment the formers’ productivity and competitiveness. 

These challenges are amplified further by the severe lack of reliable information/statistics about 

the precise magnitude of domestic investment, more so, domestic private investment. 

The main objective of this study is to evaluate of the growth and impact of investment, asses 

the role played by TIC in investment promotion and facilitation and recommend for measures 

for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction. 

In particular, the specific objectives of the study as provided for in the Terms of Reference 

correspond to its scope as outlined in section 1.3 below. 

1.3 Scope of Work 

This study identified five areas for analysis, namely: 

(i) 

Providing the trends and magnitude of both local and foreign investment in Tanzania; 


2

(ii) 

(iii) 

(iv) 

(v) 

Assessing the adequacy of investment level to meet the goals of Tanzania Development 

Vision 2025; 

Identifying measures for evaluating the costs and benefits of investments made in 

Tanzania; 

Evaluating the impact of investments, and 

Recommending measures for enhancing the impact of investment on Tanzania’s 

economic growth and poverty reduction. 

1.4 Methodology 

1.4.1 Definition of Investment 

In standard economic conceptualisation, investment can be defined as any use of resources 

intended to increase future production, output or income. In value terms, investment is money 

directed toward the purchase, improvement and development of an asset for creation of value 

in expectation of generating income or profits. Clearly, this definition distinguishes investment 

from trade enterprise, which is basically a business dealing with exchange of goods or services 

at a premium. In other words, for a particular asset or money to become an investment, it has to 

involve creation of output not premium. 

In the context of this study, it is crucial to make the definition of investment clear given difficulties 

involved in measuring investment, and the variety of investment (by size, source, and ownership 

etc.) Therefore, not all business enterprises are investment (and of course, not all investments 

are business enterprises. For instance, road construction is an investment but not a business 

activity. In this case, the wholesale and retail trading enterprises notably preoccupying most 

enterprises in Urban Tanzania or SMEs that do not involve creation or use of asset to generate 

output, income or other assets may not be considered as investment. 

Gross fixed capital formation is usually used as a convenient definition of (or proxy for measuring) 

total investment, as such it measures assets created or used in generating output (market or 

public) or income. Gross fixed capital formation is divided into private and public components. 

However, as discussed in section 2.3, from the way official statistics are constructed, the private 

component is not disaggregated further to make possible a distinction of relative contribution of 

foreign and local funds to capital formation. Nevertheless, in section 2.3, this study proposes a 

way to estimate the domestic private investment. 


1.4.2 Overall Approach 

The overall approach taken aimed at adding value to the study by evaluating both primary 

and secondary data. The first task involved reviews of various documents and literature in 

both developing and developed countries to enrich and inform the study findings. In addition, 

the consultants involved a large number of stakeholders in discussions and reviews aimed at 

soliciting information and opinion on investment issues. The stakeholders included government 

ministries and departments, research and academic institutions, the private sector, development 

partners and the civil society. In addition, extensive consultations were made with the client, 

i.e. the TIC management to review progress and share valuable information on the study. The 

stakeholder discussions and evaluations were pivotal in the process of evaluating growth and 

impact of investment. Further, the documentary and literature review enabled the study team 

to design a purposive semi-structured field survey instruments to collect key information from 

investors that was considered critical for achieving the study’s goals and objectives. 

1.4.3 Field Survey 

Fieldwork for this study was conducted in December 2006. The consultants developed purposive 

unstructured and semi-structured interviews and questionnaires and made extensive field 

consultative sessions. The purpose of the fieldwork was to collect primary data, solicit additional 

information that was considered key in complimenting secondary information and gather 

contextual information for validating and updating existing investment information. Purposive 

sampling technique was used to obtain sectors and regions for interview. The sectors selected 

were as follows: 

(i) 

(ii) 

(iii) 

Agriculture: Information was collected on the magnitude as well as quality of investments 

in the sector. The agricultural sector is particularly important because at the moment it 

is dominant in terms of contribution to GDP and employment in Tanzania. 

The services sector: This was included in the sample, in part because documents 

reviewed showed that this sector receives considerable FDI and domestic investment 

resources in particularly, services related to the tourism industry. These were surveyed 

to obtain information lacking in most reviewed documents. 

The manufacturing sector: This has included to capture the significant share of divested 

parastatal enterprises that are in this category and some information relevant to the 

study that lack from reviewed documents. 


4

(iv) 

The Mining sectors: Apparently given its notable the special position of mining in having 

its own policy and code in addition to general investment policy and code. 

Once the sectors had been selected, the next task was to identify regions that could best provide 

the sector-wide information needed. Morogoro and Iringa regions were selected largely to provide 

information on agricultural-related investments in farming, agro-based industries and services. 

Kilimanjaro and Arusha regions were selected to provide information on mining and related 

mining services, agriculture and agro-based industries and tourism-related services. Mwanza 

and Mara regions were selected to provide information on mining, mining-related services, 

manufacturing and services. Dar es Salaam was selected to provide data on manufacturing 

and investments in services. The study team envisaged interviewing and administering semistructured 

questionnaires to over 75 local and foreign investments in these seven regions. The 

actual number of firms that responded positively to the interviews 55, of whom 49 (or 89 percent) 

of them are located in up country regions. 

1.4.4 Data Analysis 

The study team collected a wide array of primary (through the interviews and questionnaires) and 

secondary (published and unpublished from TIC) data on investment that has been tabulated, 

computerised and stored within ESRF data bank. Data processing and analysis included trend 

analysis, cost-benefit analysis, causal effect analysis and thus impact assessment. In addition 

analysis was extended to policy adequacy and linkage assessment, at the macro and sectoral 

levels. Given the policy nature of the envisaged end product, the study did not use empirical 

models to analyse the investment or linkage impacts. However, triangulation approach was 

adopted using the above mentioned study approach to derive key conclusions. That is using 

different (three in this case) approaches: field work information, literature and secondary data to 

examine the issue under investigation. 

1.5 Organisation of the Report 

The <strong>report</strong> is organised as follows. After this introduction, Chapter 2 examines the trends and 

structure of total (domestic and foreign) investment, and identified the magnitude of investment 

in Tanzania. As Tanzania has made significant progress in attracting FDI flows, it is not known 

if the current level of investment is adequate for the desired poverty reducing economic growth 

rate. This challenge is discussed in Chapter 3. Chapter 4 presents the proposed measures for 

evaluating the cost and benefits of (particularly foreign) investment in Tanzania. The aim is to 

provide consistent criteria upon which to promote particular investment and recognise its impact 

in relation to the costs associated with its promotion and operation. The impact of investment 


on the Tanzanian economy using some of the suggested criteria and various other economic 

dimensions of investment is discussed in Chapter 5. Given unreliable and often insufficient data, 

the problem is not to identify the net impact of investment in ways suggested in Chapter 4 rather 

attenuate the policy inquiry on the general impact of investment in the country. Finally, Chapter 6 

provides the main conclusions and recommendations. 


6

2.0 Tr e n d s a n d ma g n iT u d e o f fo r e i g n a n d do m e s T i C in v e s T m e n T 

in Ta n z a n i a 

One of the main objectives of this study was to identify the precise magnitude and structure of total 

investment in Tanzania. Although there are obvious data limitations in achieving this objective, in 

this section we attempt to put together and use the available data to show the revealed structure 

and trends in investment while discussing some existing data gaps/limitation. This is important 

since any observed limitation does impair a full assessment of the beneficial impact and cost of 

investment, hence the leverage to formulate or regulate credible investment policies. 

The chapter begins in section 2.1 by utilising data on the familiar Gross Fixed Capital Formation 

(GFCF) to show, at least for general and convenient purposes, the revealed trends and structure 

of investment in Tanzania. In section 2.2 the chapter presents trends and structure of FDI, data 

of which are widely available from the TIC. In this section, we also reiterate the key findings 

from the various joint surveys on FDI by the Bank of Tanzania, TIC and NBS (see BOT, relevant 

years). Identification and trends of domestic direct investment (DDI) is made in section 2.3 while 

discussing evidence on the empirical relationship between FDI and DDI. The key issue is that, 

the data on DDI is undeveloped, yet it is important in distinguishing the impact of investment 

policy from the perspectives of local versus foreign investment. With such limitation, this chapter 

may contribute to the debate on the need to develop such a database. Finally in section 2.4 the 

chapter concludes by bringing to the fore key policy issues arising from the trends and structure 

of investment in Tanzania. 

2.1 Trends and the Structure of Capital Formation 

Total investment includes foreign and domestic investment. However, the two components are 

different in many aspects, a fact that poses challenge in estimating total investment for Tanzania, 

but also showing the imperative of knowing the exact structure of each. Domestic investment 

may also be distinguished into private and public investment. On the one hand, domestic 

private investment or for convenience, Domestic Direct Investment (DDI), despite being the 

largest component of total investment, its investment activities are mainly characterised by (i) 

predominance of small and micro-enterprises (SME) mostly supplying low technology products 

and services in the largest section of the market; (ii) existence of few large scale firms mainly 

in light manufacturing activities. Moreover, the public domestic investment is characterised by 

significant share of infrastructure and construction activities, mainly the buildings and physical 

infrastructures. On the other hand, FDI has become an important component of private investment 

in the last decade in terms of its economic significance (tax revenue, technological capacity and 

export performance) despite of its relatively smaller size compared to DDI. FDI is also a major 

player in the privatisation of the former state-owned enterprises and boosts development of some 

sectors such as mining and tourism. 


Nevertheless, statistics on the magnitude and structure of domestic and foreign investment 

are necessary in formulating policies for increasing the value (benefits) and flow of investment. 

However, such statistics are not readily available. First, data on FDI has been available only 

from 1992 (and revised in 1998), so that comparable trend with domestic investment is not 

possible for the earlier period. Second, domestic investment varies widely in size and nature 

of activities, which makes it difficult to define, compared to FDI that is easier to trace through 

the investment promotion agency (TIC) and has almost universal definition. Third, unlike FDI, 

domestic investment is composed of public and private components – whereas most of the 

former is also undergoing divestiture and privatisation, information which is difficult to access. 

Therefore, Gross Fixed Capital Formation (GFCF) is used for convenience as a proxy for total 

investment in the country. 

2.1.1 Trends in Total Capital Formation 

In aggregate terms, GFCF has fluctuated over time, with some years showing growth and others 

a decline. This is divided into private and public components. Nevertheless, from the way official 

statistics are constructed, the private component is not disaggregated further to make possible a 

distinction of relative contribution of foreign and local funds to capital formation. 1 Capital formation 

in Tanzania as a percent of GDP is still too low relative to its desired role of fostering the economic 

growth at levels that are adequate for sustainable per capita income growth and therefore poverty 

reduction (CUTS, 2002). 

The GFCF declined from the peak of nearly 30% of GDP in 1992 to only 12% in 1997. Although 

a recovery was observed in the years that followed, it has not been able to go back to the rate 

achieved in the early 1990s. In 2003, GFCF as a proportion of GDP was nearly 19%. As Figure 

2.1 clearly shows, the recovery in overall investment since 1997 is entirely driven by a recovery in 

investment by the public sector, while the investment by the private sector continued its downward 

trend. This gives reason for concern, since much of the literature on economic growth suggests 

that private investment is closely associated with economic growth, while the linkage between 

public investment and growth is much weaker (Utz, 2005). The relationship between public 

investment and growth is influenced considerably by the nature of public investment and whether 

it has a crowding in or crowding out effect on private investment. Previous decline in investment 

starting from 1992 has been mainly associated with a marked decline in public investment as a 

result of parastatal sector restructuring and privatisation of the former state-owned enterprises 

as well as cuts in public expenditure that was not matched by a proportional growth of private 

investment. 

The notable increase in the share of GFCF by public sector may also wrongly imply expansion of 

the public sector. More than anything else, we presume the growth in the share of public GFCF 

1 The joint survey on FDI by BOT, TIC and NBS found that local/domestic investment 

share an average 14% of the joint venture FDI’s. 


8

to arise from the surge in foreign aid mostly used in developing infrastructure. Surprisingly, in 

the same period, private GFCF has stagnated at less than 15% of GDP. Since FDI (considered 

to be part of the private GFCF) has been increasing dramatically in the same period of time, 

this stagnation implies that Domestic Private GFCF (DDI) has been declining at a more than 

proportional increase in FDI – a claim that is difficult to establish in the absence of reliable data 

on domestic private investment. In addition, it is not clear if and to what extent the value of private 

GFCF data includes that of FDI. Nevertheless, we proceed with these shortcomings in mind to 

examine trends in each of the two (public and private) components of the GFCF. 

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2.1.2 Capital Formation by Public and Private Sector 

As a proportion of total capital formation, the relative importance of public and private investment 

has also varied in the last decade. Until 1999, the relative contribution of public investment 

in total investment declined continuously. This may be attributed to the changing role of the 

government and the decision to shift from direct production of goods and services by the state 

to facilitating growth of the private sector 2 . Nonetheless, since 2000 the relative importance of 

2 The role of the state is now attuned to maintenance of law and order, provision of basic 

infrastructural and social services and building of a suitable environment for the private 

sector to take control of production activities. 

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public investment in total investment has since been increasing (See Figure 2.2). This could be 

attributed to increased investment in infrastructural and social services for poverty reduction, 

financed heavily by foreign aid. 3 The percentage of GDP capital formation by the public sector 

declined steadily until 1997 reaching its lowest level of 2.9% in 1997 and did not grow much until 

2000. In 2000 the proportion of public investment as a percent of GDP grew to about 6% and 

although a recovery has been observed since then, the increase has not been able to match the 

levels experienced in the early 1990. Growth of total fixed capital formation as a percent of GDP 

has also been modest. 

Nevertheless, there was a marked increase in private investment as a proportion of GDP from 7% 

in 1989 to 19% in 1994 4 , but has since then been a decline gradually to just 10% in 2003 (which 

is close to international average, according to World Bank draft CEM for 2005). The decline in 

private investment coincided with the dramatic increase in FDI since the mid 1990s, which peaked 

in 2000 exceeding 5% of GDP, but has returned to the previous level of about 3% of GDP (See 

Figure 5.1). As a share of total capital formation, private investment doubled between 1989 and 

1995 from 40% to 80% (See Figure 2.2). The reversal experienced at this time could be attributed 

to inadequacies of the institutional reforms for which more rigorous measures started to feature 

only in mid 1990s. Inadequacies of the institutional reforms that remained as liberalisation efforts 

started limited the ability of the system to redress the high transaction costs experienced by the 

private sector. The unsatisfactory performance of the private investment from 1995 after peaking 

in 1994 could also be linked to persistent high interest rates and shortage of credit facilities 

following the relatively tighter fiscal stance by the government. Nonetheless, private investment in 

Tanzania is currently an important contributor to overall investment since public sector has withdrawn 

from productive and commercial activities; hence a limited share in total capital formation. However, 

the relative decline in the share of the public sector experienced in the 1990s is likely to reverse 

in the near future. For instance, according to Figure 2.2, having declined from 65% in 1989 to 

20% in 1995, the share of public sector in total capital formation has been increasing gradually 

to about 50% in 2003. 

A World Bank CEM study established a close relationship between central government capital 

formation and inflows of development assistance. As it has been shown in various PERs (e.g. 

World Bank, 2003), about 90% of the development budget in Tanzania is financed by foreign 

aid. Interestingly, during the decade of fiscal adjustment in Tanzania (1985-1995), development 

budget was the most affected (Utz, 2005:24). Another source of information on investment trends 

are data on imports of capital goods, which declined dramatically from 14% of GDP in 1992 to 

about 4% in 1997, recovering to about 7% in 2003. 

3 It is worth noting that the share of foreign aid in total government expenditure has increased 

tremendously, currently accounting for close to 50% of total spending. 

4 Note that the real exchange rate depreciation between 1990 and 1994 increased the 

price of (mostly imported) capital goods over this period. 


10

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2.1.3 Capital Formation by Type of Assets 

It is not sufficient to examine the component of capital formation by private and public sector. 

One other structural feature of capital formation is the type of assets that constitute fixed capital 

formation either in the public or private sector. Examining this can unveil important insights about the 

relationship between capital formation and economic growth. Capital formation includes residential 

and rural own-account buildings and various public expenditure mainly on infrastructure. These 

expenditures are not productive in themselves but complements private investment activities to 

flourish. According to Utz (2005), the share of directly productive investment in total investment 

has been declining during the past decade by 10 percentage points from 63% in 1993 to 53% in 

2003. This raises the question about the appropriate balance between public and private sector 

investment; and whether public funds should be used to fund public expenditures and public 

investment. Official data on national accounts and economic surveys consistently <strong>report</strong> statistics 

on the composition of capital formation by different assets. Although these sources of information 

do not <strong>report</strong> such composition for separately public and private sector, it may be important to 

only examine the major sources of capital formation because such results will inform on the 

differential impact of adopted (hence the prospects for alternative) investment/economic policies 

that could have influenced such composition. 

Trends in the value and structure of the three broad types of assets that constitute capital formation 

in Tanzania namely buildings, equipment and other Works are shown in Figures 2.4 and 2.5 

respectively. The value of capital formation has been increasing in real terms from 280 billion Tshs 

in 1997 to about 500 billion Tshs in 2003 after it declined from around 400 billion Tshs in 1991. 

Except for Equipments, the value of other assets (Buildings and Works) is shown to be increasing 

over time. 


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Equipment that include transport, machinery and other equipments constitute the largest 

share (about 50% on average) of total capital formation, while works (development of physical 

infrastructure) constitute the smallest (about 20% on average), hence buildings occupy about 

30% on average. There have also been some marked changes in the trend of capital formation 

by assets. The composition of Buildings and Works has both been increasing notably from 2000. 

One clear explanation for this trend is the relative importance of infrastructured development 

before and after 1995. As noted earlier, significant share of donor aid money has gone into 

� 

12

developing of infrastructure. In addition, the share of building is increasing much faster from 

1998 onwards – in part reflecting the boom in the construction industry evidenced by existence 

of large buildings and ‘own home’ construction throughout the country especially in Dar es 

Salaam. Equipment share of total capital formation increased notably in 1998, perhaps indicating 

a purchase of particular high value equipment in that year, most probably, mining equipment. 

From above trends, it seems that in the near future, buildings and works are likely to increase 

even faster in composition than equipments, as the government development policy as outlined 

in vision 2025 and in the MKUKUTA, place continued emphasis on infrastructural development. 

And most equipments (including transport) are not replaceable in the short run. 

Further decomposition of capital formation by specific type of assets is shown in Figure 2.5 for 

Building works, Figure 2.6 for other Works and in Figure 2.7 for Equipment. The purpose of 

this decomposition is to bring on the surface information that may be useful in explaining the 

changing structure of capital formation and which may not be easy to pursue using only broad 

categories of assets. 

Overall, each type of asset has experienced differential growth of its major constituents with 

a more consistent and structured trends in the case of Buildings and equipment compared to 

somewhat sharp and erratic trends in the case of Works. The major items in Building works is 

rural own account (for obvious reasons of the subsistence character of rural sector), but the 

rest of the items: residential and non-residential buildings have variably changed in importance 

until from 2000 when the importance of non-residential building increased sharply surpassing 

residential and rural dwellings whose share continue to fall. 

In the case of other Works, we observe rather erratic trends is various items. The largest item 

in this type of asset has alternated between roads and bridges on the one hand, and other 

infrastructure works on the other. The former has risen sharply since 1997 to become the largest 

component, as opposed to the latter whose share of total has fallen from 90% in 1990 to less than 

5% in 2003. Overall, the importance of water supply in capital formation has also increased – its 

share has doubled from an average of 10% between 1990-1997 period to about 20% in the later 

period. There are indications that roads and bridges construction and water supply will continue 

to increase in share reflecting government policy emphasis on poverty reduction 5 . 

The structure of Equipment is much more clearer and steady. Equipment is composed of two 

major items: transport and other (including machinery and electrical) equipment where the latter 

constitute close to 60% and 40% for the former. 

5 One of the HIPC condition is that the money resulting from debt forgiveness be spent 

on social services and infrastructure development for poverty reduction. These services 

include education, health, water and sanitation. 


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2.1.4 Capital Formation by Sectors of the Economy 

In terms of sectoral distribution, capital formation in Tanzania between 1989 and 1998 was mainly 

concentrated in manufacturing, transport and communication, and storage. Between 1989 and 

1997 manufacturing and transport communication and storage activities contributed more than 

56% of total capital formation of the economy while the remaining seven sectors contributed 

only 44% in total. Construction and mining grew in importance considerably starting in 1998, 

before which their contribution to total capital formation was only modest. Investment in the 

agricultural sectors has been very small throughout the last decade. The highest level recorded 

as a percentage of total investment was 4.7% in 1991. On average, capital formation in the 

agricultural sector has been around 3.4% between 1989 and 2002 (Figure 2.9). 

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by economic sectors are for year 2001. Similar note apply for Figures 2.9 and 2.12. 

Source: Calculated using data National Accounts (various years). 


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Source: Calculated using data National Accounts (various years). 

2.2 Trends and the Structure of Foreign Direct Investment 

Having discussed total investment (GFCF) by various aspects, we proceed to distinguish the 

foreign and domestic component of investment for two basic reasons. First, the investment policy 

(promotion and facilitation) has given significant policy emphasis on attracting foreign investment 

as one “sure” ways of financing growth and development. Secondly, there has been concern by 

various stakeholders (especially the private sector) that domestic (local) investors have not been 

facilitated to access the kinds of incentives that FDI is accessing despite the dominant share of 

DDI in total investment. Below we examine the structure and trends of FDI in Tanzania. 

2.2.1 Size and Growth of Foreign Direct Investment in Tanzania 

Foreign direct investment flows into Tanzania grew considerably in the second half of 1990s. This is 

also the period that was marked by improvements in the economic situation, rigorous reform efforts 

to improve the investment environment and beginning of the privatisation programme. UNCTAD 

(2002) notes that the market oriented reforms reached a critical mass and sound foundations 

for an enabling framework for FDI were put in place, which triggered the positive response from 

prizvate investors from abroad. Total FDI into Tanzania between 1995 and 2004 totalled US$ 

2476.4 million compared to less than $ 2 million between 1986 and 1991. On an annual basis, 

from 1992 FDI inflows into Tanzania increased faster, reaching $ 150 Million in 1996. Although the 

growth rate slowed between 1996 and 1998 the achieved rates of FDI inflows were remarkable. 

The year 1999 and 2000 experienced the highest record of FDI inflows into Tanzania most of which 

came forth with the proliferation of mineral prospecting activities in the country. 

16

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The inward stock of FDI in Tanzania has also grown considerably and was revised (upwards) by 

the information collected in the BOT/TIC/NBS survey for 2001. As a percent of GDP, UNCTAD 

(2002) estimates that the stock of FDI in Tanzania in 1980 was around 0% of GDP. Nevertheless, 

it recovered with the growth of FDI inflows and in 1998 it had reached 2.1 percent. For the period 

1990-1998 the stock of FDI as a proportion of GDP in Tanzania averaged 1.3%. In 1999 FDI 

stock as a percent of GDP had reached 11.2% (UNCTAD, 2002) 6 . Data from local sources on FDI 

stocks for years before 1998 is not available. However, the BOT/TIC/NBS survey of foreign firms 

establishments between 1998 and 1999 and in 2001 revealed that the stock of FDI had grown 

considerably. FDI stock as a proportion of GDP has almost doubled between 1998 and 2001 from 

close to 20% in 1998 to 38% in 2001 (Table 2.1). 

Table 2.1: FDI stock in Tanzania 1999-2007 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 

FDI Stock Millions US$ 1,637.7 1,903.0 2,891.6 3,637.0 3,877.4 4,125.2 4,385.4 4,833.0 5,307.5 5,820.0 

GDP (mp) Millions US$ 8,382.4 8,637.9 9,093.7 9,476.6 9,660.9 10,047.3 11,201.1 14,220.5 15,167.2 16,399.3 

FDI stock as % of 

19.5 22.0 31.8 38.4 40.1 41.1 39.2 33.99 34.99 35.49 

GDP 

Source: FDI stock up to 2001 are from Tanzania Investment Centre and from 2002 –2007 are own 

computation by adding flows to previous years stock using data from Economic Survey (2007). 

6 While indicative of the growth trend of FDI flows and stocks TIC/BOT/NBS census of 

foreign establishments reveals that the UNCTAD <strong>report</strong>s and many other sources may 

seriously underestimate the FDI inflows into the country. In 1998 for instance UNCTAD 

<strong>report</strong>ed FDI stocks to stand at US$803 Million, while the census estimated the stocks to 

stand US$ 1637.7 Million

2.2.2 FDI by Mode of Entry, Sectoral Distribution and Ownership 

The main channel of FDI entry into Tanzania has been Greenfield investments (Figure 2.11). 

According to UNCTAD (2001), acquisitions of companies by foreign investors have been few 

in numbers but have nevertheless given a significant push to annual FDI inflows. Overall, the 

share of foreign acquisitions in FDI inflows until 2003 was about 28% while new investment 

establishments accounted for 72% of total number of projects into Tanzania. Cumulative data 

on foreign investment projects approved by TIC between 1990 and 2003 thus points to the 

dominance of interest in Greenfield investments by foreign investors. 

Analysis of sectoral structure of FDI distribution has important policy implications. In some cases, 

sectoral distribution of FDI has not matched the corresponding sectoral economic impact. For 

instance, evidence by Kabelwa (2003) indicates that services sector accounts for over 85% of all 

employment generated by South African businesses (excluding mining) in Tanzania. The rest of 

the 15% is contributed by three sectors: manufacturing (10%), tourism (2%) and others (3%). The 

same study notes that Mining accounts for the largest share (47%) of all South African investment 

during that period, followed by telecommunication (21%) and manufacturing (16%); while tourism 

contribute 5% and services 6%. This implies that, although the services sector accounts for a 

relatively smaller share of total South African investment, it has the most significant employment 

generation potential compared to others. 

Based on the number of approved projects by sector (Figure 2.11) one can observe that the 

manufacturing and tourism sectors seems to have attracted more establishments compared 

to other sectors of the economy. This may be attributed to a number of reasons one being that 

establishments in these sectors have been mainly small in size and therefore do not require high 

initial capital. But another reason could be that the efforts to promote local manufacturing and 

tourism activities are paying off and encouraging firms to invest in the sectors. 

Given the relative importance of the agricultural sector on economic growth and development in 

Tanzania, the number of projects attracted to the agricultural sector is still to small to make a major 

impact. Although it is encouraging to note that efforts to counter the bottlenecks of investment 

in the sector are underway (e.g. example the Agricultural Marketing systems Development 

Programme, and Participatory Agricultural Development Programme, etc) it is nevertheless too 

early to assess the direction of progress. At the moment however, most projects have gone to 

cut flower sub sectors leaving food crop and traditional cash crop sub sectors lagging behind. 

Various risks associated with the sector, lack of credit facilities for both long term investment and 

working capital and the general lack of incentives specifically designed to attract investment into 

the sector, will still need to be addressed to ensure adequacy of investment particularly in food 

crop production. 

However in terms of stock of FDI in Tanzania the picture is different. The manufacturing sector 


18

continues to lead, it is followed by mining and quarrying and service sectors such as trade 

(wholesale and retail trade), and financial sector insurance and real estate. Concentration of FDI 

in the mining sector is possibly due to expensive equipment given the small number of projects 

attracted to the sector. 

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Examination of the key sectors for growth (namely agriculture, manufacturing and services) and 

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the priority sectors for poverty reduction shows that the types of FDI inflow to Tanzania are less 

poverty focused (Kweka and Mboya, 2004). For instance, the mining sector has very insignificant 

sectoral linkage and multiplier effects compared to the agricultural cash crop sector such as 

cotton or a service sector such as tourism (Kweka, Morrissey and Blake, 2003). The revealed 

structure of FDI inflow is more a testimony of FDI preferences and opportunities available in the 

high concentration sectors than promotion efforts by the TIC in such sectors. 

In addition, social sectors identified as key for poverty reduction (in the first PRS) have attracted 

disappointedly smaller share of total FDI. This implies that the impact of FDI on poverty in 

Tanzania is not consequential. The small share of FDI into the agricultural sector in total FDI 

is also attributed to the adverse conditions in the agricultural sector (including adverse weather 

condition, low prices of agricultural products in the world market, insufficient domestic markets 

and other supply side and institutional bottlenecks). A study by ESRF (forthcoming) analysed the 

factors constraining significant inflow of FDI into the Agricultural sector as being lack of favourable 

agricultural infrastructure and slow privatisation of existing state owned parastatals. 

That is, sufficient policy efforts have not been made to attract FDI into the agricultural sector. The 

government needs to make deliberate efforts to attract more FDI to the agricultural sector as a 

way of enhancing its efforts to alleviate poverty by among other things, expediting land ownership 

reforms and addressing the infrastructure and other supply side bottlenecks to rural enterprises. 

In terms of ownership structure, there is a growing trend towards formation of joint ventures. Of 

foreign investment projects that were registered in the country between 1990 and 2003, about 

52% were joint ventured while foreigners wholly owned projects accounted for the remaining 

42%. This tendency is encouraging especially because formation of joint ventures is associated 

with transfer of proprietary knowledge and skills; thus encouraging faster development of human 

capital through learning by doing. However, the share of local investment in joint ventures has 

remained low (on average 14%) especially in service sectors. 

2.2.3 FDI by Country/Region of Origin 

Data from TIC on approved projects by country of origin between1990 and 2002 shows that 

investment from Western Europe (both in value and in numbers) dominated the scene. In 

numbers, UK has been the largest single source of investment projects coming to Tanzania 

(35%) followed by Kenya (13%), United States (10%) and India and South Africa (7%) as shown 

in Figure 2.13. 


20

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Source: Tanzania Investment Centre 

The large number of projects from UK may be attributed to the long established relationship 

between Tanzania and UK, which dates back to the colonial era. In terms of value however, 

projects from India though few in numbers (accounting for 7% only of all projects with foreign 

interests established in Tanzania between 1990 and 2002), account for the largest share in value 

terms of all the projects established since early 1990s (see Figure 2.14). Most projects with 

Indian interests were established between 2000 and 2002, thus changing the structure, which 

until 2001 was dominated by investments from UK. 

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2.2.4 Spatial Distribution of FDI 

Concentration of FDI remains in the same regions namely Dar es Salaam (42.5 percent), Mwanza 

(26.4 percent) and Shinyanga (12.7 percent). Apart from its commercial and infrastructure 

advantage, concentration of FDI in Dar es Salaam is partly attributable to the location of 

headquarters of some companies, which have <strong>report</strong>ed consolidated data that includes upcountry 

investments. Large share of investments in Shinyanga and Mwanza is on account of 

the regions’ richness in diamond and gold deposits. In Zanzibar, North Unguja received largest 

amount of FDI. The government is urged to enhance the efforts that are already in place to 

improve infrastructure and utilities especially in the regions that have attracted less FDI. 

Table 2.2: Stock and flow of FDI by Regional Destination, 1998 - 2005 (US$ million) 

REGIONS 1 2001 2002 2003 2004 2005 p % of total for 2005 

Dar es Salaam 1,762.90 1,742.80 1,973.40 2,125.20 2,184.40 42.5 

Mwanza 332.5 400.3 770.5 1,128.90 1,354.90 26.4 

Shinyanga 151 465.3 693.7 657.6 652.4 12.7 

Arusha 145 124.8 135.5 206.1 183.8 3.6 

Morogoro 179.5 134.3 166.7 193.6 180.7 3.5 

Mara 122.1 128.6 125.3 123.9 122.3 2.4 

Iringa 50.7 49 52.5 54.2 90 1.8 

Kilimanjaro 37.6 35.4 49.1 53.2 70.2 1.4 

Kagera 0.2 0.2 0.1 0.1 55.1 1.1 

Mbeya 13.2 17.9 18 22.7 22.8 0.4 

Manyara 10.6 10 11.2 12.7 14.6 0.3 

Tanga 27.8 14 13.1 13.8 13.9 0.3 

Pwani 7.5 8.6 8.6 8.9 8.8 0.2 

Tabora 3.1 3 2.7 2.8 2.5 0.0 

Ruvuma 0.6 0.6 0.4 0.3 0.3 0.0 

Singida 0.2 0.1 0.1 0.1 0.1 0.0 

Total for Mainland 2,844.30 3,134.90 4,021.10 4,604.30 4,956.70 96.5 

North Unguja 44.7 38.9 43.6 75.9 92.3 1.8 


22

Urban West 38.2 40.3 47.5 52.4 61.4 1.2 

South Unguja 31 27.3 24.1 23.6 22.7 0.4 

South Pemba 0.1 0.1 1.1 1.2 1.3 0.0 

North Pemba 1.4 1.2 1.2 1.2 1.1 0.0 

Total for Zanzibar 115.4 107.8 117.5 154.3 178.9 3.5 

Total for Tanzania 2,959.70 3,242.70 4,138.60 4,758.50 5,141.8 100.0 

*Notes: Cells containing zero values means that the FDI value was insignificant; empty cells (-) means 

there was no FDI flow. Figures for 1998 are FDI in Stock, and flows for subsequent years. 

Source: Collated from Tanzania Investment Reports and database, 2001 and 2005. 

2.2.5 Portfolio Investments into Tanzania 

Although most of the foreign investment flow is popularly considered as FDI, it can also take other 

different forms including portfolio investment. Until the opening up of the Dar stock Exchange 

Market for Equity participation by foreign firms, portfolio investment into Tanzania was close to 

absent. The Capital Markets and Securities Authority was established in 1994 but wasn’t until 

1998 that the first Stock Exchange market, The Dar es Salaam Stock Exchange Market (DSE), 

started operations with only one company listed—the Tanzania Oxygen Limited (TOL). The 

number of companies listed to participate in the market has since then increased to seven and 

3 cross listed companies and the opening up of the market for participation by foreign firms has 

opened the way for portfolio investment funds to flow into Tanzania with more ease. The level of 

activity in the market is nevertheless still low. 

2.3 Level of Domestic Direct Investment (DDI) 

2.3.1 Identification of Domestic Direct Investment (DDI) 

Except for the generous series on the Gross Fixed Capital Formation (GFCF), there are no 

systematic data on private domestic investment in Tanzania, which makes a complete analysis 

of domestic private investment difficult. In the absence of a better alternative, below we describe 

a methodology for identifying DDI using the available information data on FDI and GFCF. Since 

FDI is basically private foreign investment, we can obtain the value of DDI by netting FDI from the 

private GFCF. Figure 2.15 describes the major components of investment to identify DDI. 


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This approach may have various snags, but three are notable. First, not all foreign investment is 

captured in the FDI data. The published data on FDI are those produced by the TIC – and reflect 

investments that pass the TIC threshold/definition. Foreign investment flows in a non-FDI form, 

and those not captured by TIC will be largely left out, hence undervalue the true magnitude of 

foreign investment. Secondly, this approach may not effectively distinguish the foreign versus 

domestic component in the joint ventures FDIs. However, the TIC/NBS/BOT surveys estimate the 

share of local private investment in joint venture FDI to be on average 14%. Nevertheless, some 

sectors such as manufacturing and finance/insurance had as greater share of local investment 

as about 50% and 20% respectively. However, we consider this weakness less serious since 

its effect can be cancelled out with the value of domestic investments that has foreign joint 

ventures. 

It should be noted that we use the above approach as a second best alternative while recognising 

as usual, unreliability of the information on the value of domestic investment and the severe lack 

of statistics on the number of domestic establishments. Figure 2.16 shows the resulting trends of 

DDI relative to FDI. 

A clearer trend in the relative significance of domestic and foreign investment is shown in Figures 

2.17 and 5.1. In general, the two figures show that although public policy has tended to be more 

favourable to the FDI, domestic private investment (or DDI) has been a significant component of 

total investment in Tanzania. However, it is only in the recent years (since 2000) that domestic 

investment has become a consistent contributor to economic growth (see Figure 5.1 in section 

5). Domestic investment is the significant part of the economy unlike foreign investment whose 

importance in economy has been recognised only since the last decade. 

24

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2.3.2 Relationship between Foreign and Domestic Investment 

One of major concerns by most developing countries’ appraisal of policy on FDI is the extent 

to which FDI has had a positive externality to domestic investment. This is because FDI is 

expected, at least in theory, to provide linkage and stimuli to local enterprises, where the latter 

is expected to learn and grow from the relationship with the former. In practice, however, the 

relationship between the two may not be as automatic and useful. It may require deliberate 

public intervention to steer the relationships in the direction that is consistent with achieving the 

national development goals. 

First, the institutional framework guiding promotion and facilitation of FDI does not provide policy 

leverage for enticing foreign investors to relate to local investors. The relationship between 

the two has not been developing according to existing market requirements and opportunities. 

Second, existing initial conditions do not readily enhance substantive linkages between foreign 

and local investments. Such supply side problems as underdeveloped markets in some sectors, 

weak production base on the side of local enterprises (poor quality, lack of standards and poor 

infrastructures) and weak market institutions demean prospective collaboration between the two. 

Third, many FDI develop from or/and have already developed international linkages (for supply 

chain) that may further limit the extent of collaborating with locals that cannot compete on similar 

footing unless deliberate effort is made to support their development. 

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of interests or strategic interests of their respective establishment. If this mismatch is significant, 

it implies little room for any substantial linkages. For instance, as mining is the biggest recipient 

of FDI for Tanzania in the last decade, it has feeble sectoral linkage with other sectors of the 

economy, hence limited participation of the local enterprises. Even when the latter are engaged 

in this sector, they are mostly undertaking artisan mining using rudimentary technology, products 

which are exported indirectly through dealers from neighbouring countries. Technical composition 

of many FDI activities is too advanced for the local enterprises to learn/adopt in the short run. The 

learning/adaptation by local firms of the advanced technology/skills of the foreign enterprises may 

be compromised if the strategic motive of the latter is export market opportunities (i.e. products 

are not sold in the domestic market thereby learning or adopting). 

2.3.3 Literature Review 

One controversial area in which FDI has received critical examination in the literature is its impact 

and relationship with domestic investment. Appendice A2.2 and A2.3 summarise key findings 

from the theoretical and empirical literature. The literature is unfortunately inconclusive on this 

matter (for detailed literature review see Phillips et al. 2000). In all the cases, there seems to 

be firm agreement on the affirmative side of the equation (that FDI is generally beneficial), but 

controversies on the negative side. The debate has included three issues. First, how beneficial is 

FDI to growth. Second, what is the statistical relationship between FDI and domestic investment 

or DDI (i.e. is foreignness that important) and the third issue is, what is the impact of FDI on the 

domestic investment (DDI). 

The first question has received a lot of emphasis in policy debates and analysis compared to 

the last two questions. Since, in addition, this question has been treated in chapter 3 in several 

dimensions, our purpose here is to focus on the last two questions, but more specifically on 

the last one 7 . Note however, that the analyses investigating the statistical relationship between 

FDI and DDI aim at determining which of the two investments lead the other. That is, is the FDI 

the leader or follower of the DDI? Various studies conclude that the relationship can go either 

way (blurred), but noting like the stylised fact that DDI is in principle, the prime source of capital 

formation and which is expected to contribute to GDP growth. Subsequently, if growth and market 

size are key determinants of FDI, then DDI is the leader of FDI. The opposite is true when 

DDI has to learn and adopt a more advanced (or new) technology and export markets. Such 

literature recommend in view of these facts, policies that intend to better the overall investment 

environment as these are most beneficial. Another finding from empirical studies suggests that, 

in countries where DDI growth is financed from domestic financial sector, FDI tend to participate 

more substantially (hence follow DDI). 

Our aim in the last question is to find out whether and to what extent FDI is beneficial to DDI, 

7 In its simplest formation, FDI theory suggests that FDI can promote economic growth 

through increases in the capital stock, tax revenue, trade, wage levels and employment. 


26

since one of the principle and theoretical objectives of promoting FDI is to enhance its positive 

externality to and for the growth of domestic firms. As expected, FDI has been contributing to the 

growth of capital formation (Figure 2.17). Although the share of FDI to total capital formation has 

been declining since 1999 after a sharp rise in 1998, there are prospects that it will increase in 

the medium term. 

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In addition, economic theory points to at least two ways through which FDI may affect DDI. 

First, FDI may have an impact on the profitability of domestic investment by, for instance, 

improving infrastructure. This is true in the case of Tanzania, where, as discussed in chapter 3, 

many FDI companies have developed infrastructure in the local communities surrounding them 

(electricity, water, road and other productive amenities). In addition, the country enjoys substantial 

improvement in her telecom sector as a result of foreign investment in that sector (establishment 

of world-class telecommunication systems and availability of mobile phones). Secondly, FDI may 

alter the ownership structure of total investment in the host country thereby easing availability of 

investment funds through, for instance, privatisation sales (that can be used to increase public 

domestic investment or offer finance to DDI). 

Other studies (See Appendix A2.3) have shown that FDI can have a positive or a negative impact 

on domestic investment depending on the level of trade barriers (TBs) and financial regulation 

(FR) imposed by the host country; such that the more restrictive are the TBs and FR, the less 

beneficial FDI are to DDI. However, it is important to note the fact that FDI can crowd out DDI by 

demeaning profitability of the DDI. This negative effect is amplified if the domestic investment is 

not associated with joint ventures with FDI. However, FDI is unambiguously beneficial in a joint 

venture type of ownership. 


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The above discussion plus information in Appendix A2.2 and 2.3 implies that the precise impact 

of FDI on DDI can vary by country and time – such that each country case can provide a different 

experience. The impact should be assessed in a dynamic context as impact can change as 

policies/investment environment changes over time. In general, the studies make clear the 

fact that neither the theoretical work nor the empirical evidence provides a definitive answer 

regarding the impact of the FDI on domestic investment. On balance, however, the empirical 

work seems to suggest that FDI has a positive impact on domestic investment (Phillips et al. 

2000:24). Yet another conclusion from literature suggests that, while the benefits of FDI for MNEs 

are easily quantifiable, the potential host country benefits are less apparent. Critics of FDI argue 

that the profit seeking motives of MNEs are often inconsistent with the objectives of developing 

countries. 

For developing countries such as Tanzania, FDI’s importance for domestic investment may also 

be demeaned by structural weaknesses characterizing both the economy at large and specific 

firms in particular. For instance, according to Mashindano (2004:70), Tanzania has acknowledged 

and recognized the importance of attracting FDI in order to attain a desirable economic growth 

rate and improve living standards. It is the economic deficiencies in poor country’s thrive for 

development. more than impact on domestic investment that actually drives their quest for FDI. 

The government should design policies that will enhance possible benefits of FDI on DDI not only 

those that maximize inflows of investment. However, according to the FDI promotion policies 

have short-term benefits to the domestic investment in Tanzania, especially when those policies 

are targeted at regional level. 

2.4 Policy Implications 

The review of literature shows agreement that investment is critical for the growth process and 

hence social welfare (see Phillips et al. 2000). The question is about what kind of investment 

is most beneficial and what the most cost-effective and socially harmonious ways to stimulate 

investment. To corroborate this concern, Kabelwa (2003) notes “…Debate on FDI in Tanzania 

has somehow neglected the role of foreign investment in the country. That is, whether foreign 

investment has met the country’s expectations and what impact it has on Tanzania’s economic 

development. The issue that lies ahead is to ensure that the attracting more FDI gores in tandem 

with the analysis of costs and benefits of this investment…” (2003:18). 

Monitoring and evaluating FDI in Tanzania is constrained by poor data. However, efforts by the 

Bank of Tanzania (BOT), Tanzania Investment Centre (TIC) and the National Bureau of Statistics 

(NBS) is commendable in putting together many sources of data and information in order to 

generate a more plausible data series. These efforts should also include establishing an effective 

mechanism for tracking private foreign investment in all its forms, and subsequently capital flight 

since, as Nyoni (2000) notes, Tanzania’s investment incentives structure lends itself to capital 

flight (Mashindano, 2004:61). 


28

3.0 in v e s T m e n T s ad e q u a C y in re l aT i o n T o de v e l o p m e n T go a l s 

3.1 Development Goals 

Tanzania’s Development Vision 2025 provides a statement of hope in the country’s quest for 

socio-economic development. Nevertheless, it has ambitious targets: half abject poverty; create 

a base for sustained development of the economy; and fashion a diversified, middle-income, 

market economy. To achieve these targets, the strategy is to create a sustained export-led growth 

of 8.0 percent or more per year, through judiciously exploiting the country’s rich natural resource 

base and fostering domestic and foreign investment. 

Tanzania is also party to the Millennium Development Goals (MDGs). These are also ambitious: 

eradicate extreme poverty and hunger by 2015; achieve universal primary education by 2015; 

promote gender equality and empower women; reduce child mortality; improve maternal health; 

combat HIV/AIDS, Malaria and other diseases; ensure environmental sustainability; and develop 

global partnership for development. To attain these goals it requires an increasing amount of 

quality domestic and foreign investments, sustained over a long period. 

In order to progress in achieving the above development goals, economic growth is necessary. 

This section answers the question: “Is Tanzania’s investment adequate to attain its development 

goals?” To answer this question, we first establish the link between investment and growth. Then 

we discuss Tanzania’s historical experience in relation to investment and growth. Finally, we 

examine what should be done to make investment more productive in support of growth. 

3.2 Link between Investment and Growth 

Experience in other countries shows that there is a strong link between investment and economic 

growth. In the long run, economic growth is highly linked with investment in new capital and 

increases in productivity that is associated with investment in new technology, Research and 

Development (R&D) and training. Empirically, most growth regressions, including those that 

focus on Sub-Saharan Africa, show that investment is the largest and most robust determinant 

of economic growth. 

Empirical work by Chi Hung Kwan (2004), reveals that for China, Japan, South Korea and 

Taiwan, investment was the engine of economic growth in those countries. Kwan’s findings are 

summarised in Table 3.1: 


Table 3.1: Investment and Growth in selected countries 

Country Year 


Investment Ratio 

(% of GDP) 

a 

GDP Growth 

(%) 

b 

1 China 1991 - 2003 39.1 11.6 3.4 

2 Japan 1961 - 1970 32.6 10.2 3.2 

3 South Korea 1981 - 1990 29.6 9.2 3.2 

4 Taiwan 1981 - 1990 21.9 8.0 2.7 

Source: Kwan (2004), Analysis based on official statistics of each country. 

ICOR = Incremental Capital Output Ratio 

ICOR 

With regard to Sub-Saharan Africa, Barro and Lee (1994), Collier and Cunning (1999) and 

Calamitsis et al (1999) using growth regressions have all shown that investment is one of the 

main determinants of growth 1 . Similar findings were obtained by Young (1994, 1996), and Mankiw, 

Romer, Weil (1993). A study on Tanzania by Wangwe, et al (2001) also concluded that physical 

capital accumulation (investment) is crucial for long-run growth in Tanzania. 

Despite the above empirical evidence, there are also studies that show negligible linkage between 

investment and growth. For example, between 1960-75 Zambia had an average investment rate 

of over 35 percent of GDP but achieved only 0.4 percent per capita growth (Easterly, William 

and Levine, Ross, 1997). Similarly, cross-country analysis linking investment to growth in Africa 

conducted by Devarajan, Easterly and Pack (2002) show little correlation between investment 

and growth. During 1960-94 Africa invested 9.6 percent of GDP but achieved only 0.5 percent 

real per capita growth. The study tested several theories by examining the relationship between 

the change in investment ratios and the change in growth per capita. One of the most famous 

predictions in development economics, dating back to Sir Arthur Lewis and Walt Rostov, is that 

increases in investment ratios lead to growth accelerations. The study on 29 African countries did 

not establish significant association between increases in investment in Africa and changes in 

growth from 1960-79 to 1980-1999. Only Botswana had high investment and high growth. Private 

investment had a significant positive impact on growth but once Botswana was factored out, the 

effect of private investment on growth became relatively small. 

Several factors have been cited as being important in facilitating high investment and growth in 

the countries shown is Table 3.1 above. These are: 

• 

Economic and political stability and transparency: According to Olivia Jensen (2001), 

social and political stability in a country is almost a sine qua non for investment. 

1 Other explanatory variables include school enrolment rates, life expectancy, macroeconomic 

policy variables, the inflation rate, political stability and geography variables. 

a/b 

30

• 

• 

• 

A steady policy-making environment is conducive for both investment and economic 

growth. Similarly, transparency in decision-making is important for investors. Investors 

seeking sites for long-term investment attach great importance to the predictability 

of the operating environment. Integral to this issue is the degree of transparency of 

policy choices and the accountability of policy makers. Investors also value highly a 

transparent and reliable legal system. 

Stable macroeconomic policies: The size and growth rate of the market and low cost of 

production are important for investment. Low inflation and commitment by government 

to pursue non-inflationary policies, including following appropriate monetary policy are 

valuable for investors. 

Supportive conducive infrastructure: Studies conducted by Amar Bhattacharya, et all 

(1997) indicate that good physical, financial, human and institutional infrastructure 

is essential in facilitating investment and growth. An educated, hard-working labourforce 

was found to be crucial for investors in the above-mentioned countries. Good 

roads, well functioning and efficient harbours, stable and reliable electricity supply and 

supportive financial institutions, were all ingredients for attracting high investment and 

fostering high growth. 

Government resolute commitment and pro-active support for private domestic and foreign 

investment: In most of these countries, Olivia Jensen (2001) observes that there was 

significant active participation by government in facilitating investment through extensive 

programmes aimed at creating a conducive environment for investment and growth. 

As the study by Easterly et al, (1997) amply shows, countries that have marked inadequacies 

of the attributes outlined above have experienced low growth despite high investments in some 

of these countries. The upshot of this is that in order for Tanzania to accelerate investment and 

achieve higher growth, relentless efforts must be made in improving the enabling environment. In 

particular, focus should be on continued and sustained economic and political stability, enhanced 

transparency in all aspects of economic and social management, stable macroeconomic policies 

that foster low inflation, greater improvements in the country’s infrastructure and more pro-active 

government support for domestic and foreign investments. 

3.3 Tanzania’s Historical Experience on Investment and Growth 

Tanzania’s experience (Figure 3.1) shows that investment and growth hardly seem to correlate. 

The period of highest investment 1980-83 when the investment ratio as percentage of GDP 

averaged 24.6 percent coincides with the lowest growth that averaged only 0.3 percent. Similarly, 

when Tanzania achieved an investment ratio of 25.8 percent between 1991-94, average growth of 

GDP was only 1.6 percent. In contrast, between 1960-79 an investment ratio that averaged 16.5 

percent achieved a growth of 3.8 percent. Similarly, an investment that averaged 16.8 percent 

between 1995-2002 coincides with a growth of 4.5 percent. 


The results depicted on Figure 3.1 appear to be confirmed by a recent World Bank study on 

Tanzania (Devarajan, Easterly, and Pack 1999). The study that used “growth accounting” 

methodology revealed that the correlation between output growth and capital growth was 

insignificant. The R 2 was only 0.10, indicating that capital growth explains only 10 percent of the 

variation in growth of output. This apparent lack of correlation between investment and growth in 

Tanzania is explained in sub-section 3.4. 

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3.4 Explaining Tanzania’s Insignificant Linkage between Investment and 

Growth 

There are several reasons why Tanzania’s relatively high investment has not achieved high 

growth rates. One reason confirmed by the results of the growth accounting study by Devarajan, 

et al. (1999) relates to low productivity of investment. Value-added in manufacturing sustained 

a 39 percent decline between 1975 and 1990. According to the study, the main reasons for low 

productivity were lack of complementary human skills needed to use complex capital gainfully. 

Empirical studies by Elbadawi, Ndulu, and Ndung’u (1997) and Jaspersen et al. (1995) prove that 

productivity of FDI is higher in countries with a higher educational attainment. Both studies cited 

confirm that the interaction between FDI and secondary educational attainment is statistically 

significant in explaining growth, while the interaction with primary education is insignificant. Thus, 

given that Tanzania has the lowest level of secondary education in the world (about 6 percent of 

the relevant school age population); this could be an explanation of the slower growth rate. 

According to Paul Krugman of Princeton University, the “East Asian Miracle” (called so because 

of the high rates of growth) was achieved through a rise in productivity and an increase in the 


� 

32

use of larger amounts of factors of production – especially capital and labour. When considering 

investment efficiency (productivity), the “incremental capital-output ratio (ICOR)’ serves as 

a guide 2 . Japan, for example, invested 32.6 percent of its GDP between 1961 and 1970 and 

achieved 10.2 percent sustained growth, implying an ICOR of 3.2. In other words, in order to 

boost growth by one percentage point, the equivalent of 3.2 percent of GDP had to be newly 

invested. Similarly South Korea invested 29.6 percent of its GDP between 1981 and 1990 and 

achieved 9.2 percent growth, implying an ICOR of 3.2. In all these countries sustained growth 

was achieved through improved productivity. Now lets turn to the experience of Tanzania. 

The relationship between investment and growth in Tanzania is shown in Table 3.2. 

Table 3.2: Investment and Growth in Tanzania 

Investment ratio 

(% of GDP) 

GDP growth 

(%) 

ICOR 

1965 - 73 20.8 5.2 4.0 

1974 - 79 20.6 2.5 8.2 

1980 - 85 16.4 1.1 14.9 

1986 - 90 27.7 3.9 7.1 

1990 - 95 24.6 2.5 9.8 

1995 - 2000 16.0 4.1 3.9 

2000-2004 17.6 5.6 3.2 

Source: World Bank (2002), “Tanzania at the Turn of the Century – Background Papers and Statistics,” 

Washington D.C. Bank of Tanzania (2004), “Economic and Operations Report for the year ended 

30 th June, 2004,” Dar es Salaam. National Bureau of Statistics, “The Economic Survey 2001,” Dar es 

Salaam, June 2002. 

The data provided in Table 3.2 indicate that there is hardly any direct relationship between 

investment and growth. Periods of high investment are not automatically translated into high 

growth. For example, during the period 1973-87 and 1987-99, investments were 17 and 20 

percent of GDP but registered –1.3 percent and 1.0 percent growth respectively. The efficiency of 

investment was low, registering an ICOR of 15.7 and 20 respectively. In the latter case, it means 

that in order for Tanzania to achieve a one-percentage point growth it has to invest 20 percent 

of its GDP – a highly inefficient way to achieve growth. What are the reasons for low investment 

productivity? 

2 The “incremental capital – output ratio (ICOR)” is obtained by dividing the ratio of investment 

as a percentage of GDP with real economic growth (real GDP growth). The smaller 

the ICOR is, the more efficient the investment. For example, as Table 3.2 shows, Tanzania’s 

ICOR for most years are high compared with those of developing countries. According 

to Wangwe and Tsikata (1999), the high ICOR is a reflection of low productivity of 

public investments and low rates of industrial capacity utilisation. 


According to Devarajan, Easterly, and Pack (1999), the low growth in Tanzania is not due to 

lack of investment but is associated with inefficiency. This finding is also supported by studies 

by Wangwe et al (2001) using “Growth Accounting” analysis. The results of their study are 

reproduced on Table 3.3. 


Table 3.3: Sources of Growth in Tanzania 

Output per worker Capital per worker Education per worker 

Total factor 

productivity 

1960-1970 1.9 0.4 0.3 1.2 

1970-1980 1.3 1.0 0.1 0.3 

1980-1990 -0.3 0.2 -0.1 -0.4 

1990-1998 -0.2 -0.2 0.0 0.0 

1960-1998 0.7 0.4 0.1 0.3 

Source: IMF calculations. Country Economic Memorandum (1999). 

As shown in Table 3.3, output per worker increased by 0.7 percent per year over the period 

1960-98. Increases in capital per worker contributed 0.4 percent per year, while education per 

worker contributed only 0.1 percent. The remaining 0.3 percent of annual growth is attributed 

to the residual, total factor productivity growth. Notice that there is a large decline in total factor 

productivity between 1960 and 1990. From a high 1.2 percent between 1960-70, it fell to 0.3 

percent per year between 1970-80 and turned negative between 1980-90. This happened 

despite an increasing level of investment during this period. The empirical evidence suggests 

that productivity of public sector investment and industrial capacity utilisation rates were too 

low to sustain high levels of growth. More generally, the lack of complementary investment 

(presumably due to adverse initial conditions typical in low income countries such as Tanzania) 

and especially in service sectors and required skills (that facilitate efficient utilisation of resources) 

have exacerbated the high ICOR. 

The observation made above shows that during 1960-70 increases in total factor productivity were 

the main driving force behind the relatively high economic growth – contributing 1.2 percentage 

points to overall annual growth. However, after 1970, total factor productivity began to decline, 

turning negative between 1980-90. The main reasons for declining productivity were3 : 

� Poor incentives for increasing productivity under the socialist regime, 

� Weak macro-economic policies that led to foreign exchange shortages, 

3 Pritchett (1999) argues that low rates of productivity could also indicate problems in 

measuring the value of the capital stock. In particular, corruption, lack of government efficiency 

in investment, patronage, and a variety of many other factors may lead to costs 

of investment that overstate the actual contribution of investment to capital accumulation. 

34

� 

� 

� 

� 

Inadequate institutions to support high productivity, 

Insufficient availability of inputs and complementary investment into the production 

process, 

Poor investment decisions by parastatal organisations that resulted in over-capacities, and 

Inadequate supportive legal and regulatory framework. 

The reforms initiated in the 1990s reversed the declining factor productivity but have not been 

sufficient to boost growth to high levels. 

The contribution of education to growth is small, averaging only 0.4 percent per year between 

1960-98 (Table 5.3). Experience in other countries shows that investing in human capital in 

the form of education, training, health care, or improved nutrition is key to faster and sustained 

economic growth. Investment in human capital is particularly important for growth because it 

affects the development of entrepreneurial, managerial, and organisational skills, as well as 

innovation, learning, and adaptation of new technology and modern practices. Thus, apart from 

being growth enhancing, investment in human capital also directly improves the quality of life of 

the beneficiaries and the society as a whole. Unfortunately, the quantity, relevance and quality 

of Tanzania’s education, especially post-primary, are among the lowest in Sub-Saharan Africa. 

As a consequence, the expected contribution of education to economic growth has been weak. 

Education, therefore, is an area that requires higher investment to boost growth in the future. 

The low observed investment productivity is also due to inadequate or weak infrastructure. A 

study by Deepack et al, (2001) illustrates show that investment productivity tends to be higher in 

countries with well-developed physical infrastructure. Tanzania’s erratic and unstable electricity 

supply, inadequate water supply, poor roads, inadequate communication infrastructure and the 

like, tend to reduce the productivity of investment. 

3.5 Investment Adequacy 

In this section the question posed in Section 5.1: “Is Tanzania’s investment adequate in relation 

to her development goals?” As discussed in Section 5.1, the country’s vision 2025 requires a 

GDP growth rate of 8.0 percent or more to achieve desired development goals. The discussion 

in Section 5.2 to 5.4 above is not conclusive about the relations between investment and growth. 

Some countries such as Japan, South Korea, Taiwan and China invested over 22 percent of their 

GDP and achieved a sustained 8.0 percent growth or more over a period of 10 years. Others 

such as Botswana invested about the same level as Tanzania (averaging 17.0 percent of GDP) 

and achieved over 7.0 percent growth sustained for a period of 10 years or more. Others, like 

Zambia invested over 35 percent of their GDP but achieved only 0.4 percent per capita growth 

for 15 years between 1960-75. Tanzania like Zambia achieved a dismal growth as discussed in 

Section 7.3. Similarly most Sub-Saharan African countries invested over 9.6 percent of their GDP 


etween 1960-94 but had the lowest growth in the world (Hoeffler 1999). However, despite all 

these observations, there are a number of lessons that we can draw from the above empirical 

evidence. 

First, investment is one of the few most robust variables in cross-country growth regressions 

(Levine and Renelt, 1992). This implies to get the Tanzanian economy growing at 8.0 percent per 

annum or more requires higher levels of investment that are channelled to sectors of the country’s 

highest comparative advantage. In addition, there is need for greater public-private partnerships 

in development, each complementing one another. Further, greater facilitation of local investors 

is needed in tandem with current efforts to promote foreign investments. Other complementary 

conditions are discussed further below. 

How much more investment is needed? Using empirical studies quoted by William Easterly 

(1998), an increase of direct investment/GDP of 1.3 percentage points results in an increase of 

one percentage point in growth. This means for Tanzania to increase its growth from the current 

5.0 percent to 8.0 percent, we need to raise investment/GDP by 3.8 percentage points. In other 

words, investment/GDP needs to rise from the current 17.6 percent to 21.4 percent. For example, 

Taiwan invested about that level (21.9%) between 1981-1990 and achieved 8 percent sustained 

growth over that period. 

Alternatively, we can know how much investment is needed by learning from empirical studies 

conducted using the Financing Gap approach. This approach uses the Incremental Capital 

Output Ratio (ICOR) to project growth. The EBRD in its annual 1995 <strong>report</strong> on ex-Communist 

economies said, “growth of 5 percent requires investment of 20 percent”. This implies an ICOR 

of 4. A 1995 World Bank <strong>report</strong> on Latin America says “enhancing savings and investment by 

8 percentage points of GDP would raise annual growth by around 2 percentage points – again 

implying an ICOR of 4. The IMF Institute in its training manual for developing countries suggests 

that investment requirements be calculated as “Target growth * ICOR.” In Section 5.4, Table 

5.2, Tanzania’s experience with regard to investment efficiency as measured by ICOR varies 

widely from a high 20.0 between 1987-97 to a low 3.2 between 2000-2004. If we assume the 

most recent experience can be sustained, then using the IMF approach, Tanzania would need 

an investment/GDP level of 25.6 percent – about 8.0 percentage points higher than the current 

level of investment. 

We can now conclude, albeit on the theoretical level, that Tanzania would need to increase her 

investment/GDP level by between 21.4 to 25.6 percent per annum in order to achieve her Vision 

2025 of raising GDP growth by 8.0-10.0 percent or more. However, as Section 7.2 to 7.4 amply 

illustrates, sustained growth requires not only increasing levels of savings and investment, but 

also the efficiency/productivity of that investment and other complementary growth determinants. 

We discuss these other growth-enhancing factors in the next section. 


36

3.6 Raising Investment and Growth: What can be done? 

3.6.1 Improving the Environment for Investment 

Tanzania’s ratio of investment to GDP averaged about 17.0 percent of GDP between 1965-2004. 

This is well below the ratio attained in developing countries of Latin America (20-22 percent) 

and Asia (27-29 percent). Therefore, it is important for Tanzania to strive to raise investment 

to those levels achieved by other higher growth developing countries. Also, the empirical 

evidence shows that Tanzania’s ratio of private investment to GDP is low. This is worrisome for 

two reasons. First, private investment has been found to have a significantly stronger effect on 

growth than government investment – probably because it is more efficient and less associated 

with corruption. However, both public and private investments are needed because these 

complement one another – especially where the government improves markedly the country’s 

physical infrastructure. Second, official development assistance, which provides the financing for 

a large share of Tanzania’s investment, is declining – except for priority sectors. Thus, Tanzania 

has to do more to attract more domestic and foreign private investment. To achieve this noble 

goal and foster sustained growth, the following steps are important. 

First, there is need to ensure continued macroeconomic stability. Cut budget deficit. Reduce the 

rate of increase in money supply and inflation. Manage more carefully arrears – both domestic and 

external. An empirical studies by Pritchett (1998) has shown high correlation between adequate 

macroeconomic policy and rapid growth. Investors tend to have greater confidence in countries 

that have sustainable price stability. Ndulu (1997) also calls for reducing the size of the budget 

deficits through concerted efforts to raise revenue collection and reduce wasteful expenditures 

as a way of fostering sustainable price stability. Case studies on Sub-Saharan Africa cited by 

Ndulu et al (2000) also show high linkage between sustained macroeconomic stability and rapid 

economic growth, the latter benefiting from increased domestic and foreign investment. 

Second, make continuous improvements in the legal system. Private investment is not likely 

to take off on a sustained level where investors and lenders lose their capital because of 

dysfunctional court system that fails to enforce contracts and property rights. Tanzania has made 

commendable progress in this area but much remains to be done. In particular making further 

improvements to enhance efficiency of the recently established Tanzania’s Commercial Court 

and Tanzania National Business Council as well as considering possibilities for institutionalising 

rural property rights. 

Empirical studies by Sachs, J. et al (1997) show that improvements in the quality of institutions 

emphasising the rule of law and security of property as well as more stable political and social 

environment conducive to higher investment have the potential to add 0.6 percent to a country’s 

annual growth. Similarly, cross-country studies cited by Ndulu (2000) conclude that improving 


governance scores (by reducing corruption, improving the quality of bureaucracy and adhering to 

the rule of law), has the potential of increasing long-run growth by nearly a third of a percentage 

point per year. 

Third, review the entire taxation system to provide for greater transparency and more equal 

level playing field between domestic and foreign investors. High taxes are normally associated 

with low investment. This is particularly evident in agriculture where investment is low due to 

high taxation, inadequate infrastructure support especially poor roads, unavailability of power 

supply, inadequate water supply, poor telecommunications and a workforce that leaves much to 

be desired. 

Forth, the debt overhang that Tanzania continues to accumulate despite recent HIPC debt 

reductions discourages private investment by reducing the expected after-tax rate of return on 

capital. Therefore better management of the country’s domestic and external debt is essential. 

Fifth, refrain from special “subsidies” (tax exemptions) for foreign investors. The Government 

of Botswana refrained from offering tax exemptions to foreign investors but managed to attract 

more foreign investment in part because of following prudent economic management principles 

that also assured investors that their property rights would protected. That is, achieving a robust 

macroeconomic policy environment and favourable investment climate is more fundamental to 

attracting FDI than just offering tax exemptions. 

3.6.2 Raising Investment Productivity and Sustaining Growth 

Overall factor productivity in Tanzania is low (Table 5.3) because of a variety of distortions and 

institutional deficiencies. In order to spur growth in productivity and output, the following steps 

have to be taken to reduce those deficiencies: 

(i) 

Make concerted efforts to improve the country’s physical infrastructure 

Empirical studies by Deepak et al (2001) show that productivity gains are high in countries with 

skilled workforce and well-developed physical infrastructure that complements the investment. 

Studies cited by Easterly (1997) show that an increase of 1.7 percent of GDP in public investment 

in transport and communication can increase growth by one percent. Similarly in the case of 

Tanzania, findings by Kweka (2003) indicate that improvement in infrastructure has significant 

influence on growth. The study observes that real GDP growth increases by 0.5 percent and total 

welfare rises remarkably by about 2.0 percent. World Bank studies on Sub-Saharan Africa have 

cited poor infrastructure as a major deterrent to investors. Good infrastructure is key to “crowding 

in” domestic and foreign investments. Unfortunately, Tanzania’s basic infrastructure and utilities 

are poor. The road network is undergoing major improvements but much more remains to be 

done to ensure regular maintenance and upgrading. Kweka (2004) observes that in the case of 

Tanzania investments being made to improve transportation infrastructure has reduced trade- 


38

elated transaction costs, but these are still high – typically about 5 percent of value. Power supply 

is erratic, unreliable, and expensive and has limited coverage. Electricity costs are over 215 

percent higher in Tanzania than neighbouring Kenya and nearly seven-fold the charges in South 

Africa (Musonda, 2000). Much improvement is required in this area to ensure that power supply 

does not constrain productivity and growth. Progress is evident in telecommunication services 

but more competitive conditions are needed to lower costs. Water supply for productive activities 

is irregular and inadequate to support a growing economy. All these and other infrastructure 

require urgent improvement to spur investment and growth. 

(ii) Improve policy and institutions 

Policies and institutions are important determinants of growth. A Study by Parente and Prescott 

(1999) shows that removing policy and institutional constraints could triple output through more 

efficient use of existing capital and adoption of new technologies. Recent projections by the 

World Bank using cross-country regressions of per capita GDP growth in 1990-97 show that 

if Tanzania improved its policies and institutions and thus raise its performance rating by 0.5 

percent, per capita growth would increase by 2.5 percentage points (World Bank, 2002). Tanzania 

has made commendable progress in putting in place sound investor-friendly policies. However, 

some of the institutions are still plugged with past rigidities and do not fully support the ensuing 

market economy. Civil servants are still not customer-focussed and investor-friendly. Attitudes 

and mindsets need to change. The tax authority (TRA) needs to make improvements in service 

delivery and avoid undue harassment of investors. This also applies to the business licensing 

authority and immigration which need to speed up service provision. 

(iii) Improve work-force skills and knowledge 

Empirical studies indicate high correlation between a country’s growth and its labour-force skills 

and knowledge. A study by Easterly, (1998) indicates that an increase of 1.2 years in average 

schooling of the labour force could raise growth by one percent. Similarly, the same study shows 

that an increase in secondary enrolment of 40 percent could raise growth by one percent. Primary 

education had no significant contribution to growth. As shown in Table 5.3, Wangwe, et al (2001) 

also revealed that education per work is one of the factors contributing to growth in Tanzania. In 

addition to secondary and higher education that have a high contribution to growth, the World 

Bank (1998b) has identified two sorts of knowledge that are critical in enhancing the productivity 

of investment and growth. These are: 

� 

� 

Knowledge about technology – technical knowledge or know-how. In the context of 

economic growth; examples would be knowledge about manufacturing processes, 

agricultural methods, and organisational methods. 

Knowledge about attributes, such as the quality of a product, the diligence of a workers, or 

the creditworthiness of a firm – which are all crucial for establishing effective markets. 


Based on the above observations, the current government’s efforts to expand secondary education 

are in the right direction. It is also important to expand the knowledge base of the workforce 

through skills upgrading and improvement in the information and communication infrastructure. 

(iv) Improve further the legal and judicial framework 

Experience shows that investors are enticed to invest in countries that have a well functioning 

legal system that is capable of protecting property rights. Although Tanzania has made progress 

in reforming its legal and regulatory system, much needs to be done. In particular, further 

improvements are needed in corporate and contract law, competition policy, bankruptcy law, 

labour law, and property and land rights. This is essential to facilitate the country’s quest to build 

a transparent, expedient, and cost-effective regulatory system that provides a level playing field 

for both domestic and foreign investors. 

(v) Strengthen public-private partnerships (PPP) 

Growth comes as a result of a great deal of effort by many people and their government doing 

the right thing over an extended period. A credible, transparent, well-financed and well-managed 

government is essential in imposing economy-wide discipline of law, secure property rights and 

provide for adequate social safety net. This market-friendly government environment should 

be expected to encourage saving new investment and foster further growth through powerful 

public-private partnerships (PPP) for development. In turn, the private sector has to reciprocate 

by abiding with rules and regulations, improving investment quality and actively engaging the 

government in win-win dialogues that foster social-economic development. 

3.6.3 Diversifying Sources of External Finance and Raising Effectiveness of Official 

Development Assistance 

Tanzania needs to put greater efforts at diversifying its sources and composition of external 

finance. Prime to this effort relates to fostering creditworthiness to attract private investment. 

In this respect there is need to reduce sovereign risk as influenced partly by the ability to 

service debt and by constraints to cross-border transfer of profits. Studies by Jaspersen et al 

(1995) and Kharas et al (1991) have shown that creditworthiness is important especially in 

determining whether or not progression from official to private lending will be smooth. In addition, 

macroeconomic stability, policy credibility and sustained efforts to maintain both are important for 

reducing uncertainty and raising creditworthiness. Helleiner (1993) reiterates that key elements 

in securing policy credibility are the adequacy of finance and the assurance of its continuation. 

This underscores the critical importance of stability of Official Development Assistance (ODA) in 

reducing the perceived likelihood of policy reversals in response to sudden resource crunches. 

Thus, donor assistance can be expected to play a significant catalytic role in attracting other 

forms of foreign capital in the future. 


40

Experience also shows that one way of diversifying sources of finance is to develop co-financing 

arrangements between ODA and private capital in a way that will permit ODA to leverage private 

resources. The scope for such arrangements is high especially in infrastructure investments 

(such as IPTL, SONGAS). 

3.6.4 Mobilising Domestic Resources 

The current situation where development assistance plays a large role in both recurrent and 

development expenditure is not sustainable. A more conducive environment for progressive 

and orderly transition to less dependence on external financing of the country’s development is 

essential. In particular, actions are needed in five main areas: 

� 

� 

� 

Fostering domestic resource mobilisation including increases in domestic savings, 

generation of higher foreign exchange earnings, and making further improvement in 

government revenue collection. These efforts are critical because experience shows that 

own resources form the financial base for sustained development of economies – both in 

developed and developing countries. 

Reforming the country’s taxation system. High taxes and low credibility of banks tend to 

discourage savings and therefore retard growth. High growth and high savings are interrelated. 

A low tax policy is important for encouraging savings and fostering high growth. 

Thus, for higher growth to be achieved in accordance with the country’s millennium goals, 

savings as a share of GDP has to rise from the current 12 percent to over 30 percent – a 

monumental task unless urgent actions are taken towards encouraging savings. 

Promoting private investment to support economic expansion while sustaining on-going 

economic reforms. Tanzania’s experience shows that the response of private investment 

to the reforms that were initiated since the mid-1980s has been slow. Where response 

has come-forth, investments have been dominated by short-term low risk behaviour – 

especially channelled to trading activities (Elbadawi, Ndulu and Ndung’u, 1997, Severn, 

1996). To reverse this trend, reforms have to be deepened further to create assurances 

of negligible chances of policy reversal, civil and political stability has to be fostered at any 

cost, and the investment code must be implemented in fairness within the framework of a 

level-playing field for both domestic and foreign investment. 

3.6.5 Making Further Progress in Tanzania Investor Roadmap-type Issues 

Tanzania has made commendable progress in investment facilitation since the first Investor 

Roadmap assessment was made in 1996. The January 2004 Tanzania Investor Roadmap 

indicates significant progress in removing investment bottlenecks. In this section we review 

progress to date and recommend for further actions to improve the process further. 


Table 3.4: Roadmap on Institutional Facilitation of Investment 

Employing Activity Agency Involved Practice in 1996 Practice in 2003 to date Recommendations 

Reduce the period to 

between 2-5 days. 

Submission: 

5 Photos; Curriculum Vitae; 

Memorandum of Association; 

Articles of Association; TIC 

Certificate 

Takes 2 days to 2 weeks. 



Memorandum of Association; 

Articles of Association; TIC 

Certificate 

Takes 2 to 6 months 



Memorandum of association; Articles 

of Association; IPC Certificate; Birth 

Certificate; Educational degrees; 

Business Plan/Feasibility Study; Sector 

approval. 

Department of 

Immigration 

Obtaining Class A 

Permit 

Reduce the period to 

between 2 –5 days 

Takes 2 to 6 months Takes 4 days to 4 weeks 

Obtaining Class B 

Permit 


Takes 1 week Takes 3-4 days Reduce further to 2-3 days 

Commissioner of 

Lands, Ministry of 

Lands 

Obtaining Letter of 

Offer 

Reduce to between 1-2 days 

Maximum time taken 14 

days, average 10 days, 

minimum 3 days 

TTCL Takes 5 to 6 months 

Obtaining phone 

connection 

Full/economy rate per minute 

Full/economy rate per minute 

Rates have gone down to 

competitive levels. Now strive 

to improve quality of service 

delivery. 

US$ 1.30 

US$ 2.5/$2.0 

US$ 1.5 

US$ 3.0/ $ 2.4 

TTCL 

US$ 1.70 

US$ 4.0/ $ 3.2 

US$ 1.70 

US$ 4.8/$ 3.8 

US$ 1.70 

US$ 4.5/$ 3.6 

Calling abroad: 

Africa – COMESA 

Africa Non-COMESA 

Europe, North 

America & Middle 

East 

Asia 

Latin America, 

Caribbean 

42


Two processes, takes 3 to 6 days One process, takes 2-3 days One process, 1-2 days 

Registrar of 

Companies, Ministry of 

Industries and Trade 

Names clearance 

and registering firm 

Reduce time for obtaining 

trade licence to below 10 

days 

Forms in Kiswahili and 

English. Procedure posted 

for public review 

Forms in Kiswahili only, Procedure not 

publicly available 

Internal trade section, 

Ministry of Trade and 

Industries 

Getting trade licence 

Maintain 3-5 days for 

both domestic and foreign 

investors. 

Takes 3-5 days 

Threshold US$ 500,000 if foreign 

investor; 3-6 months approval. 

Investment Promotion 

Centre (TIC) 

Obtaining Certificate 

of Incentives 

Prepare import schedule, 

Submit schedule to TIC for verification 

based on business plan; 

Issue “Certificate of 

Incentives” to both foreign 

and domestic investors. 

Register with TIC for 

“Certificate of Incentives” 

Submit IPC verified schedule to Ministry 

of Finance for Remission Order; 

TIC, Ministry of 

Finance, Customs 

To qualify for 

reduction of duty on 

capital goods 

Ministry of Finance submits Remission 

Order to Customs; 

Customs matches approved times to 

capital goods when imported. 



Develop timeframe for all 

these processes to avoid 

undue delays 

1. Applicant hosts health 

inspection 

2. Health inspector collects 

fee, issues receipt, 

completes <strong>report</strong>; 

3. Health officer forwards 

Health Certificate and 

receipt information to 

trade officer; and 

4. Trade officer 

recommends yes/no on 

license 

Applicant hosts health 

inspection 

Health inspector collects 

fee, issues receipt, 

completes <strong>report</strong>; 

Health officer forwards 

Health Certificate and 

receipt information to 

trade officer; and 

Trade officer 

recommends yes/no on 

license. 

1. 

2. 

Applicant hosts health inspection 

Health inspector complete <strong>report</strong>, 

Applicant picks up Health 

Certificate 

Applicant takes certificate to trade 

officer 

Applicant pays fees and receives 

receipt, and 

Trades officer recommends yes/no 

on license 

1. 

2. 

3. 

3. 

4. 

Dar es Salaam City 

Commission 

Obtaining local trade 

licence 

5. 

4. 

6. 


Manufacturer with turnover 

of Tshs 100 million must 

register. 

Manufacturer with turnover 

of Tshs 100 million must 

register. 

Manufacturers with turnover of Tshs 10 

million must register 

Industrial Licensing 

Board, Ministry of 

Trade and Industries 

Obtaining industrial 

licence 

Adjust fees to flat rate of 

US$ 20,000 per annum for 

areas where fish depletion 

rate is high (Lake Victoria) to 

discourage over-fishing. 

License fee is now a flat US$ 

16,000 per annum 

License fee based on US$ 80 per gross 

registered ton 

Fisheries Division, 

Ministry of Tourism, 

Natural Resources and 

Environment 

Obtaining 

Commercial fishing 

licence 

Source: Based on DAI (2003 & 2004), “Tanzania Investor Roadmap.” September 2003 and January 2004. 

44

4.0 me a s u r e s f o r eva l u aT i n g T h e Co s T a n d be n e f i T s o f 

in v e s T m e n T s m a d e in Ta n z a n i a 

4.1 Introduction 

Tanzania Investment Centre (TIC) was established in 1997 by the Tanzania Investment Act No.26 

of 1997. Its main objective is to be the primary agency of Government to co-ordinate, encourage, 

promote and facilitate investment in Tanzania and advise the Government on investment related 

matters. In performing these functions, TIC undertakes various procedures as measures to 

decide on any investment approval and uses several measures to inform investment decision 

approval. 

In the context of cost-benefit analysis, investment can be defined as a long-term commitment 

of economic resources made with the objective of producing and obtaining net gains in the 

future. Evaluation refers to the determination of the values of project inputs and outputs. Under 

normal circumstances, investors conduct private cost-benefit analysis to determine profitability 

of alternative investment options. Therefore, before an investor submits request to Tanzania 

Investment Centre (TIC) for approval, it is expected that the investor has completed initial 

assessment and has firm ideas that the investment is viable and profitable. Therefore, what TIC, 

needs to do is to subject the investor’s project into social cost-benefit analysis. 

The main reason for conducting social cost-benefit analysis is to subject project choice to a 

consistent set of general objectives of national policy. For example, “does the proposed investment 

contribute towards national goals (Tanzania Vision 2025 and Millennium goals) related to higher 

employment, output, consumption, savings, foreign exchange earning, income distribution 

and other important national objectives”. “Does the investment meet desirable environmental 

standards?” “Will the net social benefits exceed social costs?” Answers to such questions before 

investment approval are important, not only to protect the national interest, but also to ensure 

that all investments contribute towards higher and sustainable economic growth and poverty 

alleviation. 

After this introduction, this chapter is divided into three sections. Section two discusses statutory 

measures that TIC has to implement before investment approval. Section three focuses on 

measures related to social benefit-cost assessment. Section four is devoted to post-investment 

that are essential in ensuring that investors “walk the talk” – that is, are in reality implementing 

projects in accordance with TIC-awarded certificate of investment approval. 

4.2 Current Measures for Investment Approval 

Current measures for investment approval are stipulated in the “Tanzania Investment Act, 1997”. 

Under the Act, which aims at providing favourable conditions for investors, the following minimum 


conditions have to be met before an investment is approved. 

♦ 

♦ 

♦ 

If the investment is wholly owned by a foreign investor or if it is a joint venture, the minimum 

investment capital is not less than Tanzanian shillings equivalent to three hundred thousand 

US dollars (US$ 300,000); 

If locally owned, the minimum investment capital is not less than Tanzanian shillings 

equivalent to one hundred thousand US dollars (US$ 100,000). 

For new investments, submission of investment application for approval has to contain the 

following: 

- The name and address for the proposed business enterprise, its legal form, its bankers, 

the name and address of each director or partner and the name, address, nationality 

and shareholding of each share holder; 

- The qualifications, experience and other relevant particulars of the project 

management; 

- The nature of the proposed business activity and the proposed location where that 

activity is to be carried on; 

- The proposed capital structure or the amount of investment and the projected growth 

over the next five years; 

- How the investment will be financed; 

- Evidence of sufficient capital available for investment; and 

- An undertaking that the project shall be implemented as indicated in the projections of 

the project. 

Where the application is to rehabilitate or expand an existing enterprise or both, the 

application shall contain: 

- The name of the existing enterprise, its articles of association and Memorandum of 

association or partnership agreement; 

- The qualifications of the project management; 

- A statement of audited accounts for the three previous years; 

- The nature of rehabilitation or expansion; 

- The capital structure and projected growth over the next five years; 

- Financing of the rehabilitation or expansion project, together with evidence of availability 

of finances; 

- An undertaking that the expansion or rehabilitation shall be implemented as indicated 

in the projection. 

Where the application is for equity investment, shares or stock in an enterprise, it shall 

contain: 

- 

The name of the enterprise in which the equity investment is made or shares held; 


46

- Constitution of the enterprise or partnership agreement; 

- The amount of equity investment made; 

- The number of shares or stock held by the equity investor, and 

- The currency in which the equity investment is made. 

The evaluation team finds these minimum statutory measures to be inadequate because 

investments are not subjected to social cost-benefit analysis as discussed below. 

4.3 Cost-benefit Measures 

As stated in the introductory section, an investment is oriented towards the generation of future net 

gains. This objective can be achieved only when an investment is properly integrated within the 

Tanzanian business environment. Therefore, any proposed application for investment approval 

should be viewed not only as a part of a system of supply and demand of goods and services that 

aim at making profits, but also as an integrated part of a socio-economic and ecological system 

within which the investment performs. Thus, for the investment to be socially and economically 

beneficial, it has to serve the needs and development objectives of the Tanzanian socio-economic 

system (e.g. Tanzania Vision 2025, Millennium goals, etc.). Since it is in the public interest that 

investments make efficient use of scarce resources and contribute as much as possible towards 

national development, social benefit-cost analysis has to be applied to each investment. The 

measures most commonly used to assess benefits are as follows: 

4.3.1 Social Benefit Measures 

1. Employment Creation. 

indirectly? 

Will proposed investment create jobs, both directly and 

2. Technology, Knowledge and Skills Transfer. One important measure for evaluating 

investment is whether the proposed project has a chance of enhancing technology, 

knowledge and skills transfer. Often FDI can bring into the country both hard technology 

(e.g. equipment, industrial processes) and soft technology (e.g. knowledge, information, 

expertise, organisational skills, management, marketing and technical know-how). 

Sometimes some investments are also associated with growth of research and 

development (R&D) thus increasing the country’s technological capacity. All these are 

important measures in evaluating investment applications. 

Promotion of the country’s exports, competitiveness and markets. 

3. Transnational 

companies can help boost the country’s exports through their foreign affiliates. In general, 

Foreign Direct Investment (FDI) can be an important intermediary between Tanzanian 

domestic producers and markets abroad. Foreign investors engaged in export-oriented 

primary manufacturing and service activities can be particularly useful in enhancing the 

county’s export competitiveness – in part because of their technological superiority and 


quality consciousness. 

4. Linkages with sectors of the economy. Is the investment likely to source inputs in the 

local market? Will the investment improve the supply chain of goods and services? Will the 

investment add value to domestic resources. These and other considerations that foster 

linkages within the economy are important for accelerating economic growth. 

5. Improvement in the country’s financial inflows and balance of payments. Foreign 

direct investment can inject substantial financial resources into the country beyond those 

referred to in the statutory requirements. Such resources if channelled to new investments 

(Greenfield-typeinvestments)orinfrastructure(e.g.electricity,telecom,waterandsanitation, 

roads (build-operate principles) can make marked contribution to national development. 

Under social benefit-cost analysis, investment inflows have to exceed outflows in terms of 

profit and other remittances). 

4.3.2 Social Cost Measures 

Generally, the distinction between benefits and costs is simply one of sign. A cost is a sacrificed 

benefit. Apart from the usual project costs normally submitted during an investment application, 

(e.g. costs of initial investment, production, marketing and distribution, plant and equipment 

replacement, working capital requirements and decommissioning at the end of the project life), 

there are important social costs that have to be evaluated. The rationale for assessing social cost 

measures relates to the possibility that seemingly profitable investments may have detrimental 

effects on the economy such as destroying the environment, reducing employment, retarding 

entrepreneurial development, reducing the supply chain of domestic goods and services, to 

mention but a few. Some of these social costs are discussed below. 

1. Crowding out local investors. Due partly to technological superiority, some FDI 

investmentshavesqueezedoutlocalproducers.Forexample,alargegarmentmanufacturer 

that supplies cheap clothes to the domestic market can easily kill local small-scale garment 

manufacturers. Large foreign banks are known to “crowd out” local banks and due to 

automation reduce labour considerably. 

2. Holding back local skills development and reducing entrepreneurial growth. If an 

investment application demands the use of many expatriate managers and professionals. 

whose skills are domestically available, this could be regarded as holding back local skills 

development. Similarly, if FDI investors prefer to use foreign suppliers, this can be taken 

as reducing entrepreneurial development. In the financial sector, excessive automation by 

both foreign and local banks has resulted in to reduced employment and lost opportunities 

for further learning. In situations where investors cut off an existing domestic supply chain 

due to sourcing abroad (e.g. TBL import of barley from South Africa), this action could be 

result in killing local entrepreneurial linkages. 


48

3. Environmental Damage. Some investments may have negative effects on the environment 

although the project may be financially profitable. A typical example is the pollution of air 

or water by industrial plants. The discharge is a by-product of the industrial process that 

results in net disbenefits to the surrounding population. For such projects an Environmental 

Impact Assessment (EIA) is mandatory. However, for TIC purposes, it is a good idea to 

include environmental concerns as one of the measures for investment evaluation. 

4. Social costs related to systemic risk. Sometimes an economy can be exposed to 

significant instability due partly to structural and institutional weaknesses of the economy. 

For example, the entry of foreign financial institutions might undermine the ability of the 

Bank of Tanzania to exercise control over international capital movements into and out of 

the country – despite the existence of good regulations. 

4.4 Calculating the Social Cost-Benefit Measures (Modus Operandi) 

The inclusion of social benefit-cost analysis in investment evaluation is implemented using 

UNIDO’s software. The Computer Model for Feasibility Analysis and Reporting (COMFAR) 

developed by UNIDO is a computational tool for the analysis of investment projects. TIC has inhouse 

competence and access to this software. UNIDO donated to TIC five computers that have 

been installed with COMFAR. TIC staffs have also received training on the COMFAR programme. 

Data for inputting onto the software is derived from the investor’s application as mandated by the 

1997 Investment Act and any additional information TIC might request from the investor. 

In a nutshell, COMFAR computational analysis for social benefit-cost analysis works as follows: 

♦ The model assumes tht it is desirable to assess and evaluate the impact of national 

development projects. 

♦ Project inputs and outputs are valued at shadow prices that reflect their true value to the 

national economy. (Shadow prices indicate the value of goods and services assuming no 

market distortions). 

♦ Direct effects on the economy (involving imports, exports, employment, foreign exchange, 

supply and demand, environment and ecological conditions, etc), as well as indirect 

effects (affecting the performance in other sectors, through reduced under utilisation of 

installed capacities, new investment initiatives, disbenefits associated with skills and 

entrepreneurship, etc.), are included in the analysis where significant. The effects may be 

economic benefits or costs, both tangible and intangible. 

♦ Accounts for social time preferences. (Social time preference reflects the weight that 

society attaches to the future as opposed to present consumption. For the social benefitcost 

analysis, time preferences are expressed by the social discount rate, which differs 


from the individual discount rate applied in private benefit-cost analysis). 

Parties that require more details on the COMFAR computational tool should refer to: UNIDO, 

“COMFAR 111 Expert Reference Manual,” Vienna, 1997. 

4.5 Post Investment Measures 

Post investment measures have three objectives. First, to ascertain whether the approved 

investors are doing what the application said they would do. Second, to provide feedback on 

fulfilling investment goals and aspirations. Third, to provide opportunity for closer co-operation 

between TIC and investors in resolving problems and fostering greater impact of investments. 

This section outlines statutory and non-statutory post investment measures. 

4.5.1 Statutory Measures 

The post investment statutory requirements are stated in the Tanzania Investment Act of 1997. 

These are: 

♦ 

♦ 

♦ 

A holder of an investment certificate is required to inform TIC in writing of the date 

of commencement of investment. TIC is expected to verify the commencement of 

operations. 

If a holder of investment certificate ceases to operate, the investor has to notify TIC in 

writing. 

A holder of an investment certificate is required to inform TIC when: 

- A person other than the person to whom the certificate was issued has succeeded to 

the investment; 

- The name or description of the business or enterprise is changed; or 

- There is an enlargement of or substantial variation in the investment. 

TIC is expected to verify above information and if satisfied amend the certificate. 

4.5.2 Other Follow-up Measures 

Arms-length tracking of approved investments is considered valuable, both as a way of knowing 

progress and creating a more friendly business environment. TIC is resolute in its efforts to 

establish close client relationship with all investors, and to build strong linkages with all other 

public and private parties involved in the investment process. The measures most useful in 

tracking post investment are as follows: 

1. 

Annual progress <strong>report</strong>s. A simple investor tracking system (ITS) should be developed 

to monitor progress. The tracking system could provide minimum information such as: 

Number of employees disaggregated by gender and local/foreign; production; exports/ 

imports; investment; taxes/royalties paid to government. All investors could complete the 


50

2. 

3. 

4. 

5. 

simple ITS and e-mail or fax it to TIC. 

Monitoring performance of commercial courts to ensure fair play for all businesses, 

domestic and foreign. This is an important investor support by TIC to ensure prompt and 

amicable resolution of investment conflicts. 

Organising and participating in investment forums. The forums are expected to provide 

opportunity for TIC to learn from investor successes and problems. In addition, participation 

in investment forums within the country and outside is important in promoting investment 

and facilitating investor access to important information concerning Tanzania’s unique 

investment opportunities. 

Facilitation of small and medium enterprise (SMEs). The aim is to stimulate and facilitate 

development of entrepreneurship skills and growth of domestic investors, especially 

SMEs. Establishment of TIC zonal offices in Mwanza and Mbeya to complement that in 

Moshi is an important step in this direction. TIC is also keen to work closely with the Better 

Regulation Unit and Local Government Authorities to advocate for the removal of legal, 

regulatory and administrative barriers that face local investors. 

Follow-up of investors. TIC needs to know if the investments being undertaken in the 

country are becoming beneficial to the investors and the nation as a whole. Through 

follow-up TIC can also learn if the investments being implemented are in accordance with 

investors’ original plans as channelled through TIC. To date investor follow-up by TIC has 

been inadequate. It is urged that TIC develop mechanisms for undertaking investor followup 

and further streamline current procedures. 

4.6 Recommendations for Addressing the Key Remaining Constraints 

To date, TIC has made commendable progress in investment promotion and facilitation. The 

achievements so far have been acknowledged worldwide and over 96 percent of the surveyed 

firms revealed that TIC is resolute in its commitment to turn Tanzania into a premier investment 

destination. The task ahead, however, is formidable. The investment climate must undergo 

further improvements – much beyond TIC’s overt control and direction. Nonetheless, the following 

recommendations may be considered by TIC as a way forward. 

4.6.1 Becoming more Pro-active in Promoting Local Investments 

TIC is urged to make more efforts at promoting domestic investment at all levels, particularly 

Small and Medium Enterprises (SMEs). TIC initiative to establish Zonal Offices in Moshi, 

Mwanza and Mbeya to stimulate domestic investment and entrepreneurship development is to 

be commended. In this regard, TIC is urged to develop plans and strategies for supporting SMEs. 

The strategies could include sensitisation seminars, entrepreneurship training, and facilitation of 

SMEs to secure. TIC could facilitate establishment of SMEs “seed” fund. In addition, TIC could 

act as matchmaker in facilitating technology and joint venture partnerships with foreign firms. To 


accomplish these noble tasks, TIC has to work closely with other stakeholders in the private sector 

and government departments. Since SMEs are plugged with insufficient supportive business 

environment, TIC has to work closely with the Better Regulation Unit and Local Government 

Authorities to ensure the removal of legal, regulatory and administrative barriers that constrain 

local business establishment and operation. 

4.6.2 Further Promotion of Foreign Investments 

Tanzania, like most African countries, suffers from negative image portrayed over decades. This 

makes the marketing of Tanzania as an attractive investment destination extremely important, 

albeit difficult task. Thus, as a way forward, TIC has to continue to improve the functioning of its 

“one-stop shop” for investment promotion and facilitation. Investors are generally attracted to 

countries where the regulatory and administrative requirements are not a hustle. Image building 

will require relentless networking efforts. In particular, networking with International investment 

consultants, participating in International investors Round Table Working Groups (IRT), funding 

investment missions abroad, using local and international media, through seminars and 

conferences, more active use of the TIC and National Websites, and investment publications of 

all sorts. All these efforts should sell Tanzania as a premier investment destination and insulate 

the country from earlier negative perceptions. 

4.6.3 Taking Advantage of Bilateral Investment Treaties 

Bilateral Investment Treaties (BITs) contribute to the establishment of a favourable investment 

climate between countries by providing assurances and guarantees to investors. Currently over 

158 nations are signatories to almost 1,900 treaties. TIC is urged to pursue this option because 

BITs play an important role in attracting investors’ attention to a country as well as building the 

necessary confidence that Tanzania is indeed an investment destination of choice. However, 

necessary precautions must be taken prior to signing any BIT treaty to ensure all provisions of 

such an agreement are beneficial to the country. 

4.6.4 Improving Prospects for Technology Transfer 

The survey conducted for this study showed that technology transfer is taking place, albeit 

slowly. The next steps might be for TIC in collaboration with key stakeholders such as Tanzania 

Commission for Science and Technology to develop guidelines for technology policy. In 

particular, TIC might make provision for attracting foreign investors that have high technology 

in sectors important for Tanzania’s development – especially in agriculture, biotechnology 

and agricultural processing industries. TIC could also assist in speeding up the establishment 

of industrial parks with high quality infrastructure to attract high technology investors. These 

industrial parks could be developed by private investors under appropriate support – especially 

in acquiring land and other infrastructure. 

Equally important is the urgent need for improving domestic human resources through training. 


52

TIC might work with relevant government authorities to place a training requirement on investors 

to raise the quality of the labour force within the firm or provide resources for training outside the 

firm. Another approach would be for TIC to continue improving its efforts in collecting, organising 

and disseminating information about technical issues, research findings, Tanzania’s comparative 

advantages and training facilities that can be used as springboards for technological transfer. 

Last, but not least, TIC could facilitate improvement of technology access for local enterprises, 

by providing information on foreign and local sources of technology. 

4.6.5 Improving the linkages between SMEs and existing investors. 

Forging linkages between the existing (large scale) investments with SMEs is important for the 

development of the latter but also in enhancing competitiveness of the former by cutting down costs 

of importing if supply can be sourced locally at similar standards. In this way, further development 

of SMEs to become seedbed for industrialisation can become effective. The ensuing question 

is how that linkage can be forged on. TIC can play a role by encouraging existing investors to 

contract out some of their supplies to SMEs. The existing investors can also undertake training 

of SMEs so as to improve the quality of their supplies to meet the required investor standards. 

Additionally, the Government could institute an investor-friendly policy that would encourage 

and forge such linkages especially through the design of investment incentives. The role of the 

government in forging these linkages is extremely important not only because of the perceived 

economy-wide and dynamic benefits to the nation, but also because the existing level of linkages 

between various key sectors of the economy is too low (see Kweka et al, 2003) to be left to the 

market forces. 

4.6.6 Facilitating the Creation of Employment 

The survey conducted for this study showed that both local and foreign investors were having 

significant impact on employment creation. Further efforts are now needed by TIC to facilitate 

even higher levels of employment creation. In particular, the following approaches could be 

useful: 

� 

� 

Targeting employment-intensive FDI through proactive market-friendly policies or selective 

intervention. In this regard, TIC can work with other government departments to attract 

FDI: 

- In industries that are labour intensive (e.g. garments), 

- In industries that have strong linkages to the local economy (e.g. Agro-processing 

industries), and 

- In particular regions with high unemployment or under employment. 

Working closely with NDC, EPZ and other stakeholders to facilitate the creation of industrial 

parks and export processing zones as a way of increasing employment. 


� 

Providing investment incentives linked to the number of jobs created by the firm. 

4.6.7 Protecting the Environment 

The survey conducted for this study showed that investors were concerned with environmental 

protection and most of them conducted environmental impact assessment prior to commencement 

of activities. TIC is encouraged to follow-up implementation of environmentally friendly investments 

by ensuring that regulations and standards are being upheld. Further, TIC can employ the following 

strategies with regard to environmental protection: 

� Conducting pre-establishment screening of investment on environmental grounds, 

� Requiring all local and foreign investors to provide their corporate environmental policy 

statements and records when making an investment application, 

� Requiring all investors, local and foreign to conduct an Environmental Impact Assessment, 

� Introducing or reforming existing policies to ensure that regulatory and market incentives 

encourage environmentally sound production and consumption, 

� Granting accelerated depreciation for clean technology capital goods, and 

� Encouraging investments in industries that involve improvements to the environment such 

as waste-to-energy plants, and construction of sanitary landfills. 

4.6.8 Facilitating and Servicing Existing Investors 

Over 64 percent of the surveyed firms indicated maintaining a link with TIC after becoming fully 

operational. TIC continued to offer after-investment services, especially in areas of investment 

disputes and acquisition of foreign experts. TIC is encouraged to continue facilitatiing and 

servicing businesses that are already established and operational. Further, TIC is urged to foster 

closer client relationships with all investors, and build strong linkages with all public and private 

stakeholders involved in the investment process. The use of the recently developed Workflow 

Management System should be valuable in monitoring investment development and proactively 

responding to investor’s problems and inquiries. 

4.6.9 Undertaking more regular follow-up of investors 

As noted earlier, the imperative of conducting regular post-approval follow-up of investors cannot 

be overemphasised. Such follow up will also act as a deterrent to unscrupulous investors who 

aim to abuse the incentive scheme. In addition, the follow up will also help to understand whether 

the investments being undertaken in the country are becoming beneficial to the nation as a whole 

and are in accordance with the objectives of TIC. 


54

5.0 in v e s T m e n T im pa C T an a ly s i s 

Tanzania has made progress towards facilitating and promoting domestic and foreign investment. 

As a result, the country is now more receptive to new ideas and better ways of doing business. 

New facilities are being built and the infrastructure that supports profitable investment is improving. 

Investments are creating jobs and opportunities for people to apply their talents and improve their 

situations. Availability of goods and services is improving both in urban and rural areas, impacting 

heavily on poverty reduction. Investments are also becoming the main source of tax revenue, 

contributing to public spending for health, education, water and other services. Thus, overall, 

investments being undertaken in Tanzania are laying solid foundation for economic growth and 

prosperity that should translate into poverty reduction over time. 

This chapter reviews the impact of investment to date. It is observed that progress is being 

made in raising growth, improving the country’s balance of payments, increasing employment, 

technology and entrepreneurial growth. However, the road to sustained higher levels of impact is 

long, requiring higher levels of investment inflows, pushing FDI and domestic investment to new 

frontiers, especially in the agriculture and small and medium enterprise sectors, and increasing 

the scale and scope of the benefits derived from the investments. 

5.1 Impact on Economic Growth 

One measure of the impact of investment is its effect on economic growth. Experience shows 

that there is a strong link between investment and economic growth. In particular, in the long run, 

economic growth is highly linked with investment in new capital and increases in productivity 

that is associated with investment in new technology, research and development (R&D) and 

training. 

What has been Tanzania’s experience? As discussed elsewhere in this <strong>report</strong> (Chapter 1 and 

2), Tanzania’s efforts to increase foreign and domestic investment began in mid 1980s, and for 

FDI-type investment largely after the establishment of TIC in 1997 (that is about 8 years ago). 

The period to date is too short to make a definitive assessment of the impact of investment on 

economic growth. First, the pay off of some investments may take several years to occur due to 

the nature of the investment (e.g. mining activity that may involve years of explorations). Second, 

economic growth is an outcome of various factors other than investment; hence disentangling its 

separate effect is not straightforward and may require an empirical study. Third, not all sectors 

receiving FDI are directly growth enhancing. Some FDI recipient sectors such as mining have 

very low employment generation capacity and also poor linkages with the rest of the economy. 

The so called “booming sectors” in Tanzania, and which have subsequently received substantial 

FDI, particularly Mining and Tourism, have mostly been criticized for massive capital drain – 

which exacerbate their (except for tourism) low level of linkage with the domestic economy. 

Finally, the net effect of FDI on growth also depends on the way they impact on existing Domestic 


investment. Some FDIs have resulted into undue competitive pressure on domestic investors, 

such that for those that could not cope exited. In addition, as many of the FDI were actualised 

through sale of the former State owned Enterprises (SoE), some FDI has led to net job losses – 

that is the number of jobs lost is higher than the number of jobs created (see detailed discussion 

on the employment impact of FDI and Privatisation, also see Mkenda, 2005). 

However, it is worth noting that the ratio of FDI flows to capital formation rose steadily, reaching 

an average of 14 percent between 1996-2004, and increased further to 17.6 percent between 

2000-2004 period. Assuming that all FDI is “GDP investment” (which is not necessarily the case), 

and every dollar of investment contributes equally to GDP growth, out of 4.2 percent and 5.6% 

of average annual growth rates in the respective periods, only about 0.6 and 1.0 percentage 

points would be due to FDI respectively. The point is, the level of FDI inflows, despite improving 

substantially in the last decade, may be too low to have a significant impact on growth. 

An interesting finding as shown by Figure 5.1 is that it is the trend in FDI part of the private 

investment that seems to impact on the GDP growth trend rather than the domestic direct 

investment (DDI). However, as further noted from the Figure, DDI and FDI have associated with 

Growth of GDP differently in different periods, i.e. pre and post 2000. Before 2000, FDI positively 

associated with GDP growth – but causal relationship between the two may be blurred so that 

it requires a fuller empirical analysis. At the same period, Domestic Investment (DDI) seems 

to have been declining as GDP grew – implying a negative relationship but one that can be 

explained presumably by two factors. First, increased FDI might have had a crowding out effect 

on DDI thereby demeaning its growth prospects. Second, the continuation of privatisation of 

State-owned enterprises (SoE) substantially decreased the public investment associated with 

such enterprises, some of which were divested into new foreign owners (FDI) 1 . That is, as the 

pace of reforms through privatisation increased, more public investments were divested, and a 

more favourable policy environment resulted that attracted further FDI and increased growth of 

the economy. However, since 2000 when most of the privatisation (of SoE) had been completed, 

association with GDP growth by FDI and DDI swapped; where DDI moved positively with growth 

and vice versa for FDI. These trends can be explained not only by the declining level of FDI 

inflow, but also the increase in the efficiency and level of private sector development. 

1 The share of public in total investment declined drastically from about 70% in 1989 to 

20% in 1995, but increased since then to about 40% in 2004. 


56

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Source :Own computation using data from TIC, National Accounts and Economic Surveys (various years) 

The conclusion we draw is that investments are having favourable impact on the economy. 

The period since Tanzania began to attract high FDI into the country may be too short to make 

definitive empirical assessment of the impact of investment on economic growth. However, it is 

useful to address the issue of investment payoff to GDP growth in broader context; that is, the 

investment policies being implemented in the country are laying solid foundations for attracting 

higher levels of foreign and domestic investment that are necessary to spur and sustain higher 

growth and poverty reduction in the future. 

5.2 Impact on Balance of Payments 

5.2.1 Impact on Exports/Imports 

Another measure of the impact of investment is its effects on increasing the country’s export 

earnings – and thus the capacity to import more goods and services. Experience shows that 

FDI plays a big role in revamping a country’s exports. Affiliates of foreign firms in Tanzania often 

create new trade flows with their parent companies or foreign suppliers and also export to third 

countries or back to the home country. Similarly, some domestic investors are engaged in exportoriented 

enterprises. 

Overall,Tanzania’s experience to date shows that there has been some impact on exports earnings 

emanating from investments. In recent years, Tanzania’s total exports earnings have risen to one 

half of imports compared with only a third a decade ago. There is a growing consensus that 

exports earnings from domestic and foreign investment is rising rapidly. Table 5.1 and Figure 5.2 

provide rough magnitudes of the contribution of investment in the country’s exports earnings. (The 


impact on export has been ‘massive’ considering the fact that, by 2005 about 50% of Tanzania’s 

exports were gold – a result of FDI into the mining sector) 


Table 5.1: Tanzania Exports (US $ Million) 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 

Total Exports (a) 439.3 519.4 682.9 764 753 588.5 543 663 851.4 979.9 1210.7 1473.1 1676.4 1736.0 2006.7 

o/w Investmentrelated 

(b) 

183.1 182.5 299.4 328 317 232.2 242 371 545.3 697 731 812 

b/a (%) 41.7 35.1 43.8 42.9 42.1 39.5 44.6 55.9 37.5 59.4 57.3 55.8 

�� 

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Source: Bank of Tanzania Economic and Operations Report (various years). 

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Source: Bank of Tanzania Economic and Operations Report (various years). 

As Table 5.1 shows, investment contribution to export earnings has risen from about 37.5 percent 

in 2001 to about 55.8 percent in 2004. The export earnings from investment have largely come 

from the mining sector, which received an average of 47 percent of all investments between 1993- 

2004. Next has been the manufacturing sector, which received an average of 16 percent of all 

investments between 1993-2004. Less than 7 percent of the investments have been channelled 

to agriculture – a sector that in the past accounted for over 50 percent of the country’s GDP and 

export earnings. The main reasons are: un conducive environment and lack of complementary 

public investment to attract domestic and foreign investments into agriculture. 

Analysis of sampled firms shows the trends in the import-export ratio is positive for agricultural 

investments, negative for manufacturing firms and mixed for mineral firms. Table 5.2 and Figure 

5.3 illustrate the trends in imports and exports for the agricultural sector. 

� 

58

Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms 2 

1999 2000 2001 2002 2003 2004 

Exports (Tshs, million) 2,778 5,524 5,159 5,732 5,586 7,420 

Imports (Tshs, million) 30 40 64 104 195 275 

Imports/Export (%) 1.1 0.7 1.2 1.8 3.5 3.7 

Source: ESRF Survey (2004) for TIC (It is doubtful whether this can be updated, unless the survey was 

done again sometimes recently) 

As Table 5.2 clearly illustrates, there is almost a negligible amount of imports going to the 

agricultural sector compared with revenue generated through exports. 

The conclusion we make here is that investments undertaken so far have had little impact on 

the agricultural sector. This may imply a need to develop more attractive policies, which will 

encourage greater investment into agriculture – especially through investment in irrigation 

agriculture, introducing modern livestock production systems and importing or manufacturing 

agricultural equipment and machinery locally. 

�� 

�� 

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Source: ESRF (2004) Survey for TIC 

The trends in export-import ratio for sampled manufacturing firms are shown in Table 5.3 and 

Figure 5.4. The picture that emerges in the manufacturing sector is completely different from that 

in the agricultural Sector. Exports to imports average 4.5 percent and as Figure 5.4 shows, the 

trend has remained almost the same since 1999. 

2 Seven sampled agricultural firms in Morogoro, Iringa, Kilimanjaro and Arusha Regions. 


�

The conclusion we arrive at is that the trade impact of investment is essentially negative for the 

manufacturing sector. This implies, amongst other things that policies have to be reviewed to 

encourage more exports of manufactured goods, especially those thatTanzania has a comparative 

advantage like garments and processed agro-products. 

Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms 3 


1999 2000 2001 2002 2003 2004 

Exports (Tshs, million) 29 29 32 38 47 53 

Imports (Tshs, million 620 693 705 879 979 1130 

Exports/Imports 4.6 4.1 4.5 4.3 4.8 4.7 

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Table 5.4 illustrates the trends in import-export ratio for selected mining firms. The data shows 

that investment in the mining sector is associated low imports and high exports. Overall, however, 

initial capital imports in the mineral sector are high but over time as the initial high investment 

bear fruit exports tend to rise. 

The conclusion we draw from the data is that investments in the mineral sector have a high potential 

for increasing the country’s export earnings. The mineral exports earning, however, appear to 

3 Seven sampled manufacturing firms in Kilimanjaro, Arusha, Mwanza, Morogoro, and 

Iringa Regions. 

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e low - in part due to under-declaration of production and smuggling through neighbouring 

countries. Further policy improvements are needed to entice investors in the mineral sector to 

contribute more to the export earnings of the country. (I am not sure if mineral exports in Tanzania 

are low – compared to any other sector – may be, exports are low compared to what should be 

the ‘optimal’ level – which has not been established anyway) 

Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms 4 

1999 2000 2001 2002 2003 2004 

Exports (Tshs, million) 28,563 44,565 68,340 41,297 35,524 39,680 

Imports (Tshs, million) 252 2 9 10 5 7 

Import-Export ratio 0.88 0.00 0.01 0.02 0.01 0.02 

5.2.2 Impact on the Balance of Payments 


Another measure of impact is whether the effect of investments is positive or negative on the 

country’s balance of payments. It is often argued that if external outflows exceed inflows, the 

impact on the balance of payments will be negative, and vice versa. 

What has been Tanzania’s experience? As discussed in Chapter 2, total FDI into Tanzania 

between 1995-2004 reached US$ 2,476.4 million compared with only US$ 2 million between 

1986-1991. This level of inflows of about US$ 309 per annum is changing the structure of external 

financial flows to Tanzania. While during the same period official development assistance (ODA) 

declined from an annual average of US$ 876 million between 1990-1994, to US$ 617 million 

between 1995-2003, the FDI inflows compensated for over half of the decline in ODA. During 

the former period (1990-94), profit remittances on FDI (US$ 151 million) exceeded FDI inflows 

(US$ 82 million). In subsequent years annual profit remittances have averaged US$ 170 million 

compared with inflows averaging US$ 309 – thus impacting positively on the county’s balance of 

payments. 

Despite observations made above, the impact is not conclusive. This is because it is not possible 

to make definitive conclusions on the impact of FDI on the balance of payments. The main reason 

is that data on the transactions of foreign affiliates and the indirect impact of FDI on consumers 

and domestic firms (such as those discussed earlier in this <strong>report</strong>) are not available countrywide. 

However, the contributions of foreign affiliates to export earnings and hard currency from tourism 

impact positively on the country’s balance of payments. 

4 Four sampled mining firms in Arusha, Mwanza, and Mara Regions. 


5.3 Investment Impact on Government Revenue 

Another measure of impact is the contribution of investments to government revenue. It is 

expected that once the incentives provided under the investor’s investment certificate have 

expired, enterprises be obliged to pay taxes. 

Data from Tanzania Revenue Authority (TRA) shows that since the removal of “tax holidays” in 

1997 (which were replaced by capital allowance incentive), investments have been contributing 

significantly to government revenue. Table 5.5 and Figure 5.5 provides a summary of income tax 

derived from investment-related enterprises. 

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Table 5.5: Investment-related Income tax 

Tshs, Million 

1998/99 171,674 

1999/00 224,541 

2000/01 210,353 

2001/02 170,403 

2002/03 201,818 

2003/04 317,340 

Source: Tanzania Revenue Authority (various years) 

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Source: Based on TRA Income Tax Databank 

As Table 5.5 and Figure 5.5 show income tax from TIC –related investments has been fairly 

stable, ranging between Tshs. 170,000 million to about Tshs. 200,000 million per year between 

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1998/99 and 2002/03, rising to over Tshs. 300,000 million in 2003/04. 

With regard to the impact of investment on income tax, the conclusion we arrive at is that except 

for 2003/04, when inflation is factored is, there has been relatively little increase in income tax 

revenue since 1999. In the future, however, if the country continues to maintain low inflation, 

investments should make greater real contribution in the form of income tax. 

Table 5.6 and Figure 5.6 provide a summary of investment-related Value Added Tax. Overall, 

the data shows that revenue from this source declined by nearly 40 percent from Tshs 232,908 

million in 1998/99 to just Tshs 176,450 million in 2003/04. Laxity in revenue collection coupled 

with increased tax exemptions is largely responsible for the decline. 

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Table 5.6: Investment-related Value-added tax 

Tshs. Million 

1998/99 232,908 

1999/00 240,242 

2000/01 210,925 

2001/02 115,756 

2002/03 145,176 

2003/04 176,450 


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With regard to investment contribution to value-added tax, there has been a decline between 

1998/99 and 2000/01 and a rebound after 2001/02, although previous levels have not been reached. 

The current trend, however, is encouraging and higher impact is expected in the future. 

Another important source of government revenue is derived from customs. Tanzania Revenue 

Authority estimates that nearly 55 percent of the custom revenue is investment related. Based on 

this estimate, Table 5.7 and Figure 5.7 provide an estimate of the amount of taxes obtained from 

investment-related custom revenue. The data shows that revenue from this source has increased 

by over 56 percent from Tshs. 222,803 million in 1998/99 to over Tshs. 516,940 million in 2003/04. 

Thus, with regard to customs revenue, the data clearly shows there has been positive and rising 

impact on this source of government budget resources. 

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Table 5.7: Investment-related revenue from Customs 

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Tshs, million 

1998/99 222,803 

1999/00 241,794 

2000/01 412,556 

2001/02 455,276 

2002/03 471,096 

2003/04 516,940 


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Therefore, the main conclusion is that as domestic and foreign investment increases, tax revenue 

also shows a tendency to rise. However, the prevalence of tax exemptions through the investment 

“Certificate of Incentives”, especially with regard to investments in the mining sector, tends to 

reduce this impact. The government is encouraged to revisit the current regime of investment 

incentives and offer concessions where there is a clear economic and social justification and 

where potential for abuse can be kept to a minimum. 

5.4 Impact of Investment on Savings Level 

5.4.1 Introduction 

Another measure of impact relates to the role of investment in assisting the country to overcome 

its domestic investment gap. The country’s low income and low savings rates have meant 

that there are limited resources within the national economy available for investment. Foreign 

investment can close the domestic gap by providing outside sources of financing for investment 

and economic growth. 

Theorypostulatesthatallcapital,whetherforeignorlocal,respondstoincentivesanddisincentives, 

to stability and instability in an economy and to other constraints to development. Foreign Direct 

Investment (FDI) however, seems to have an added advantage over local investment because 

of several reasons. First, it allows investors to increase their profits while diversifying the risk 

of their businesses outside their countries. Second, it is usually associated with the use of new 

skills technology and increase in competition within the recipient country, thus forcing national 

investors to improve their performance for their own survival. Third, it is believed that FDI is a 

reliable source of capital that is less volatile and non-debt accumulating and can therefore be 

expected to complement domestic savings and capital resources to finance investment where 

such resources are limited. Section 5.4.2 provides Tanzania’s experience. 

5.4.2 Trends in Government and Private Savings 

As Figure 5.8 shows, during the period of 1990-94, gross national savings was essentially negative. 

This negative saving was associated with the worsening of the recurrent budget position and 

cutbacks in donor assistance to the country. National savings turned around beginning in 1996 

to about 5 percent of GDP, partly because of increased domestic private savings since 1993 and 

achievement of positive government savings starting in 1997. 


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Source: Based on National Bureau of Statistics Data (various years). 

A close review of Figure 5.8 above shows that gross national savings recovered after 1996 to 

about 12 percent of GDP in 2004. Since savings performance is influenced by domestic policy and 

non-policy factors as well as foreign factors, it appears that increased Foreign Direct Investment 

(FDI) inflows during this period exerted influence on savings. In particular, during the period 1995 

–2000, Tanzania received a total of US$ 1 billion (Tshs 1,060 billion), compared with less than 

US$ 2 million (Tshs 2.2 billion) during 1986-1991. In addition, Wuyts (1997) has shown that there 

is some correlation between the growth of national savings and investment and high foreign 

aid inflows. During the analysis period after 1996, Tanzania received increased aid inflows from 

the donor community in part to support the country’s structural adjustment programme. The aid 

inflows have been pivotal in sustaining Tanzania’s positive real growth for the past decade to 

date. 

The conclusion we make here is that investments have played a role in reversing the country’s 

declining savings trend, especially after 1995. However, the savings level is still inadequate to 

foster higher rates of investment and growth. Section 5.4.3 examines what can be done to raise 

the savings level. 

5.4.3 Improving Savings Mobilisation 

Empirical evidence from the past two decades suggests that the best performing developing 

countries have had high rates of savings and investment. East Asian countries, which grew 

fastest, had rates averaging between 25 and 30 percent. Therefore, for Tanzania to achieve 

high growth improvements in public and private savings mobilisation are necessary. In particular, 

it is essential to boost private savings through easier access to financial institutions and better 


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financial intermediation. This should be expected to encourage households to deter consumption 

in favour of investment. In addition, financial intermediation should be progressively deepened 

and diversified to develop flexible money and capital markets. 

Equally important is the need to raise public savings by reducing budget deficits, raising tax 

revenue and controlling public expenditure. Recent experience shows that Tanzania Revenue 

Authority is making good progress in raising revenue. What is needed now is much stricter fiscal 

discipline to ensure that spending reflects investment and development priorities. 

5.5 Investment Performance and Profitability 

Another measure of impact relates to performance of the investments and their profitability. In 

economic environments where investments perform well make profits – the prime motive for most 

investments, some of the profits can be ploughed back into the investment and some channelled 

for Research and Development (R&D) – thus improving quality of supply. Additionally, good 

performing investments can register in the Dar es Salaam Stock Exchange, invite shares from 

the public, and if profitable pay dividends to its shareholders. 

What has been the experience of Tanzania? Most investments in Tanzania perform well compared 

with targets established by the firms as attested by the data from a few firms producing beer, 

cigarettes, and soft drinks and providing mobile phone services (Table 5.8). Investments in mobile 

phones have performed exceptionally well. Most other investments realise above 80% of their 

planned targets. The investments are not only performing well, but are also profitable as evident 

from the sample of four companies which are listed on the Dar es Salaam Stock Exchange (DSE) 

(see Table 5.9). Each of the companies shown in Table 5.9 is making profits, providing dividends 

to its shareholders, increasing market capitalisation and increasingly contributing to Government 

revenue. 

The conclusion we draw from these well-performing and profitable investments is that Tanzania 

has created a good enabling environment for profitable investments. As a consequence, investors 

and the country as a whole benefit – not only in terms of increased financial deepening of the 

economy but also in fostering financial market development and enhancing economic growth. 


Item 

Excise Duty- Local 

Table 5.8: Performance of Large Taxpayers (2003-2004) 5 

Estimate Actual 


2003/04 2004/05 

Performance 

(actual % of 

estimate) 

Estimate Actual 

Performance 

(actual % of 

estimate) 

Beer 49,785 44,587 90 50,538 52,052 103 

Cigarettes 31,725 29,886 94 32,923 32,648 99 

Soft Drinks 6,243 5,051 81 6,200 6,973 112 

Mobile Phone 5,601 6,989 125 1,214 9,731 801 

Others 2,799 2,688 96 14,177 4,261 30 

Sub-Total 96,152 89,201 93 105,052 105,666 101 

VAT-Local 

Beer 28,347 26,763 94 34,669 32,978 95 

Cigarettes 15,706 12,554 80 17,937 15,298 85 

Soft Drinks 3,021 3,035 100 - 3,134 100 

Others 74,707 73,628 99 135,456 115,731 85 

Stamp duty 407 522 128 530 1,297 245 

Sub-Total 122,188 116,501 95 188,592 168,437 89 

Corporate Taxes 42,317 68,755 162 79,214 106,736 135 

PAYE 43,362 50,582 117 106,904 116,230 109 

B.Skills & Dev.Levy 12,301 16,266 132 20,745 19,136 92 

Gaming Tax 248 187 75 248 268 108 

Rental Tax 3,728 4,502 121 5,659 2,998 53 

Other With/ng Taxes 24,580 24,645 100 36,123 23,961 66 

Sub-Total 126,537 164,936 130 248,894 269,328 108 

GRAND TOTAL 344,877 370,637 107 542,538 543,431 100 

Less Transfers to refunds A/C 6,785 5,255 77 5,758 6,309 110 

Net collection 338,092 365,382 108 536,781 537,123 100 

Source: Tanzania Revenue Authority (TRA) 

5 Large taxpayers include investments such as Breweries (beer), Tanzania Cigarettes 

Company, etc. The data above are for 188 large taxpayers as at April 2005. Recently the 

Government has increased the number to 278. 

68

Indicator 

Pre-tax profit 

(Tshs, billion) 

Dividend paid 


Closing price 

(Tshs) 

Taxes paid to 

Govt. (Tshs, 

billion) 

Market 

capitalisation 


Table 5.9: Profitability of some investments (2002-2004) 

2002 2003 2004 

TBL 2 TCC 3 SIMBA 4 DAHACO 5 TBL TCC SIMBA DAHACO TBL TCC SIMBA DAHACO 

34.2 22.1 7.6 1.9 47.6 24.7 9.9 3.3 57.5 25.6 5.3 3.2 

25.8 30.7 3.5 0.8 30.8 21.8 1.3 1.0 36.8 15.6 1.8 2.6 

1,400 1,725 450 NA 1,600 1,720 700 570 1,300 1,760 1,100 560 

69.3 41.2 3.0 0.7 88.9 44.4 3.5 1.0 97.8 50.5 2.8 1.0 

330 172.5 28.6 NA 472 172 43.9 20.5 395 176 59.8 20.1 

Source: Dar es Salaam Stock Exchange Statistics; Tanzania Revenue Authority (TRA). 

5.6 Impact on Employment Generation 


An important measure of the impact of investment is job creation. Investment plays a key role in 

expanding jobs and offering opportunities for young people. This is essential not only for raising 

incomes and reducing poverty, but also more importantly for creating a more inclusive, balanced 

and peaceful country. 

What has been Tanzania’s experience? The assessment conducted during this study revealed 

that in Tanzania the qualitative effects of investment on employment has taken place through 

several routes: 

♦ 

♦ 

Directly by setting up new foreign affiliates or expanding existing affiliates. A study by 

UNIDO (2003) shows that most FDI in Tanzania are of three categories – new Greenfield 

(51%), joint venture (35%) and merger or acquisition (14%). The field study undertaken 

for this study shows that Greenfield-type investments generate the largest impact on 

employment. 

Indirectly by stimulating additional employment in suppliers and distributors (depending on 

the intensity of local linkages). For example, Kahama Mining Corporation estimates that 

about 7,500 indirect jobs will be created in Shinyanga region due to its mining operations. 

This is in part due to revamped activities supported by the company but not directly related 

to mining such as its construction of 87.5 kilometre road, building a power line, construction 


♦ 

♦ 

of water pipe line, striving local input suppliers, and the like. Other examples are outlined 

in Section 4.2.3. 

In the medium term, employment can also rise through multiplier effects from the new 

income generated by FDI or local investments or through increased demand stimulated by 

improved efficiency and restructuring of competing firms. This is particularly evident in the 

liberalised banking and financial sector – especially CRDB, Standard Chartered, Stanbic 

and Akiba Commercial Bank. 

Where FDI takes the form of merger or acquisition as observed in bullet one above, the 

investment can still increase employment by restructuring firms that might other wise have 

become sick or dysfunctional such as the divested parastatals (MWATEX, Amboni Sisal 

Farms, Kilombero Sugar and Sao Hill). 

The qualitative impacts of FDI on employment are: 

♦ Wages : Foreign affiliates generally pay higher wages than domestic firms do in similar 

activities. The difference is more marked in industries that demand higher levels of 

skills, technology and marketing and in export-oriented activities that need to ensure 

consistent quality and timely delivery (Standard Chartered Bank, Citibank, Wonder Foods, 

Abercrombie & Kent Tanzania, etc). 

♦ 

♦ 

♦ 

Job security: Foreign affiliates tend to offer greater job security because of their size, 

competitive strength and need for a stable workforce (SONGAS, KTM, and Aluminium 

Africa). However, “footloose” investment attracted by low wages may move to other 

countries so jobs may be insecure over the medium term (defunct Trust Bank and 

Greenland Bank). 

Working conditions: In foreign affiliates working conditions are generally better than in 

local firms. In particular, large and visible Transnational National Corporations (TNCs) tend 

to comply with local and international standards and even with the labour standards in their 

home countries (Unilever Tea Tanzania). 

Skills: FDI often has to upgrade employee skills by investing in training so as to meet 

their quality standards. Sometimes TNCs react to the availability of skills by raising the 

technological content of their investments, contributing to further learning and skill creation. 

This subject is discussed further in Section 6.5. 

5.6.2 Investment and employment creation 

Experience shows that economic growth as measured by real GDP growth per capita is necessary 

butnotsufficientconditionforachievingimprovementsinhumanwell-beingorreducingwidespread 

poverty. Investments that lead to employment generation are essential for reducing poverty as 

depicted below. 


70

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Taking the Investments approved by TIC as a unit of analysis, we find that if all investments 

approved by the investment promotion centre (foreign and local) were carried out to completion 

between 1990 and 2004, over 463,703 new jobs would have been created in the economy. This 

is an average of about 33,122 new jobs annually for a period of 14 years (Table 5.10). When 

compared with the existing demand for formal employment, this figure is negligible. The Poverty 

and Human Development Report (2003) and the SME policy (2002) <strong>report</strong> that about 700,000 

new job seekers enter the labour market annually in search of employment. About 500,000 of 

these are school leavers with few employable skills. 

The public sector employs about 40,000 new job seekers annually. The rest is expected to be 

employed by the private sector. This means that projects approved by TIC on the whole can be 

expected to generate about 5 percent of the country’s annual employment requirements. This 

in essence is an optimistic outlook in part because the actual jobs created by all investments 

approved by TIC are lower than the estimated potential out-turn because some approved 

investment projects either never started or started but ended up employing fewer personnel than 

it had been projected. 

Table 5.10: Actual Investment Created Employment by Sector and Categorisation for 

Mainland Tanzania (2001-2003) 

Sector Gender 

Arusha 

Dar es 

Salaam 

Iringa 

Foreigners Sub -Total Tanzanians Sub -Total 

Management 

Non-Management 


Management 

Skilled Other Total Skilled Other Total 

Grand 

-Total 

Female 46 33 0 79 136 2,177 2,775 5,088 5,167 

Male 196 89 6 291 457 3,263 4,058 7,778 8,069 

Sub -Total 242 122 6 370 593 5,440 6,833 12,866 13,236 

Female 85 32 4 121 520 3,566 5,109 9,195 9,316 

Male 925 524 24 1473 2155 13,611 16,633 32,399 33,872 

Sub -Total 1,010 556 28 1594 2,675 17,177 21,742 41,594 43,188 

Female 2 0 0 2 29 125 3,966 4,120 4,122 

Male 16 1 0 17 160 714 5,023 5,897 5,914 

Sub -Total 18 1 0 19 189 839 8,989 10,017 10,036 


Sector Gender 

Kagera 

Kigoma 

Kilimanjaro 

Mara 

Mbeya 

Morogoro 

Mwanza 

Pwani 

Ruvuma 


Management 




Management 


Female 0 0 0 0 6 35 35 76 76 


-Total 

Male 7 2 0 9 50 96 104 250 259 

Sub -Total 7 2 0 9 56 131 139 326 335 

Female 0 0 0 0 0 8 6 14 14 

Male 1 0 0 1 5 123 25 153 154 

Sub -Total 1 0 0 1 5 131 31 167 168 

Female 27 1 0 28 36 1,131 760 1,927 1,955 

Male 61 3 0 64 175 2,199 2,191 4,565 4,629 

Sub -Total 88 4 0 92 211 3,330 2,951 6,492 6,584 

Female 0 0 0 0 8 80 124 212 212 

Male 24 20 2 46 41 267 489 797 843 

Sub -Total 24 20 2 46 49 347 613 1,009 1,055 

Female 0 0 0 0 4 184 316 504 504 

Male 14 2 0 16 77 528 642 1,247 1,263 

Sub -Total 14 2 0 16 81 712 958 1,751 1,767 

Female 2 0 0 2 22 230 401 653 655 

Male 48 13 4 65 206 1,170 3,435 4,811 4,876 

Sub -Total 50 13 4 67 228 1,400 3,836 5,464 5,531 

Female 9 0 0 9 111 673 549 1,333 1,342 

Male 104 95 2 201 391 1,955 2,371 4,717 4,918 

Sub -Total 113 95 2 210 502 2,628 2,920 6,050 6,260 

Female 4 0 0 4 9 76 45 130 134 

Male 15 0 0 15 12 152 61 225 240 

Sub -Total 19 0 0 19 21 228 106 355 374 

Female 0 0 0 0 1 16 35 52 52 

Male 1 0 0 1 8 54 36 98 99 

Sub -Total 1 0 0 1 9 70 71 150 151 

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Sector Gender 

Shinyanga 

Tanga 


Management 



Management 



-Total 

Female 6 0 0 6 14 159 180 353 359 

Male 201 1 0 202 112 1,199 495 1,806 2,008 

Sub -Total 207 1 0 208 126 1,358 675 2,159 2,367 

Female 3 0 0 3 9 145 1,895 2,049 2,052 

Male 44 9 0 53 158 1,422 3,674 5,254 5,307 

Sub -Total 47 9 0 56 167 1,567 5,569 7,303 7,359 

Total 1,841 825 42 2708 4,912 35,358 55,433 95,703 98,411 

Source: Tanzania Investment Centre 

One explanation for the low contribution to employment generation is that major investment 

projects in Tanzania have favoured capital-intensive techniques, especially in the mining, 

construction and banking sectors. Figure 5.9 illustrates employment generation by industrial 

category for the period of 2001-2003. The data shows that mining and finance with the highest 

capital intensity have the lowest employment generation – about 1 percent each. Agriculture 

and fishing have the highest employment effect although less than 7 percent of all investments 

have gone to these sectors. Field assessment conducted for this study provides data to support 

this assertion. Actual direct employment in mineral related investments were as follows: Mobela 

Gems (7), Sarajevo Mining (140), Papa King S. Mollel Mining (150), Gems and Rock Ventures 

(130), Tanzanite Africa (250), TANCAN Mining (81), Major Drilling (13), and Meremeta Mining 

(230). In contrast, agricultural related investments provided a greater number of employment 

opportunities: Unilever Tea Tanzania (5,330), Kilombero Sugar (4,377), Tchibo Estate (1,550), 

DIMON Morogoro Tobacco (780), APC Lyamungo Coffee (400) and SAO Hill (360). On average, 

manufacturing and services sectors were next from agriculture in terms of employment generation: 

Sun flag (2,100), Nyanza Bottling (442), Impala Hotel (192), Interchem pharmacy (171), Sunkist 

(167), Morogoro Plastics (98), and Print care (23). 

Table 5.11 shows trends in total employment for sampled firms employing over 100 workers. 


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Source: Based on Tanzania Investment Centre Data Bank. 

Table 5.11: Trends in Total Actual Employment of Selected Firms 

Firm 1999 2000 2001 2002 2003 Average 

% change 

from 1999 

UTT M 25 35 36 37 48 36 44.8 

F 5,875 4,465 5,564 5,616 4,933 5,291 (9.9) 

Foreign 2 2 2 2 2 2 - 

ST M 600 640 790 855 1,154 808 34.6 

F 1,100 1,210 1,210 1,245 1,246 1,202 9.3 

Foreign 30 35 40 45 50 40 33.3 

DIMON M 37 67 68 68 69 62 67.0 

F 443 403 772 542 821 596 34.6 

Foreign 5 5 5 5 5 5 - 

NBC M 582 570 484 444 427 501 (13.8) 

F 12 12 10 10 9 11 (11.7) 

Foreign 18 18 16 16 15 17 (7.8) 

TE M - 70 100 350 750 254 262.9 

F - 80 150 500 800 306 282.5 

Foreign - 3 3 3 3 2 - 


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Firm 1999 2000 2001 2002 2003 Average 

% change 

from 1999 

SHI M 360 366 270 350 285 326 (9.4) 

F 52 54 46 58 47 51 (1.2) 

Foreign 2 2 2 3 2 2 - 

TPM M 225 276 209 112 142 193 (14.3) 

F 192 226 184 153 133 178 (7.5) 

Foreign 2 2 4 4 2 3 40.0 

APC M 40 100 100 100 200 108 170.0 

F 60 100 150 150 100 112 86.7 

Foreign 1 1 1 1 1 1 - 

PKM M 130 120 140 100 150 128 (1.5) 

F - - - - - - 

Foreign - - - - - - 

TATEPA M 45 55 65 90 104 72 59.6 

F 55 65 70 85 96 74 34.9 

Foreign 2 2 2 3 3 2 - 


UTT = Unilever Tea Tanzania Ltd. 

ST = Sunflag Tanzania Ltd 

DIMON = DIMON Morogoro Tobacco Processors Ltd 

NBC = Nyanza Bottling Company 

TE = Tchibo Coffee Estate 

SHI = Sao Hill Industries Ltd. 

TPM = TPM(1998) Ltd 

APC = APC Lyamungo Coffee Estate 

PKM = Papa King S. Mollel 

Overall, as Table 5.11 illustrates, the trend in total actual employment during the past five years has 

been positive. However, there are marked inter-year variations and gender specific employment 

trends. For example, Unilever Tea Tanzania reduced female employment by nearly 10 percent 

(584 workers) but increased male employment by about 45 percent (11 workers) – signifying a 

large net reduction in employment. Similarly, TPM (1998) reduced male employment by 14.3 

percent (32 workers) and by 7.5 percent for females (14 workers). However, for most other firms, 

overall total employment shows an upward trend. As Table 5.11 illustrates, foreign employees 

form an insignificant number (typically less than 5 in most firms) within the total employment 

framework. However, the foreign employees play a critical role in training local staff, management 

and technological operation of the enterprises. 


The conclusion we make from the analysis above is that although jobs being created through 

investments are fewer than national requirements, the situation would have been worse without 

these investments. Continuing to entice more investments through making further improvements 

in the investment climate, undertaking more active promotion and facilitation and providing 

specific incentives for luring investments in agriculture and industry should create more jobs in 

the economy. 

5.6.3 Employment Impacts through Linkages with the Rest of the Economy 

Another measure of impact is fostering linkages with the rest of the economy. These linkages 

are important because apart from creating jobs also help in the growth of small and medium 

enterprises (SMEs). 

Tanzania’s experience shows that there are investments that appear to create jobs, both directly 

and indirectly, through forward and backward linkages to the economy. For example, Kahama 

Mining Corporation employs high-tech mining techniques but during construction it employed over 

2,000 people. Currently the mine employs 900 local personnel and 200 expatriates. In addition, 

the mine provides indirect employment to over 600 people as contractors for various services. 

Other job-related activities include efforts by the company to improve community roads, water 

systems, electricity and thriving small businesses surrounding the mine. 

Another example is the US$ 2.6 million investment by AEF Horticulture Farms & Export Ltd. in 

Arusha. This company, which grows flowers for export, employs over 200 people but through 

training and demonstration effects to the local community, over 230 farmers are now undertaking 

the flower business. 

Other field examples of employment creation through input supply linkages are: 760 direct and 

1,400 indirect employees who supply tobacco to DIMON Morogoro Tobacco Processors 85 direct 

and 2,500 indirect employees who grow and supply pyrethrum flowers to Tanzania Pyrethrum 

Company 360 direct and 800 indirect employees who support Sao Hill on a temporary employment 

basis its tree plantations. 5,330 direct and 1,500 indirect employees who supply tealeaves to 

Unilever Tea Tanzania, and 192 direct, and 87 indirect employees who supply various inputs such 

as meat and fruits vegetables to Impala Hotel. 

The conclusion we make is that the question of promoting linkages in the economy is gaining 

momentum. In the case of mining, for instance, it has been pointed out that the Tanzanian business 

community and government officials have expressed the wish to improve the management of the 

linkages between large and small scale miners with a view to generating more jobs, transferring 

technology and realising balanced sustainable growth. The Mining Trust Fund could have been 

used to the benefit of small-scale mining. 


76

Analysing and promoting supply chains is one way of maximising value addition, employment 

and technology transfer. For instance, the mining sector can be induced to forge linkages with 

the manufacturing sector with a view to enhancing value addition through cutting lapidary, setting 

and creating ornaments. In addition, the mining sector has the potential of developing basic 

industries for fabrication of parts used for mining equipment and machinery. Incentives should 

be designed to attract investments in linkages and value adding activities. 

5.7 Impact on Human Resources Development 


Another measure of impact is the effect of investments on fostering skills development. Skill 

inadequacies and shortages have been for a long time a development challenge of the country 

(ESRF, 2002; UNCTAD, 2001; World Bank, 2001; Wangwe, 1995). Although literacy rates have 

recorded slight improvement from an estimated 67 percent in 1999 to 82 percent in 2003, much 

remains to be done (URT, 2003). Some other studies on Tanzanian experience are less optimistic 

(URT, 2003) unless more efforts are made to ensure that the education system generates 

competencies required in the current labour market and globalisation. 

With skill shortage limiting productivity growth, FDI may be looked upon, at least in the short and 

medium term, as a prime source of human capital development and new technology diffusion 

for the country. Jenkins and Thomas (2002) for instance, posits that if technical, entrepreneurial 

and managerial skills are scarce in a country, training of local personnel by foreign subsidiaries 

established in the country could bring about an important diffusion of these skills. These would 

only help in multiplying jobs and raising wages but also in encouraging investment in human 

capital through the transfer of skills and knowledge to the local workforce. Section 5.7.2 examines 

Tanzania’s experience in fostering skills development. 

5.7.2 Development of Human Resources 

In this section we provide several examples where investments undertaken in Tanzania are 

fostering human resource development. First, we examine the banking sector. All local and foreign 

banks have training programs to upgrade skills of their workforce. These include: Citibank, Stanbic, 

Standard Chartered, CRDB, NBC, Barclays, Kenya Commercial, Postal Bank, International Bank 

of Malaysia, to mention but a few. The strategy of all the banks involves training in-house, internal 

mentoring including use of visiting personnel expatriates, in-country and international training to 

build a pool of professionals with international exposure. Some banks (CRDB, Stanbic, Postal Bank) 

provide financial assistance (pays for tuition) and encourages its staff to undertake professional 

banking courses on part-time basis from the Tanzania Institute of Bankers (TIOB). 

Mining is another sector where investments are having valuable impact on human resource 


development. All large mining companies have training of their staff. These include: Kahama 

Mining, Geita, Golden Pride,Africa Mashariki, Mwadui, to mention, but a few. Skills being imparted 

relate to geology, mining, electrical and mechanical engineering related to mining operations, 

underground mining techniques and safety measures, processing, finance and management. 

For example, Kahama Mines has already spent over US$ 6.3 million to conduct on-job training 

for its 900 local staff. TANCAN Mining Company spent Tshs. 5 million between 2002 and 2004 

to train 43 workers. In 2001 to 2003 Gem & Rock Ventures Company incurred Tshs 1.4 million in 

upgrading skills of its professional workers. 

The transfer of skills and knowledge is also evident in the manufacturing Sector. For example, 

Wonder Foods Tanzania Ltd, a subsidiary of cowbell International (UK) has offered training to its 

staff in food processing, blending, packaging and distribution. The company conducts in-house 

training and also sends its technical staff for advanced training abroad. Sun flag Tanzania – an 

FDI investment that is one of the largest vertically integrated textile mills in East Africa, conducts 

in-house and external training for its 2,450 workers. Workforce skills have been upgraded in 

the areas of spinning, knitting and dyeing. This company, which exports quality garments, yarn, 

woven and knitted fabric to the USA, European Union and South Africa, spends over Tshs 17 

million annually in training of its staff. TPM (1998) Limited, a local company that has been 

manufacturing gunny bags since 1998 also trains its staff to upgrade skills. During the past 

two years the company spent Tshs 9 million to upgrade skills of its 100 workers. Another local 

company, Dabaga Vegetables and Food Canning Company also trains its 18 employees at an 

annual cost of Tshs 3.5 million to upgrade skills and improve the quality of its products. The 

Company has 3 expatriates that provides regular in-house training to its staff. 

In agricultural-related investments both local and foreign investors also provide training and 

skills development to employees. For example, DIMON – an FDI that has been processing 

tobacco for the export market since 1997 has incurred Tshs 20 million to upgrade the skills 

of its 30 professional workers. An additional Tshs 60 million has been spent to train 200 semiskilled 

workers in order to raise their productivity. Tanzania Pyrethrum Processing and Marketing 

Company – an FDI that started operations in Tanzania in 1998, also trains its staff to improve 

the quality of its three products: pyrethrum crude extract, pyrethrum powder, and pyrethrum dry 

marc. The company has spent Tshs 37 million to upgrade skills of its 60 professional staff and 

an additional Tshs 43 million to upgrade the skills of its semi-skilled and unskilled workers. SAO 

Hill, a company that was divested to foreign ownership in 2000, also trains in-house its 360 

employees to improve the quality of its timber and pole products. The company has 3 expatriate 

staff that conducts the training at about an annual cost of Tshs 25 million. Another example is 

Unilever Tea Tanzania Ltd, an FDI that produces tea for the domestic and export market. The 

company has 2 expatriate female staff that conducts in-house training for over 5,330 employees, 

of whom 85 percent are women. Similarly, Tchibo Estate, an FDI that has been producing coffee 

for the export market since 2000, provides in-house training. In 2003, the company incurred Tshs 


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10.5 million to upgrade skills of 34 employees. Vaso Agro Ventures, a joint venture between local 

and foreign investors (25:75% share split) has expatriate staffs that offer training to over 100 

employees at about Tshs 5 million per year. 

Based on the above experiential findings, the conclusion we draw is that there are no doubts 

that human skill development is taking place and being undertaken by both domestic and foreign 

investors in Tanzania. Incentives should thus be developed to entice investors to undertake more 

human skills development to their employees. 

5.8 Impact of Investment on Technology Transfer 


An important measure of impact is the transfer of technology. Tanzania, like other developing 

countries, contributes little to modern science and technology. A study by Mohamed (2000) 

show that Less Developing Countries account for only 4 percent of the world’s application and 

development of modern science and technology. Tanzania, in recognition of the importance 

of science and technology established the “National Science and Technology Policy” in 1986, 

which was later revised in 1996. Over the past four decades, Tanzania established a number of 

institutions aimed at improving the country’s technological development. The main ones are: i) 

Tanzania National Scientific Research Council (TNSRC) in 1969. ii) Tanzania Commission for 

Science and Technology (COSTECH) in 1986 to determine “Research and Development (R&D) 

priorities. iii) Centre for the Development and Transfer of Technology (CDTT) for monitoring and 

regulating technological flows. iv) Tanzania Industrial Research and Development Organisation 

(TIRDO) in 1979 to monitor services related to technology. v) Small Industrial Development 

Organisation (SIDO) to provide the institutional support including marketing skill information. vi) 

Institute of Production Innovation (IPI) for production-related innovations. All these ins-titutions 

and organisations have played some role in enhancing Tanzania’s technological base although 

there are few tangible achievements to date. However, Foreign Direct Investment (FDI) appears 

to have had a greater impact on fostering the country’s technological capacity, although the 

country has a long way to go. 

FDI is greatly accredited as a source of new technologies, knowledge and innovation and other 

intangible assets to capital deficient developing countries. However, as Tambunan (2003) points 

out, the ultimate impact of investment in the economy depends not only on the performance of 

foreign firms, but also on the diffusion of new technologies, innovations, knowledge, new best 

practices and other intangible assets from FDI to local firms throughout the country. In principle 

the diffusion of all these intangible assets should lead to increased efficiency and productivity per 

worker. 

In general, best practices in investment can be transferred in several ways, including: 


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Purchase of exports from developed countries, 

Importation of capital goods embodying improved technology, 

Technology licensing by developed countries to firms in developing countries thus allowing 

acquisition of knowledge, and 

Employment of expatriates from developed countries that would transmit knowledge to 

developing countries. 

Apart from the above channels, experience shows that FDI remains the most effective mode 

of transferring knowledge and best practices to developing countries. This is because FDI 

embodies and integrates technological elements from various methods (Tambunan op cit, Klein 

et al 2000). Similarly, Borenzstein et al (1998) in a test of the effect of FDI on economic growth 

using cross country regression framework found that FDI is an important vehicle for the transfer 

of technology. The results show that FDI contributes relatively more to economic growth than 

domestic investment but the result holds only when there is some threshold of stock of human 

capital. 

Technology transfer and diffusion between local and foreign firms works through subcontracting 

arrangementsbetweenforeignandlocalfirms,throughemployersponsoredandotherprofessional 

training locally and abroad and through between job movements of experienced personnel. Batra 

and Tan (2000) in a study on inter firm production linkages and productivity growth in Malaysia 

found that local firms that entered into subcontracting arrangements with their foreign counterparts 

became more efficient. In an earlier study Batra and Tan (1997) established found that firms that 

invest in training and upgrading of their employees’ skills and in new technology grow faster 

than those, which do not. Investments made in skill development and technology in their study 

explains much of the difference in productivity between local and foreign firms. Foreign firms 

turned out to be more efficient compared with their local counterparts by virtue of the investment 

undertaken in skill development and new technology compared with local firms. 

5.8.2 Tanzania’ Experience 

In the particular case of Tanzania, technology transfer, both tangible and intangible has been 

weak despite many support institutions as discussed above. Before 1990, Tanzania’s efforts 

aimed at improving her low technological base was hampered by its almost closed nature of the 

socialist economy (UNCTAD, 2001). Significant liberalisation of the economy thereafter triggered 

considerable private domestic and foreign investment that has opened doors to acquisition of 

modern technology. This section will provide illustrations on lessons learned in new working 

styles and culture, transfer of technology and technical/managerial skills. 

5.8.3 Transferring Business Skills and Working Styles 

In the past, customer-focus was virtually absent. Public enterprise workers were oblivious to 


80

customers. Civil servants were no exception. Files went missing without explanation. Long queues 

symbolised pervasive inefficiencies. Then mid-eighties things began to change. Economy-wide 

reforms ushered in competition. Investors from South Africa, Mauritius, Malaysia, Britain, China, 

India, to mention, but a few came in. Walk into a Shoprite (Supermarket), or Nandos (Restaurant) 

or Woolworth (Clothes), young women and men greet customers with a smile, fill their orders with 

dispatch, and say “thank you” as they receive payment. This business style has spread quickly to 

almost all sectors of the economy. Walk into an Indian or indigenous Tanzanian shop and smiles 

greet you – others even offer a soft drink while the customer waits for service. Government 

executive agencies providing public services such as the Business Licensing Agency (BRELA), 

Tanzania Civil Aviation Authority, to mention a few, are now customer-focused. Civil servants are 

also emulating these business skills and offering better services. Foreign investment is paving 

way for a new culture of hard work, customer focus and new ways of doing business using stateof-the 

art technology – based especially on computers and telecommunication linkages. 

5.8.4 Examples of Technology Transfer in Selected Sectors 

In the mining sector there are a number of examples related to technology transfer. For 

example, between 2000 and 2003, Afgem (a South African Mining Company) invested about 

US$ 20 million in Tanzanite fields in Merelani. The company managed to pioneer a branding 

and certification process for its germ quality Tanzanite production. Other mining companies are 

expected to emulate this example by adding value to minerals produced through processing 

in-country and branding their products. Another example relates to leasing mining equipment. 

Dalnick Metal Ltd leases mining equipment to small and medium scale miners. This technology, 

apart from increasing productivity, it has facilitated the manufacture of spare parts within the 

country – thus enhancing technological skills in the mining sector. Mobela Gems Limited provides 

another example of technological transfer. The joint venture between local and foreign investors 

(50:50% share split) started operations in 1999 cutting, polishing, shaping and selling gemstones. 

The foreign partners have managed to train local employees in gemstone processing, and the 

company now exports quality gemstones to India, North Korea, USA and Thailand. 

In the cement business quality has improved through the injection of foreign investment 

partnerships. Wazo Hill cement factory has eliminated the dust that in the past polluted the 

environment. Tanga Cement invested US$ 12 million for improving operational efficiency, 

reducing costs and maintaining high and consistent product quality. In addition, the company 

has introduced “just-in-time” production systems that are more efficient. Mbeya Cement has also 

improved product quality to remain competitive. 

In the manufacturing sector, Seaunguk Trading Company’s processing and fruit-canning plant is 

exemplary. The company processes and cans fruit for export and the local market. The company 

has transferred fruit production technology to small-scale farmers who now supply fruit of a 

uniform size and quality. Similarly there appears to be considerable spill over of tyre retreading 


activities ushered in by Tredcor (T) Ltd. The production of sign boards and outdoor advertising 

facilities pioneered by Afrigavix Ltd. and Global Outdoor Systems Ltd appear to be emulated by 

many other local producers. Linlan (T) Ltd has introduced production of confectioneries, sweets 

and cool drink powder technology in Tanzania that has a high chance of being emulated by others 

in this category. 

Although less than 7 percent of FDI has gone into agriculture, the investment made so far 

appears to impact on agricultural development through technological transfer. For example, the 

International Chemical Products Ltd that acquired Mufindi Pyrethrum Extraction Plant in 1997 has 

introduced new technology in pyrethrum flower production and facilitated training of local staff to 

improve quality. Another example is Wonder Foods Tanzania Ltd. The company established a 

new agro-processing plant to pack, market and distribute milk power in the country. In order 

to ensure good quality and hygienic conditions, the company has helped local milk producers 

acquire the technology for raising high producing milk cows and equipment for hygienic sanitary 

storage and transportation. In 1998, the company expanded its operations into tea processing, 

blending, packaging and distribution. Small-scale farmers cultivating tea have benefited from 

extension services provided by this company. Similarly, Morogoro small-scale farmers cultivating 

tobacco have benefited from new cultivation techniques extended by Golden Leaf Growers Co. 

Ltd that grows flue-cured tobacco. Vaso Agro Ventures, a joint venture between local and foreign 

investors (25:75% share split) started operations in 2003 growing flowers, cutting flowers and 

growing fresh beans, largely for the export market. The company conducts seminars to out 

growers on vegetable production, growing flowers and simple bookkeeping and accounting. The 

simple technology transferred to outgrowers has enabled the producers to use less water in 

production and supply to the company of uniform quality products that are competitive in the 

international market. 

Perhaps the largest impact has been in telecommunication. Since it’s establishment in Tanzania, 

Vodacom – a mobile operator company, has invested about US$142 million. This company, 

together with Celtel, Mobitel and TTCL have revolutionised telecommunication linkages in the 

country. Apart from facilitating communication that has impacted positively on business efficiency, 

small local entrepreneurs have sprung up to provide repair, recharge and hook-up services. 

5.8.5 Technology Transfer-through Imports of Capital Goods 

Another route through which investments can foster technology transfer is through imports of 

capital goods. Studies by Damijan et al, 2001; Eaton and Kortum 1996; Olarreaga and Schiff 2001 

have identified a positive relationship between imports of capital goods and related technology 

diffusion and productivity growth. According to UNCTAD (2000), Tanzania has benefited from 

capital imports with technology-embodying products (machinery, equipment and tools). Figure 

5.10 provides broad categories of imports according to Bank of Tanzania classification. Overall, 

capital goods imports have averaged over US$ 500 million per year, slightly higher than 

intermediate and consumer goods. 


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Source: Based on Bank of Tanzania Economic and Operations Reports (various years). 

The conclusion we make here is that investments are fostering the transfer of technology, albeit 

slowly. Further incentives are needed to entice more transfer of technology especially through 

FDI investors training SMEs to supply to them inputs that meet requirements of quality and 

standards. The Government, through its institutions such as SIDO should also become more 

active in upgrading the capacity of SMEs to supply inputs to FDIs through training in skills 

development. 

5.9 Impact of Investment on Entrepreneurial Growth 

5.9.1 Entrepreneurship Growth 

Another measure of investment impact relates to fostering entrepreneurship growth. 

Entrepreneurship – or attitudes toward innovation, pro-activity, and risk taking plays a key role 

in fostering investment and economic growth. The literature on the impact of investment on 

entrepreneurship growth is limited (UNCTAD 2004). Rodriquez-Clare (1996) for example shows 

that through networks and linkages with local firms, foreign direct investments (FDI) can lead to 

considerable growth in a country’s entrepreneurship. The study illustrates how FDI spillovers 

from production networks and linkages may work: affiliates increase a host country’s access 

to specialised varieties of intermediate inputs and technologies, the improved knowledge and 

skills raises productivity of domestic producers and in some cases leads to growth of a country’s 

number of entrepreneurs. The UNCTAD study cited above provides examples of where domestic 

firms acquire soft technologies from foreign affiliates through contact with experts, information 


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flows and observation. The extent of investment impact on entrepreneurship growth depends on 

the strength and breadth of the networks and linkages established. In the field study conducted 

for this assignment, the main types of networks and linkages relate to local sourcing and purchase 

of inputs, components and services. The investor’s choice of suppliers depends on several 

attributes, including: 

♦ 

♦ 

♦ 

Cost, quality and reliability of local supplies – where these were inadequate, investors 

tended to transfer requisite skills and knowledge to the local firms/individuals so as to meet 

standards. 

Access to local information and business practices – a network of suppliers of raw materials 

and other inputs flourished well where local information was readily available and the local 

firms/individuals showed business-like acumen. 

Ability to develop relations of trust. Often this aspect was found to be important in part 

because of assurance of reliability of supplies and more so because some of these local 

suppliers had to be advanced inputs and working capital to facilitate production and regular 

supplies. 

Tanzania’s experience with regard to facilitation of entrepreneurial growth through a network 

of suppliers’ linkages is shown on Table 5.12 and further illustrated in Box 5.1. Overall, local 

sourcing of inputs was the largest contributor to the growth of entrepreneurship. 

Sector 

Table 5.12: Network of Suppliers of Raw Materials and Other Inputs 

Local Sourcing 

(%) 


FDI Non-FDI (Local) Joint Venture 

Import 

(%) 

Local 

Sourcing (%) 

Import 

(%) 

Local Sourcing 

(%) 

Agriculture 87.5 12.5 90 10 80 20 

Manufacturing 80.0 20 70 30 73 27 

Services 60 40 80 20 90 10 

Import 

(%) 

Mining 10 90 23 77 12.5 87.5 


In agriculture investors sourced over 80 percent of their raw materials and inputs locally. Next 

was manufacturing firms that sourced over 70 percent. Services did not reveal discernible pattern. 

While service-related joint venture firms sourced 90 percent locally, FDI firms sourced only 60 

percent locally. In mining, over 80 percent were sourced through imports – a pattern that would be 

expected in a country where nearly all mining machinery and equipment have to be imported. The 

study learned that over time companies tend to develop more local input network and linkages, 

thus fostering entrepreneurship growth. 

84

Linkages related to Research and Development (R&D) was negligible among local investors but 

foreign based firms tended to have considerable investment in this area. For example, DIMON 

Tobacco Processors is an FDI that has contracted a locally based firm called TORITO to research 

on issues related to improvement in tobacco flavour. The company pays an equivalent of 5 percent 

of its annual sales on R&D. Blue Mountain Coffee Farm is also an FDI that produces quality coffee 

for the export market. This company has contracted a locally based international agency called 

Utzkapeh to provide strategic R&D and to check the company’s compliance with environmental 

standards set by international organisations. Unilever Tea Tanzania, also an FDI, conducts R&D 

on improvements in the quality and care of tea. APC Lyamungo Coffee Estate, another FDI that 

grows coffee for the export market, has a strategic technology partnership in the area of R&D with 

TACRI – a local firm that does experiment and improvement of coffee seedlings. 

The conclusion we make from the above experiential analysis is that investments are fostering 

entrepreneurial growth, albeit slowly. There is need to develop incentives to entice investors to 

source more locally as well as increase their network of suppliers of raw materials and other inputs. 

Box 5.1: Tanzania: Investments are Fostering Entrepreneurship Growth – Albeit Slowly 

Dabaga Vegetables and Food Canning Company is a local company that started operations in 1976 in Iringa 

town. It produces tomato sauce, juices, jam, pickles, vinegar, baked beans and T/puree for the domestic market. 

Only 1% of its products are for exports. The three company expatriate staffs have played a key role in fostering 

entrepreneurship growth through subcontracts and out-sourcing almost all its input supplies. Suppliers are trained 

on their own farm to produce and supply quality fruits and vegetables. To date the company has trained the 

following entrepreneurs (their numbers in bracket): pineapples (66), mangoes and oranges (4), tomatoes (20), 

onions (5), cinnamon (1), and chilly powder (3). The company plans to train more input suppliers as capacity 

utilisation rises from the current 73% to 95% by 2007. 

Vaso Agro Ventures is a joint venture between domestic and foreign investors (25:75 % share split). The company 

started operations in Moshi, Kilimanjaro in 2003. Its main products are flowers, flower cuttings and fresh beans. 

The company has trained over 35 local suppliers to grow flowers, to undertake flower cutting and produce quality 

seeds. 

TANCAN Mining Company (TMCL) is a joint venture between domestic and foreign investors (40:60 % share 

split). Since 1999 the company has been involved in mineral exploration of gold and diamonds in Mwanza 

Region. The company assisted in the establishment of a local company - Humac Laboratory to conduct test and 

experimentation of samples and drilled rocks from TMCL. Through an elaborate skills transfer mechanism, TMCL 

appointed SGS laboratory to counter-check and verify the work of Humac while providing them with advisory 

services. Africa Mashariki Gold Mine has established similar arrangements. This company which deals with gold 

mining in Tarime, Mara region assisted in the establishment of a local firm, Stanley Mining Services, that has been 

contracted to provide drilling, quarrying and civil works for the company. 

Vegetable Oil Industries Ltd (VOIL) is a joint venture between domestic and foreign investors (20:80 % share 

split). The company, which started operations in 1966 in Mwanza, manufactures double refined cottonseed oil, 

margarine, cooking facts (Pride), and drinking water (AQUA). The company uses a network of input suppliers – 

cottonseeds. The new local firms established to supply cottonseed to VOIL are: Alliance Ginneries, COPCOT 

Ginneries (Geita) and LINTEX Ginneries (Shinyanga). 


Tanzania Pyrethrum Processing and Marketing Company provide another example of networking to obtain 

quality pyrethrum flowers. This FDI company which started operations in Tanzania in 1998 produces pyrethrum 

crude extract, pyrethrum powder and pyrethrum dry marc, largely for the export market. The company estimates 

it has brought about 300,000 farm families to grow pyrethrum that is supplied to the company. The company’s 

extension service transfers skills and knowledge to the farmers that have enabled the supply of uniform quality 

pyrethrum flowers to the company. Similar extension services undertaken by Kilombero Sugar Company has 

resulted into growth of sugarcane out-growers from 2,000 to 5,000 delivering about 600,000 tons of cane or 50 

percent of the company’s requirement. 

Kilimanjaro Industrial Development Trust (KIDT) is a typical success story in entrepreneurship growth in 

Tanzania. With technical and financial assistance from the Japanese Government, KIDT that was incorporated 

in 2001produces oil expellers, spare parts for industrial and agricultural machinery, coffee husk pulpier, sugar 

cane squeezer, groundnut sheller, train weather plates, earthenware products, to mention, but a few products. 

While KIDT is 100% local firm, the technical assistance given by Japanese experts has transformed KIDT into a 

powerful dynamic entrepreneurial powerhouse capable of producing internationally competitive products. Over 

30 entrepreneurs have graduated from KIDT training and have established their own machine/foundry or forging 

workshops. 

Source: ESRF Survey (2004) for TIC. 

5.10 Community and Neighbourhood Impact 

Another measure of impact is the contribution of investments in fostering community development. 

Domestic and foreign investment has community level impact that is not well documented in 

the literature. Field studies conducted for this assignment revealed two kinds of impacts. Those 

that improve the socio-economic well being of the communities within the investment area and 

beyond, thus fostering poverty reduction and those that have negative effects – especially on the 

environment. This later aspect is discussed separately in Section 5.12. 

Tanzania’s experience shows that investments are making a commendable contribution towards 

community development. For example, at the national level, the investment made to exploit 

Songo Songo gas has brought to the people of Tanzania a reliable supply of safe, clean and 

efficient energy with far reaching socio-economic impact (see Box 5.2). 

Box 5.2: Developing a resource out of reach: Songas natural gas 

When discussing investment impact, the Songas story is exemplary. It has brought to the people of Tanzania a 

reliable supply of safe, clean and efficient energy. Ever since 1974, when natural gas was discovered on and 

around Songo Songo Island, (about 225 kilometres from Dar es Salaam), the development of this resource 

remained a dream. Then in 1994 a powerful public/private investor partnership turned the dream into reality. The 

Government of Tanzania provided policy and logistical support. The Commonwealth Development Corporation 

(CDC) made an initial US$ 6 million investment in Songas in 1997 and progressively increased its stake, including 

additional capital committed to the expansion of Ubungo generating capacity. The World Bank played a key role in 

Songas, approving a US $ 183 million, interest-free loan in October 2001. World Bank’s technical representatives 

provided expertise and oversight for more than 12 years to see the Songas project through completion in 2004. 


86

The major user of natural gas from Songo Songo is Ubungo Power Plant in Dar es Salaam. Originally built 

to run on imported liquid fuel, the plant was refurbished and converted to use the country’s own natural gas 

resources. Since July 2004 Ubungo plant, which is capable of producing 45 percent of Tanzania’s total electricity 

requirements, has been using natural gas in place of the expensive imported fuel. The plant provides safe, reliable, 

efficient clean electricity to Dar es Salaam and the national grid. 

Source: ESRF (2004) survey for TIC. 

Other more specific examples of community level impact were obtained from this study’s fieldwork. 

The sample of 30 investors interviewed, both domestic and foreign, feel obliged to contribute part 

of their earnings for some social course – especially in reducing problems related to access to 

social amenities. Overall, as Figures 5.11 and 5.12 illustrate, 69 percent of the donations or 

nearly Tshs 4.7 billion incurred by the 30 sampled investors between 1998 and 2004 were for 

rural roads rehabilitation or maintenance. Others expenditures with their value in brackets are: 

education 12 percent (Tshs 862 million), Health 11 percent (Tshs 773 million), Water 6 percent 

(Tshs 418 million), Electricity 1 percent (Tshs 87 million) and others 1 percent (Tshs 63 million). 

Box 5.3 provides elaboration of some main philanthropic firms in the survey. 

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Box 5.3: Investors are becoming charitable and generous 

Afrika Mashariki Gold Mine, an FDI that began gold mining in 2002, is exemplary when one talks of philanthropy. 

Since inception the company has contributed Tshs 400 million for construction and equipping village health 

facilities, Tshs 550 million for primary and secondary school improvement efforts, Tshs 100 million for rural water 

supply, Tshs 600 million for rural roads construction and Tshs 30 million for the construction of ward office. Over 

3,500 households have benefited from the company’s socio-economic assistance. 

Kilombero Sugar Company, another FDI that began operations in 1998, considers social responsibility part of 

the company’s vision. To this effect, the company has contributed Tshs 106 million in support of community 

primary and secondary schools, Tshs 250 million for improving community health facilities, Tshs 100 million for 

water supply, and Tshs 4 billion for rural roads improvement as part of sugar out-growers support. Over 10,000 

households have benefited directly or indirectly in this socio-economic assistance. 

Sao Hill Industries, an FDI that produces timber for the domestic and export market, provides anther example of 

commendable philanthropy. Since 2000 when the company began operations, Tshs. 18 million have been donated 

for primary and secondary school improvement, Tshs 20 million for improving community health facilities, Tshs 

2 million for water supply and Tshs 6 million for improving community rural roads. Over 700 households have 

benefited from these socio-economic activities. 

Nyanza Bottling Company, a joint venture between foreign (64% of the shares) and local investors that produces 

soft drinks for the domestic market has also made valuable socio-economic contributions. The company that 

started operations in 1984, has contributed Tshs 30 million is support of community primary and secondary 

schools, Tshs 30 million for improving community health facilities, and Tshs 10 million for improving rural roads. 

The company estimates over 1,000 households have benefited from these charitable activities. 

88

Vaso Agro Ventures, another joint venture between foreign (75% of the shares) and local investors that started 

operations in 2003, is also among food philanthropic firms. The company has contributed Tshs 15 million in 

support of primary and secondary schools and Tshs 140 million to provide reliable water supply to the surrounding 

communities. 

Local investors are also good philanthropists as shown in Annex B. For example, Meremeta Mining Company, 

a wholly owned local gold mining company that started operations in 2002 has shown commendable social 

responsibility. The company has contributed Tshs 89 million is support of community primary and secondary 

schools, Tshs 20 million for health improvements, Tshs 27 million for water supply and Tshs 40 million for improving 

rural roads. Over 1,000 households have benefited from these charitable activities. 


The considerable investment channelled to improve rural roads appears to have been made to 

facilitate access to local supplies critical for investor requirements. For example, rehabilitation 

of community roads in pyrethrum growing areas was meant to assist out-grower farmers to 

supply pyrethrum flowers throughout the year. Similarly, improvement of roads in large sugar 

cane plantations such as Kilombero are meant to facilitate transport of cane by out-growers 

to ensure regular supply rather than fostering a charity of giving to the communities. Even 

improvement of roads by mining companies such as Kahama Mines appear to have self-interest 

in mind to improve input access and other amenities. However, despite own firm-level interests, 

improvements in rural roads are having valuable benefits to communities. Upgraded roads are 

usable all year round, causing less damage to the vehicles using them. The improved roads 

allow farming households and the firms to move their goods more often and more cheaply. In 

some cases, as in Kilombero, some farmers have shifted from low value maize production to 

sugar cane production – thus earning higher income. Investors also show a high degree of social 

responsibility through assisting in the provision of education, health and water facilities. Annex 

4.1 provides a breakdown of the social-economic contribution provided by 30 sampled domestic 

and foreign investors that have high impact on the recipient communities. 

The conclusion is that available field data reveals that FDI investors tend to make larger social 

contributions to communities around their investment (Annex 4.1) compared with local investors. 

However, most of these FDI have “Certificate of Incentives” that provide more business advantage 

compared with local investors. Thus, in the absence of an “equal playing field”, it is difficult to 

make any definitive conclusion on the contribution of FDI and Non-FDI to the socio well being 

of local communities. A policy should be developed to encourage greater contribution to local 

economies in fighting poverty and enhancing equitable development. 

5.11 Illustrative Cases of Some of the Performing Investments 

Clearly, although most investment enterprises have performed well as a result of a better 

investment climate and favourable policy regime, some have achieved better and at times 

significant performance than others. Below we describe a few case studies to give supportive 

evidence of the performance of some large investment enterprises. As time and resources could 

not allow sampling many firms, we limited our case study of investment performance only on 

those upon which information was available, and used for illustrative purposes. 


5.11.1 Tanzania Cigarette Company (TCC) 

TCC is a joint venture between foreign (75% of the shares) and local investors. The British 

American Tobacco initially started the company in 1961. In 2000, its shares were listed in the 

Dar es Salaam Stock Exchange. The company’s main products are: Sportsman, Sweet menthol, 

Camel (filter and lights), Embassy (menthol, lights and kings), Winston (lights and filter), Club 

(menthol and filter) and Crescent star (kali). TCC has the capacity to produce 4 billion sticks per 

annum 

TCC is a shining example of the success of Tanzania’s privatisation programme. Since its 

privatisation in 1995, the company’s production efficiency has improved due to investment in 

new technology, plant and machinery and training. Profits have more than doubled, enabling the 

company to pay higher dividends to its shareholders, paying greater taxes to the government and 

providing better remunerations and training to employees (Table 5.13). Over 250 of the nearly 

700 employees (35.7%) have received training to upgrade skills. Between 2002 and 2004, the 

dividend paid to shareholders averaged Tshs 22.8 billion and taxes paid to government averaged 

Tshs 48.6 billion. 

Employment 

Skills Development 


Table 5.13: TCC Performance 

2002 2003 2004 

Male (Local) 345 345 325 

Female (Local 344 344 344 

Foreigners 11 11 8 

Number of those trained in 

house 

Number of those trained 

abroad 

295 295 200 

50 50 50 

Dividend paid to shareholders TZS, Million 22,174 24,160 22,362 

Share Capital or Market Capitalisation TZS, Million 170,000 172,000 176,000 

Taxes and other charges paid to 

government 

TZS, Million 42,213 45,533 58,316 

Source: TCC databank (Can this information be updated?) 

TCC has also contributed importantly in the transfer of technology through a network of suppliers. 

The company estimates that over 40,000 tobacco farmers have benefited from the company’s 

improved crop husbandry skills transfer. Similarly, over 200,000 dealers and retailers have 

benefited directly through the marketing of the company’s products. 

90

The company management believes that its success lies in adoption of sound investment 

core values: high quality culture (excellence, simplicity and satisfaction); innovation (dynamic, 

enthusiastic and fast); commitment (respectful, responsible and transparent) and synergy 

(diversity, engagement and teamwork). These values are important not only to enable companies 

improve efficiency, but also to foster competitiveness in a globalised world. 

5.11.2 Kioo Limited Company (KLC) 

Kioo limited is another success story. This wholly private owned local company started production 

in 1966 producing glass and bottles for nearly all types of requirements. KLC current (2004) 

production capacity is 55,000 tons per annum. 

The company is a good example of investment that has high forward and backward linkages 

with the economy. Over 80 percent of the company’s raw materials are sourced locally (sand, 

dolomite, and feldspar). The company has strong linkages with other industries that use its 

products. Foremost are beverage and liquor firms such as Tanzania Breweries, Serengeti 

Breweries, Tanzania Distilleries, Coca Cola, and Pepsi. The company also supplies packaging 

materials to the pharmaceutical and food industry. Overall, KLC exports about 60 percent of 

its products to Sub-Saharan countries – earning the country foreign exchange. As Table 5.14 

illustrates, KLC employs an average of 267 people, of whom 8 percent are foreign technical 

experts. All employees have been trained locally and in-house to upgrade skills and knowledge. 

The company also paid taxes and other charges that reached Tshs 2.5 billion in 2004. The 

company is expected to contribute higher tax revenue to the government when its Tanzania 

Investment Centre certificate of incentives expires. 

Table 5.14: Kioo Limited Performance 

Employment 

Skills Development 

2002 2003 2004 

Male (Local) 251 233 189 

Female (Local 15 15 15 

Foreign 22 22 21 


in house 


abroad 

251 233 189 

Share Capital or Market Capitalization TZS Million 12,000 12,000 12,000 

Taxes and other charges paid to the 

Government 

TZS, Million 1,200 2,000 2,500 

Source: Kioo Limited database 

Overall, the company adopts best practices in its manufacturing process that are environmentally 


1

friendly, recycling used bottles and adhering with hygienic conditions on all its packaging 

materials. 

5.11.3 Mission Mikocheni Health and Education Network (MMHEN) 

Mikocheni Mission Health and Education Network (MMHEN) that provides medical and academic 

services to the country is another investment success story. The investment comprises Mikocheni 

Mission Hospital, The Hubert Kariuki Memorial University and the holding company that deals 

with administrative matters. 

The re-known hospital provides medical services to an increasing number of patients (Table 

5.15). The number of patients treated in this hospital has risen from an annual rate of 6 percent in 

2002 to 21 percent in 2003/04. The main reason to success is related to reduced treatment fees, 

in part due to reliance on medical doctor interns – making their services more affordable. 

Year 

Table 5.15: Number of patients treated between 2002-2004 


Children Adults 

Male Female Male Female Total 

2002 2,877 4,220 3,836 8,247 19,180 

2003 3,366 3,776 5,510 7,601 20,253 

2004 3,920 4,410 5,390 10,780 24,500 

Total 10,163 12,405 14,736 26,629 63,933 

Source: MMHEN database 

Improved services have resulted into increased recovery rate to between 75- 99 percent and 

reduction in the death rate to between 1-5 percent. Enrolment into the medical university has 

more than tripled from 26 in 2002 to 88 in 2004. Similarly, the number of medical graduates has 

quadrupled from 15 in 2002 to 60 in 2004. This performance is exemplary taking into account the 

acute shortage of qualified medical doctors in the country. 

The investment employs over 270 medical and other professional staff, of which 67 percent are 

women. Between 2002 and 2004, the investment contributed to the government over Tshs 670 

million in various taxes and charges. In addition, several community contributions were made, 

including Tshs 2.5 million in 2002 for roads and special illnesses (Open Heart Surgery); Tshs 

2.8 million in 2003 and over Tshs 680, 000 for supporting various community activities in 2004. 

In addition, the centre provides charitable mobile clinics in Mikocheni area that targets pregnant 

women, tropical diseases, HIV/AIDS and other communicable diseases. 

92

5.11.4 Standard Chartered Bank Tanzania (SCBT) 

Standard Chartered, with a long history inTanzania dating back from 1917, is part of the competitive 

and efficient banking system that is evolving in Tanzania following the country’s financial sector 

reforms. It is a successful FDI that re-opened in 1993 with branches in Dar es Salaam (3), 

Mwanza, Arusha and Moshi. The bank, being part for the Standard Chartered Group that has 

950 offices in 50 countries, has brought to Tanzania the best of banking worldwide. To attest this 

contention, the bank has won several prestigious awards, including “Best Bank in Africa” (1998, 

1999 and 2000), “Bank of the Year” for several years including 2004, and “Employer of the Year” 

in 2005 awarded by Association of Tanzania Employers. 

To illustrate the contribution this investment is making in Tanzania several pointers are noticeable. 

The bank has developed a strong wholesale banking business by establishing relationships with 

major international corporations, local businesses, donor agencies, Government and public 

enterprise organisations. In addition, the bank has developed business within the agriculture 

sector and provides financial access to Small and Medium Enterprises (SMEs). Its consumer 

business focuses on up scaling individuals and their businesses. SCBT is also expanding the 

range of products and services including Import and Export Finance, Structured Trade solutions, 

and management of foreign exchange risk. Some examples of the innovative products and 

services that SCBT has launched in Tanzania recently include: 

• Tanzania’s first Visa Debit Card 

• A revamped SME Banking Business 

• A sophisticated Excel Banking Centre 

In terms of making available resources for the country’s development, the bank is the largest 

lender to the corporate sector, with loans and advances of over Tshs 200 billion. Its lending 

policies support inward investment, development of domestic industries and making full use of 

Tanzania’s abundant natural resources. Examples of this include: 

• 

• 

• 

Providing pre-export finance to the agricultural sector to improve cash flow to farmers, 

Supporting investment in processing operations to raise the quality and value of export 

crops and improve farmers’ earnings, and 

Making available term funding for large-scale rehabilitation of recently privatised public 

enterprises. 

In terms of skills transfer, training is provided to all 200 plus employees. The Training aims at 

ensuring high levels of service to customers through quality career planning and skills enhancement 

of national staff. Training is both in-house and external, particularly in countries such as Gambia, 

Kenya, Ghana, Botswana and the Great Britain. Apart from training, employees are well 

remunerated. The bank aims at fostering good performance by providing staff with performance 


elated bonuses as well as other incentives such as subsidised schemes to purchase cars as well 

as to provide educational expenses. Salary levels are reviewed regularly to ensure competitive 

remuneration packages. 

With regard to community contribution, the bank recognises that it has wider responsibilities to 

the country. Thus, for a number of years it has participated in a number of community projects, 

including: 

• 

• 

• 

• 

Donation of US$ 42,000 (Tshs 48 million) in 2002 for the rehabilitation of Children’s Homes 

in different areas. The Kurasini Children’s Home in Dar es Salaam received Tshs 27.5 million 

while the remaining amount was shared between the Arusha Children for Children’s Future 

home and the Magu district Children’s Home in Mwanza region, 

Contribution of US$ 90,000 (Tshs 103 million) in 2003 to water projects in the Dar es Salaam 

Bunju area, Arusha, Kagera Morogoro and Sumbawanga. Some funds also went to a Fish 

Farming project in Mererani Arusha. This project, to be completed in 2005, will offer an 

alternative income-generating source for the commercial sex workers in that region thus 

reducing the spread of HIV/AIDS, 

Donation of US$ 60,000 (Tshs 69 million) in 2004 to assist in irrigation projects in the Mombo 

and Sanya regions which are in Tanga and Kilimanjaro regions, respectively, and 

Donation of US$ 140,000 (Tshs 160 million) in 2005 to construct an Orphaned Children’s 

Home in the Kibaha area. 

Apart from community contributions, the bank is among the large or corporate taxpayers that 

contribute considerable revenue to the government coffers. In 2004, for example, the bank paid 

to government the following taxes and other charges: 

Table 5.16: Tax paid during the year ending December 31 2004 


Category Amount (TShs Millions) 

Corporate Income tax 6,257 

P A Y E-Local Staffs 679 

P A Y E-Expatriates Staffs 383 

VAT 135 

Skills Levy 263 

Withholding tax on goods and services 301 

Withholding tax (intermediate commodities) 212 

Total 8,233 

Source: SCBT, September 2005. 

94

Thus, in discharging its corporate responsibility, in 2004 the Standard Chartered Bank Tanzania 

contributed over Tshs 8.2 billion in taxes and other charges – revenue resources that are much 

needed for accelerating Tanzania’s development prospects. In addition to the above, Table 5.17 

lists additional firms (other than those listed in Table 5.9) that could also be considered as some 

of the best performing investment enterprises. 

S.No. 

Table 5.17: Additional list of some of best performing enterprises 

Name of the 

Enterprise 

1 Tanzania 

Breweries Ltd. 

Location Sector Description of strong case 

3 Regions of 

Dar, Mwanza, 

and Arusha 

Manufacturing Uses locally source raw materials, listed 

for public shares (leading in dividend 

distribution), significant tax revenue 

and a modal of investment in R&D and 

technology transfer to local firm (Kioo Ltd.) 

2 Songas Coast Energy Example of energy development from 

own Natural resources 

3 Vodacom (T) Ltd. All over the 

country 

4 St Mary’s Schools 

Ltd 

Communication Largest mobile phone company with 

massive investment (over US$142 

million) and number of subscribers. Cell 

phone companies have significantly 

reduced transaction costs emanating 

from poor communication, and generate 

income to many retailers country-wide. 

Dar es Salaam Education Expanded fast to other regions and with 

a lot of branches, increasing significant 

number of intakes for all levels of 

education ladder (nursery to college) 

5 Simba Plastics Dar es Salaam Manufacturing Local source of raw materials, with 

strong back and forward linkages 

(building materials) 

6 Athi River Mining Tanga Mining Strong forward linkage, producing 

limestone for almost all cement 

manufacturing plants in the country 

7 Kunduchi Beach 

Hotel 

8 Mining companies Arusha, Mara, 

Shinyanga and 

Mwanza 

Dar es Salaam Tourism Investment that reclaimed over 10 

hectors of land, and a model of 

renovated hotel to a 5 star standards 

Mining Significant tax revenue and notable 

impact on growth of exports and positive 

balance of payments effects; setting 

example for others to invest in the sector. 

Source: Interview with TIC officials. 


5.12 Cross-cutting Issues 

5.12.1 The Environment 

Another measure of impact relates to the effects of investments on the environment. The extent 

to which investments have facilitated environmental sustainability is difficult to discern at the 

moment due to lack of adequate information. 

The observation above notwithstanding, Tanzania’s experience shows that there is a growing 

awareness on the environmental impact of unplanned and unregulated economic and commercial 

developments, especially in sensitive coastal and rural areas of the country important to 

Tanzania’s growing tourism economy (UNCTAD 2002). The current regulation for environmental 

protection requires all investors to undertake Environmental Impact Assessment (EIA) studies 

in advance of their construction, and these are a precondition for construction and planning 

permits. FDI projects guaranteed by the Multilateral Investment Guarantee Agency (MIGA) must 

undertake EIAs to demonstrate that they do not damage the environment and are sustainable, 

especially for mining, oil and natural gas, and tourism projects in the wildlife parks and coastal 

areas. Both TIC and ZIPA seek to assess FDI projects against environmental benefit and impact 

criteria; and can require EIAs where significant capital projects are involved (UNCTAD op cit). 

The field studies conducted for this assignment revealed that all FDI investors conducted EIAs 

and are making good progress in preserving and conserving the environment. Both domestic and 

foreign investors are aware of environmental concerns and are taking mitigation measures as 

appropriate (see Box 5.4). 

Various initiatives for ensuring environmental sustainability are being implemented by the 

government in collaboration with various stakeholders in the country. There are also currently 

initiatives to extend impact assessments to domestic SMEs once the necessary resources and 

skills are available. For a start in 2003 the government conducted sensitisation training to local 

governments on implementation of the national environmental policy. The National Environmental 

Management Council also continues to implement various environmental conservation and 

management programmes including the preparation of strategies for environmental conservation, 

education and sensitisation in the country. 

Therefore, despite inadequate information, experience in the field shows that both domestic and 

foreign investors are aware of environmental concerns and are taking appropriate mitigation 

measures. The Government should continue enforcing its environmental policy to ensure 

compliance by all investors – domestic and foreign. 


96

Box 5.4 TIC is fostering environmentally friendly investments in Tanzania 

Kilombero Sugar Company – a 1998 privatised company under three shareholders: Illovo (55%), ED & F Man 

(20%) and Government of Tanzania (25%) is making commendable progress in environmental protection. The 

company that produces over 430,000 tons of sugar per annum, immediately after being privatised, reduced 

pollution of Kilombero river water by stopping discharge of raw sewage of molasses into the river. The company 

refurbished a sewage treatment plant, installed molasses binding equipment and secured a market for molasses. 

The company also recycles the mud from the factory back to the sugarcane fields. 

Kahama Mining Corporation, an FDI that started gold mining operations in 1999, provides another good example 

of environmental protection. The company’s policy requires zero discharge that is aimed at minimising its impact 

on the air, water, flora and fauna around the mine. Wastes are recycled at the mine and water conserved. A unique 

paste tailing process is being implemented that uses 50% less water than traditional methods. Over 25% of the 

tailings produced are mixed with waste rock and directed underground to fill and seal mined areas. The company 

trains its workers on environmental issues and has established a nursery to propagate native trees for landscaping 

and re-vegetation purposes. The company has also created a wildlife refuge for monkeys, mangooses, Nile monitor 

lizards and small antelopes. These efforts are exemplary in Tanzania’s quest for sustainable development. 

Africa Mashariki Gold Mine, an FDI that started gold mining operations in 2002, has shown concern on 

environmental issues. The company’s use of explosives during blasting causes cracks in nearby houses and 

air pollution. As a mitigation measure, the company compensated people around the mine and moved them 100 

metres from the mine. New methods are being practised to contain cyanide and mercy that are used in the mining 

process. The National Environmental Management Council (NEMC) has been invited to team up with mine offers 

to conduct periodic environmental audits. 

Wazo Hill, a company that produces cement, stopped the dust that for several years has been polluting the 

environment. 

DIMON Morogoro Tobacco Processors, an FDI that started operations in 1997 processing tobacco for the export 

market, provides another example where environmental conservation is of prime concern. The company’s flue 

cured tobacco uses wood for curing. After assessment, the company found out that deforestation was taking place 

in some villages. Immediate action was taken to mitigate this problem by supporting tree planting. To date, for 

every 50 tons of tobacco grown, 100 trees are planted under the support of the company. In addition the company 

supports Morogoro Prison Tree Planting Project. 


5.12.2 The Gender Dimension 

Another measure is the extent to which gender is mainstreamed in all investment plans and 

strategies. Gender refers to the social relationship between men and women that provides women 

and men with different roles and access and control of resources in society. This in turn results in 

different needs and opportunities of the two groups. 

Tanzania’s experience shows that gender relations in Tanzania are characterised by a patriarchal 

system that gives men power and ownership over things of value and over decision-making. To 

the extent that this is the observed phenomenon, gender issues in investments, both domestic 

and foreign, requires gender mainstreaming. Gender mainstreaming relates to the process 


of integrating gender and equality concerns in all investment policies, programme (project) 

objectives, activities, and implementation process. The objective is to ensure that investments 

undertaken in Tanzania take on board concerns and needs of men and women. 

This study revealed that there is no discrimination between men and women in terms of 

employment (Table 5.10 and 5.11). Investors tend to employ more women (e.g. DIMON, Sunflag, 

Unilever Tea) or more men (e.g. Sao Hill, TPM) depending on the nature and structure of their 

production processes. However, the study noticed a lack of guidelines with regard to gender 

issues. TIC is urged to work with the relevant stakeholders to develop gender-specific investment 

guidelines that will take into consideration the following processes: 

♦ 

♦ 

♦ 

Empowering all employees and especially women to fully and effectively participate in 

investment decisions, so that the whole investment system becomes truly participatory 

and sustainable, 

Understanding the needs and concerns of men and women and plan for investment 

development accordingly. The needs of men and women differ as a result of the different 

roles that the society has placed upon them, and 

Promoting women in enterprise leadership and management in an attempt to achieve 

gender equality. 

Addressing gender in all investment aspects provides an opportunity to enhance overall 

investment performance by: 

♦ 

♦ 

♦ 

♦ 

Improving investment productivity, accountability and customer service by delivering 

products and services according to the needs of male and female clients, 

Making investment policy and strategy more inclusive and representative of the client 

base, half of which is female, 

Increasing individual motivation by understanding why differentials exist in career 

advancement between men and women, and 

Increasing effectiveness of employees by providing an equitable working environment. 

Within this framework, it is important to note that Tanzania has made significant progress in 

fostering gender equality. In particular, Tanzania is signatory to a number of declarations 

concerning gender equality, including the following: 

♦ 

Ratified the convention on elimination of all forms of discrimination against women 

(CEDAW), 


98

♦ 

♦ 

♦ 

Signatory to the Beijing Platform for Action, 

Signatory to the SADC declaration of gender and equality, and 

Unveiling the “Women and Gender Development Policy” that stresses enhancing women’s 

legal rights, economic and political empowerment of women, and improving women access 

to education, training and employment. 

In conclusion, it is important that gender be mainstreamed in all components of both local and 

foreign investment. Gender mainstreaming is a strategy and a method for achieving equality 

objectives. Essentially it entails: 

♦ 

♦ 

♦ 

Identifying the different conditions and requirements for men and women, 

Examining every question which concerns individuals from a gender perspective, and 

Analysing the expected consequences of changes for women and men respectively. 

To achieve the above ends, Tanzania Investment Centre may have to establish a gender unit at 

its headquarters to provide gender guidance to local and foreign investors. 

5.12.3 HIV/AIDS 

Another impact related to the spread of HIV/AIDS due in part to the indirect effects associated 

with the investment – especially where market towns have developed to supply socio-economic 

services. In Tanzania, the effect of HIV/AIDS is increasingly becoming a big problem due to high 

death rates of the skilled and educated manpower. HIV infection in Tanzania already ranks at 

the top of the country’s health problems. Estimates show that by 2004 the country had over 1.5 

million productive adults infected with deadly virus. In urban centres the rate of infection exceeds 

24 percent, and up to 10 percent in rural areas (we could get updates from the recent DHS and 

THIS). At this rate, the impact of HIV/AIDS epidemic is devastating. It strikes adults in their prime 

years, including the elite and professionals, which implies that it kills workers of much greater 

than average productivity. 

Tanzania’s experience obtained from field survey during this study shows that over 67 percent 

of the investors regard HIV/AIDS as a major labour-force problem. Loss of experienced workers 

due to the HIV/AIDS epidemic implies replacing them with younger less experienced workers. 

This has resulted in decline in labour productivity and at times reduced output. According to 

Cuddington (1993), unless a decisive action is taken to combat the spread of the pandemic, 

Tanzania’s GDP in 2010 could be reduced by 15-25 percent compared with a no-HIV/AIDS 

scenario. These estimates do not augur well for the country’s quest for higher investments to 

enhance growth and development of the country. 

The conclusion we make is that HIV/AIDS is becoming a serious labour-force problem that is 


likely to affect productivity of investments as experienced workers die and have to be replaced 

with younger less experienced workers. Therefore, Tanzania needs to take more decisive 

action to combat the spread of HIV/AIDS. The National AIDS Control Programme has to be 

intensified and activities spread in both urban and rural areas. Investors have to develop HIV/ 

AIDS workforce guidelines and conduct sensitisation seminars in an effort to reduce the spread 

of the pandemic. 

5.12.4 Regional Integration Initiatives 

Regional integration is expected to facilitate formation of a larger market through trade liberalisation 

and harmonisation of policies. The increase in the scale of business operation can also enlarge 

profitable investment opportunities and attract more foreign investors into the region. However, 

realising an effective and stable regional integration is challenging. The main challenges are 

related to socio-political instability, inadequate adherence to the rule of law and cumbersome 

and inefficient legislation – all of which increase investment uncertainty and limit private initiative. 

In addition, investment codes have to be harmonised within a framework where member states 

belong to several other regional groupings. 

According to Kweka and Mboya (2004), regional integration has increased intra-regional trade 

but has not led to significant intra-regional FDI in Tanzania. However, several processes are at 

various stages to promote intra-regional flow of investment at regional and extra-regional level. For 

instance, the EAC has provided for cooperation and development of capital markets of the three 

member countries with the objective that capital market can be one of the important strategies for 

achieving higher rates of investment and for attracting FDI. Another important investment provision 

under the EAC is the model investment code that is being developed for the EAC as described 

in Box 5.5. In SADC, the body urges the member states to implement macroeconomic policies 

that encourage sound investment flows, enhance savings, and stimulate technology transfer in 

the region. The Regional Investment Facilitation Forum (RIFF) – which was formerly known as 

Cross-Border Initiatives is a programme (established in 1999) for stimulating cross-border trade 

and investment amongst countries of the Eastern, Central and Southern African regions, with the 

objective of accelerating the process of trade liberalization and curbing food insecurity. However, 

the program does no longer exist due to lack of resources for its proper functioning. 

At the multilateral level, the traditional focus of the multilateral trading system (MTS) on trade 

issues has altered to include trade related investment measures (TRIMs), which are important 

for LDCs to increase inward FDI expected to augment their trade competitiveness in the global 

setting. The new EU-ACP partnership under the familiar Cotonou Agreement entails much longerterm 

cooperation between the ACP and EU countries through the required Economic Partnership 

Agreement (EPA).The EPAs have both trade and investment provisions in addition to development 

assistance, which are yet to be forthcoming for Tanzania as it has not yet concluded any EPA. 


100

Since member countries are at different stages of development, development of regional 

investment policy should be reassuring creation of a “win-win” situation (attracting greater 

investments and fostering beneficial integration) for all members. Example of such initiatives in 

the case of the EAC include creation of several instruments to promote private investment and 

increase the pace of regional integration including: 

� 

� 

� 

A common competition policy and law to protect and promote free trade and fair competition, 

and permit harmonisation of trade and investment laws and regulations throughout the 

region; 

The East African Business Council, a regional body for all of the national private sector apex 

organisations in the three member states, to promote cross-border trade and investment 

and to influence policies at the national level, to ensure that they are business friendly; 

and 

The East African Development Bank, which is being restructured to strengthen its role as a 

resource mobilisation organisation, especially for investment projects, by allowing broader 

purchasing of shares within East Africa and enhancing its capacity to issue international 

bonds. 

Generally, Tanzania stands to gain from the EAC integration if it becomes better prepared – 

especially in the area of human resource development and making further institutional reforms to 

make the economic environment more competitive. 

5.13 Policy Implications 

There is a need to develop further policies and incentives to encourage investments in the domestic 

production of complementary goods and services with a view to developing a more integrated 

economy. Policies should be reviewed to also encourage more exports of manufactured goods; 

especially those that Tanzania has a comparative advantage like garments and processed 

agro-products. The first set of measures to improve the country’s balance of payments requires 

getting trade policy right. This means creating a more favourable environment for investors (both 

domestic and foreign); promoting the contributions of catalytic export-oriented entrepreneurs and 

investors; and creating those linkages necessary to maximise the benefits of export-oriented 

investments. 

The Government can encourage networking and linkages by improving the capabilities of local 

suppliers through supply-side policies such as cost-sharing grants, establishment of “incubation” 

grants and loans to Small and Medium Enterprises (SMEs). The assistance is essential to enable 

SMEs purchase equipment and acquire training necessary to meet requirements for foreign and 

domestic investors. In addition, assistance to SMEs is needed to upgrade local technology. 


Encouraging domestic investment should be accompanied by promotion of domestic savings 

through improved financial intermediation that should be progressively deepened and diversified 

to develop flexible money and capital markets. Equally important is the need to raise public 

savings by reducing budget deficits, raising tax revenue and controlling public expenditure. 

Although it was noted that as domestic and foreign investment increases, tax revenue also 

shows a tendency to rise, it was also observed that the prevalence of tax exemptions through 

the investment “Certificate of Incentives” has eroded revenue sources, suggesting that the 

government should revisit the current regime of investment incentives with a view to removing 

excessive concessions and minimizing abuse. 

Investments are generating employment as well as developing skills and technology transfer. 

Policies to enhance further and more deliberately investments in human skill development and 

technology transfer are important. For instance, matching grants for training could be considered, 

technological networking with local R&D institutions could be encouraged and subcontracting 

arrangements between FDI and domestic investors could be encouraged. 

FDI has worked well with some communities but there are FDIs, which have come into conflicts 

with local communities. For instance, in mining conflicts with small miners, local communities 

and other stakeholders have brought an outcry leading to the formation of a special Committee 

investigate the matter. The Committee has revealed that, among other things, some of these 

complaints arise from shortcomings in the implementation of the mining policy while other 

complaints arise from poor communication of provisions in the policy and code governing mining. 

This suggests that greater effort is needed to improve the implementation of policies. 

It is within this framework that TIC’s resolve to establish zonal centres should be commended. The 

centres should be expected to become the springboard for information and facilitation support for 

small and micro entrepreneurs. 

For Investment Policy to be more effective (in enhancing further growth and impact of investment), 

policy reviews should take explicit consideration of such cross cutting issues as environment, 

gender, HIV-AIDS and regional integration initiatives. In particular, it is important that gender be 

mainstreamed in all components of both local and foreign investment as a strategy for ensuring 

not only higher economic growth, but also equality objective of development policy. 


102

Box 5.5: The EAC Model of investment Code (2002) 

The EAC Model of investment Code - 2002 (hereafter “the code”) is in advanced stage of preparation after the 

consultant (see Ruhindi, F 2002) completed the drafting and workshop to discuss it in 2002. The code is now 

going through the usual process of adoption and ratification within the regional and national bureaucracy. The 

code is composed of five parts. The first is the preliminary part highlighting on the title, interpretation and scope 

of the code. The second part is more substantive section of the code, and it deals with the rights to establish and 

benefit an enterprise from the code and other operational investment incentives procedures. Part three describes 

the rationale and objectives for establishing a regional investment promotion agency. Part four covers the 

establishment, operation and incentives for the special economic zones. Finally, part five contains miscellaneous 

clauses/issues and regulation of the code. From a region trying to hasten its integration process for growth and 

poverty reduction, the code is a very welcome idea, although its content does not differ substantively with that of 

Tanzania/(Tanzania investment policy). 

The code outlines some key benefits of establishing the investment code/agency as being: improving the 

investment climate in the region by advocating policies and regulations that are favourable to foreign investment; 

harmonizing national investment policies/agencies in order to achieve the regional development goals; and finally, 

the code is envisaged to provide the international best practices in investment promotion and practices that will 

enhance increased flow and impact of foreign investment in the region. Establishment of the regional investment 

agency and code do not replace but rather complements the respective national code/agency. It should also be 

noted that the investment code is intended to be a legal instrument, rather a guiding document for a particular 

member state that, in turn, may want to incorporate into their national investment policies and laws. In the interim 

before harmonisation of investment policies and laws made, investors are obliged to access their respective 

incentive packages from national investment agencies. 

The code provides for national treatment and non-discrimination, and avail the facilitative services of investment 

agency of a partner state to any eligible investors. Eligible investors for the investment incentive certificates are 

only those meeting the minimum threshold; and those intending to invest in the allowable areas /sectors (see 

section 5 (5) and section 8 of the code. The investment laws of the respective partner states cover the minimum 

thresholds for portfolio investment for foreign and local investment. 

Furthermore, the code includes several investment provisions relating to eligibility and granting of incentive 

certificates, incorporation and registration of investment, transfer and retention of funds, compensation in case of 

expropriation and settlement of disputes etc. The investment allowed to employ only four or less foreigners but can 

employ more if deemed necessary and approved by the immigration department. Other incentives for investors 

include a uniform corporation tax of 30%, exemption on import duty for all machinery and raw materials, duty 

draw back for all exporters, 100% deduction allowance on training, research and mineral exploration expenditures 

and loss carried forward to be offset against future taxable profits. The code also provides for establishment of 

(and conditions thereof) special economic zones including export processing zones, free trade zones, technology 

parks and tourism centres and virtual zones. The special economic zones are given specific fiscal and non-fiscal 

incentives according to specific investment activities. These are shown in Annex I of the code. 

Source: Adapted from Kweka and Mboya (2004) 


6.0 Co n C l u s i o n s a n d re C o m m e n d aT i o n s 

6.1 Key Conclusions 

TIC is a truly “one stop” centre that can greatly benefit foreign as well as domestic 

investors. 

The overarching goal of Tanzania Investment Centre (TIC) is to facilitate and promote investment 

in Tanzania – thus facilitating economic growth and poverty alleviation. To a large extent, findings 

of this study show that TIC is making commendable progress. Stakeholders interviewed applaud 

TIC as a truly “one-stop” centre for investment facilitation and promotion. TIC, apart from 

promoting investment, is also offering investor-friendly post-investment services. Despite this 

finding, there is a general feeling among many domestic entrepreneurs that TIC, and in particular 

investment promotion services have not been extended equally to the local (compared to foreign) 

entrepreneurs. While this is often pointed out as criticism against TIC and the Government in 

general, it is a public perception that is based on misinformed opinion. TIC mandate and various 

policy documents contain provisions for promoting both types of investment. In fact the domestic 

entrepreneurs face softer conditions (e.g. lower capital threshold) for accessing TIC investment 

incentives. Clearly, this perception points to the need for public awareness campaign on the 

provisions and role of TIC for domestic as well as foreign investors. 

Nevertheless, one oftheGovernment’sobjectives inreviewingimplementation of investmentpolicy 

is to increase support for domestic investment (especially SMEs). That is, done by formulating 

deliberate policies (or special package) for promoting SMEs and by reviewing the fiscal policies 

that are currently unfavourable to the growth of domestic investors. An investment policy could 

also make explicit to the public its aim to recognise investors who have grown to the threshold 

requiring TIC certificate of incentives. For that reason, extending TIC services nearer to the local 

areas (such as the established TIC zonal offices) is imperative. In addition, the achievements 

made by TIC so far should motivate the government and other stakeholders to step up resources 

to deliver even more and effectively. 

Achievements made in attracting investments are encouraging 

Between 1995 and 2007 TIC registered over 2,076 investments, of which 55.3 percent were 

foreign. During this period, the country received high FDI inflows that exceeded US$ 2.4 billion 

compared with only US$ 90 million during the preceding six years. The higher resources reversed 

the declining trend in Gross Fixed Capital Formation (GFCF), which rose from 12 percent of GDP 

in 1997 to nearly 16 percent in 2003. Sectors that benefited most from the increased inflows 

are: manufacturing, mining, services and tourism. Agriculture received less than 10 percent of 

the investments – in part due to unfavourable infrastructure that continues to retard this sector. 

However, the existing FDI in the agriculture sector has made a significant transformation both 


104

in terms of the performance of the particular commodity/sub sector (such as Floriculture) and in 

economic impact of the neighbouring community. 

…but more investment is required as well as increased productivity 

Is the current level of investment adequate in realising Tanzania’s Development Vision 2025 goal 

of reducing poverty and promoting sustained development through GDP growth of over 8 percent? 

The study, using historical data, notes a insignificant relationship between investment and growth. 

The weak link is associated with low productivity of investment and inadequate complementary 

factors particularly lack of skilled human resources and poor infrastructure. Studies from other 

countries such as China, Japan, South Korea and Taiwan <strong>report</strong> that investments averaging over 

20 percent of GDP have been pivotal in their country’s fast economic growth. If Tanzania is to 

achieve its development goals, recent (2000-2003) investment to GDP ratio of 17.6 percent has 

to be increased to between 20-25 percent to achieve a growth rate of 8 percent or more. This 

entails making further economy-wide improvements (e.g. in policy and institutional effectiveness) 

that will attract further investments both local and foreign. For instance, further liberalisation of 

foreign account may raise funds for investors to invest outside the country. 

Robust criteria are required to evaluate impact of investment 

However, an important issue is not only the achievements in attracting a desirable level of 

investment, but whether such investment unleashes the desirable impact. In evaluating the 

impact of investment on the economy, different criteria should be employed so as to know the 

costs and benefits of investment. In addition to the conventional criteria such as employment 

and tax revenue generation, it is important to emphasise that the overall objective of promoting 

investment is to improve productivity and competitiveness of the Tanzanian economy. To achieve 

this, one of the important criteria for evaluating the impact of foreign investment is the extent of 

linkages generated to the rest of the economy, and to the domestic investments in particular. The 

<strong>report</strong> has highlighted the current status, gaps and areas for improvement in the range of criteria’s 

used and applied some to analyse the impact of investment in Tanzania. The study proposes use 

of social cost benefit rather than or in addition to the statutory criteria currently being used by TIC 

in evaluating the impact of investment. 

Investments are having desirable impact … 

Generally, investment policies being implemented in the country are laying solid foundations 

not only for attracting higher levels of foreign and domestic investment, but also for sustained 

growth in the future. Domestic savings are rising, jobs are being created and new skills are being 

learnt. There is also evidence on transfer of technology and innovation, albeit slowly. Investments 

are also fostering entrepreneurial growth through forward and backward linkages, revamping 

exports and contributing towards community development and government tax revenue. Together 

with the solid achievements being made in fiscal and monetary management, investments are 

contributing towards (at least 1% of) the country’s economic growth - which is poised to grow by 


over 6 percent per annum in the foreseeable future. An impressive impact has been apparent in 

certain areas and weak in others. For instance, while many of the FDIs and privatised firms have 

generated significant tax revenues to the government and modest employment opportunities, but 

the impact on adding value, technology transfer (including R&D) and environmental conservation 

are relatively weak. Moreover despite the significant inflow of FDI and improvement in business 

operating environment, the manufacturing sector is still struggling to improve productivity. 

6.2 Recommendations 

In order to amplify both the magnitude and impact of investment in Tanzania, a number of 

improvements are recommended. 

Make further improvement in the investment climate 

Improve taxation system by eliminating multiplicity of taxes and reducing investor’s transaction 

costs and cost of doing business. Review business licensing to eliminate unnecessary licenses 

for one line of business. Review labour laws to attract and retain skilled labour, both imported 

and local. Make further efforts to improve access to long-tem credit. The government should 

emphasise continuous improvement of physical infrastructure. Investment productivity is higher 

where a country has skilled workforce and well-developed physical infrastructure. Improve 

availability and access to vital utilities, especially water and electricity. Improve further the roads, 

harbours, transport and communication. 

Foster macroeconomic and political stability 

Macroeconomic and political stability is one of the most effective factors in attracting FDI, thus, 

a need to emphasise the government’s commitment to maintaining favourable level of budget 

deficit and money supply and ensuring socio-political harmony. Make further improvements in 

fiscal and monetary management in order to maintain low level of inflation. Hasten reforms that 

will instil confidence in investors that contracts will be enforced and property rights honoured, and 

prioritise good governance by reducing corruption and improving the quality of bureaucracy at all 

levels of government. 

Target Promotion of Investment in value-adding and key sectors for growth 

One major way in which to realise full impact of investment on fastening growth is to stimulate 

linkages between different sectors of the economy by ensuring existence of backward and 

forward stimuli of the new investment to the rest of the economy. Experience with the promotion 

of mining sector reveal that targeting sectors is possible and can be effective. Therefore, the 

government should identify and target identified sectors whose linkage and value adding potential 

is substantial in investment promotion activities. 

Promote excelling domestic investment 

Domestic investment forms about 70% of the total investment in Tanzania, thus bearing notable 


106

impact on the economy. However, this investment is yet to be harnessed in a strategic manner. 

First, the multitude of domestic investment is subsistence SME that can hardly be transformed into 

growth pillars. Second, the relatively larger domestic investments have low level of productivity 

due to structural weaknesses of the economy and low level of technological capacity. Finally, 

the synergy between large and small investments, or foreign and local is too modest for the 

later to benefit. Nevertheless, the impact of economic reforms has produced a few successful 

domestic enterprises. These can be encouraged to excel as demonstration cases of success to 

be emulated by others. 

Undertake targeted promotion of investments internally and abroad 

The targeting should be based on thorough research. Market research-driven investment 

promotion tends to be more efficient in cutting costs of promotion and achieving more desirable 

investment outcomes. 

Make regular post-approval follow-up of investors 

This will help in understanding whether the actual investments being undertaken in the country 

are in line with those approved and/or benefited from TIC incentive (certificate). In this way, it 

will be convenient to assess the beneficial impact investors bring to the nation as a whole and to 

ascertain whether or not the are in accordance with plans and objectives of TIC. 

Improve investment after-care services through TIC zonal offices 

To date TIC has been performing a well job in the area of investment after care services through 

its headquarters in Dar es Salaam. These after-care services are beneficial both to the investor 

and TIC in realising customer-oriented investment promotion and support. It is urged that the 

services also be provided through TIC zonal offices in order to cut costs and increase efficiency 

in service provision. 

Improve Human capabilities and encourage technology transfer 

This will entail making large improvements in all levels of the Tanzanian education system from 

primary to higher learning institutions. Knew skills are required, especially those needed to take 

advantage of globalisation, comprehend complex technical know-how, and foster better attitudes 

towards work. 

Institute Presidential Investor Awards 

Some investments make large contributions to the socio-economic development of the country, 

not only by creating much-needed jobs but also by having net resource inflows while fostering 

high linkages with the rest of the economy. It is urged that outstanding investment performers be 

publicly recognised through bi-annual Presidential Awards managed by TIC. 


Strengthen balance between social and private goals of investors 

This is essential because the public and private interests can diverse and the society may suffer. 

One way of balancing is to encourage public-private partnership where each has a vital role to 

play in improving the quality of investment and fostering faster socio-economic development. For 

instance, it is imperative to ensure that all investors address environmental concerns. Sustainable 

development requires concerted efforts directed at protecting the environment. Thus ensure that 

environmental regulations are met and all investors adhere to acceptable standards. 


108

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112

ap p e n d i C e s 

Appendix A2.1: FDI by Country/Region of Origin, 1998 – 2004 (US$ Mill.) 

Notes: 1998 represent FDI stock, and the subsequent years are flows. Percentage total does not add to 100% 

because of rounding-off errors and the fact that our calculation omitted countries with insignificant value. Empty 

cells show no FDI <strong>report</strong>ed, while zero implies very small value. 

Source: Collated from Tanzania Investment Reports and database, 2001 and 2005. 


Flow of FDI by Source Country for Tanzania, 1999 – 2005 


Million 

Values in USD 

Country 1999 2000 2001 2002 2003 2004 2005 p 

Australia 48.5 6.7 3.7 1.5 2.6 0.1 0.1 

Austria 0.0 -0.1 0.4 2.1 10.4 5.8 1.8 

Bahamas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Bangledesh 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Barbados 0.3 0.0 0.0 0.0 0.0 0.0 0.0 

Belgium 2.5 0.0 -0.1 0.1 0.5 0.0 0.0 

Bermuda 5.2 0.0 61.8 0.2 0.7 0.5 0.3 

Bosnia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Botswana 0.0 0.0 0.0 2.0 0.8 2.7 0.0 

British Indian Ocean 

Territory 

0.0 0.0 0.0 0.0 4.5 16.0 15.7 

British Virgin Island 0.0 0.0 0.0 0.0 0.4 14.8 19.8 

Croatia 0.0 0.0 0.1 0.1 0.0 0.0 0.0 

Canada 80.9 0.0 21.5 230.2 59.0 41.0 54.5 

Cayman Islands 0.0 0.0 0.0 0.0 44.3 14.2 3.3 

Channel Islands 0.0 0.0 0.0 2.5 0.1 0.2 0.2 

China 0.0 2.6 1.9 11.4 10.7 10.0 7.9 

Cote D’Ivoire 1.3 0.0 0.1 0.0 0.2 0.2 0.0 

Cyprus 0.0 0.1 0.5 0.0 0.0 0.0 0.0 

Denmark 3.9 0.5 0.2 0.0 11.6 1.4 0.4 

Dominica 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

EU 0.0 0.0 2.4 0.2 0.3 0.2 0.4 

Egypt 1.4 0.0 0.0 0.0 0.0 6.1 0.0 

Ethiopia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Finland 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Foreign-Not Specified 4.0 3.5 0.6 0.3 -0.3 25.1 79.3 

France 12.7 3.0 2.2 0.3 2.3 -0.5 0.1 

114

Country 1999 2000 2001 2002 2003 2004 2005 p 

Ghana 134.2 0.0 1.5 0.8 2.7 0.0 0.0 

Germany 8.5 15.1 1.2 2.8 4.5 5.3 19.3 

Gibraltar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Greece 0.4 0.0 0.0 -0.2 0.4 0.1 0.1 

Guinea 0.2 0.0 0.0 0.0 0.0 0.0 0.0 

Hong Kong 0.1 0.0 0.0 0.0 0.0 0.0 0.0 

IFC 1.3 0.0 1.9 -0.4 0.2 0.0 0.0 

India 0.6 1.5 1.9 0.0 0.2 6.7 5.3 

Indonesia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Iran 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Ireland 0.1 0.0 0.0 0.0 0.0 0.0 0.0 

Isle of Man 0.1 3.2 1.6 0.0 0.0 0.0 0.0 

Israel 0.0 0.1 0.6 0.0 0.0 0.0 0.0 

Italy 4.1 4.7 2.3 5.7 9.1 9.9 5.4 

Japan 0.4 16.8 0.0 0.6 2.6 1.5 3.8 

Kenya 20.1 6.0 13.1 6.7 18.5 11.8 10.5 

Korea 0.0 0.0 -0.1 0.0 0.0 0.5 0.0 

Kuwait 0.0 0.0 0.0 0.0 4.3 0.6 1.3 

Lebanon 6.4 0.0 1.0 0.0 0.0 0.0 0.0 

Libya 0.0 0.0 0.0 0.0 0.0 0.0 0.5 

Liechtenstein 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Luxembourg 0.2 -0.1 2.3 0.0 1.1 0.7 0.1 

Macedonia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Malawi 1.3 0.0 0.0 0.0 0.0 0.0 0.0 

Malaysia 3.7 0.1 3.9 -0.2 -0.1 0.5 -0.2 

Mauritius 16.5 4.6 3.7 0.8 18.2 3.9 5.8 

Nertherlands Antilles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Netherlands 4.6 1.6 -8.1 1.4 0.8 8.2 0.8 

Nigeria 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Norway 5.5 0.0 4.7 3.0 1.2 0.5 0.4 


Country 1999 2000 2001 2002 2003 2004 2005 p 

Oman 0.0 0.0 1.3 0.0 0.5 0.0 0.0 

PTA Bank 0.0 0.0 0.0 0.0 10.4 0.0 0.0 

Pakistan 3.1 0.0 0.1 0.1 0.2 0.4 0.1 

Palestine 0.0 0.0 0.0 0.0 0.0 0.0 0.4 

Panama -1.9 -0.1 0.4 1.9 0.1 0.0 0.0 

Quatar 0.1 0.0 0.0 0.0 0.0 0.0 0.0 

Russia 0.6 -0.1 -0.1 -0.1 0.4 0.0 0.0 

Rwanda 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Saudi Arabia 6.1 0.0 0.0 0.0 0.1 0.1 0.0 

Sierra Leone 0.1 0.0 0.0 0.0 0.0 0.0 0.0 

Singapore 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Somalia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

South Africa 37.9 95.3 141.8 34.9 7.1 91.9 100.4 

Spain 0.0 0.0 0.0 6.3 7.3 8.0 10.3 

Sri Lanka 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Sudan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Swaziland 8.0 1.2 2.8 0.0 0.0 0.0 0.0 

Sweden 1.8 3.0 5.4 0.8 1.6 1.5 0.0 

Switzerland 9.0 29.8 19.5 1.9 7.9 1.6 5.3 

Taiwan 0.0 0.0 1.4 0.0 0.0 0.0 0.0 

Thailand 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

USA 23.5 27.7 32.2 29.9 2.8 1.0 5.0 

Uganda 0.0 0.3 0.0 0.2 0.0 0.6 0.5 

United Arab Emirate 0.5 2.2 15.1 2.1 14.0 0.7 0.7 

United Kingdom 35.0 32.5 42.9 38.3 47.0 36.3 86.8 

Virgin Islands (U.S) 0.1 0.0 0.0 0.0 0.0 0.0 0.0 

Yemen 0.0 0.2 0.6 0.0 0.0 0.1 0.0 

Zambia 0.0 0.0 0.0 0.3 0.0 0.0 0.0 

Zimbabwe 0.0 0.0 -0.1 0.0 0.0 0.5 0.0 

Total 493.0 261.9 390.0 388.6 311.2 330.8 446.6 


116

Appendix A2.2: Inward Foreign Direct Investment and Domestic Capital 

Formation: the Theory 

Impact on Domestic 

Investment 

(+) Increase Profitability 

(-) Reduce Profitability 

(0) New Financing 

(-) Replacement 

Financing 

o 

Mechanism Source(s) 

build infrastructure (roads, 

telecommunications etc.) 

Cardoso & Dornbusch 

1988 

o supply scarce inputs 

Helleiner 1988 

o 

o 

o 

o 

o 

demand creation (local input suppliers, 

labour income, complements 

positive externalities (training, managerial 

skills, technology, access to overseas 

markets, market information) 

addition tax revenue invested in public 

goods 

increase wages and/or cost of other locally 

supplied inputs 

worsen terms of trade 

Cardoso & Dornbusch 

1988 

Blomstrom 1989 

Cordoso & Dornbusch 

1988 

Lall & Streeten 1977 

Bhagwati Brecher, Findlay 

1981, 1983 

o stifle domestic competition 

Helleiner 1988 

o 

o 

o 

negative externalities (tariff-jumping FDI, 

corruption) 

new projects financed by FDI have no 

impact on existing domestic 

privatization and/or buyouts replace 

domestic with foreign 

Brecher & Diaz-Alejandro 

1977 

Fry 1993 

Fry 1993 

Source: Adopted from Phillips et al. 2000:23 (Table 2.1), from which details of the cited 

bibliography can be obtained. 


Appendix A2.3: Inward Foreign Director Investment and Domestic Capital 

Formation: Empirical Evidence (1975 – 2000) 1 

Date Author(s) Data Methodology Results 

2000 Phillips et al 59 Developing 

Countries 

(with case studies 

of Mauritius, 

Uganda 

and Kenya) 

1997 K.K. Mbekeani South Africa 

Macro 

1997 Brian Aitken 

Ann Harrison 

Venezuela 

Firm level 

Data 

1997 Maxwell Fry 46 country 

panel 


Panel econometrics 

and 3 Case studies 

2SLS 

Error Corr. Model 

Time Series 

Panel & Fixed 

Effects 

Time Series 

Structure Model 

3SLS 

1993 Louis T. Wells East Asia Case Studies + 

1993 Wells & Warren Indonesia Case Study + 

1993/94 Maxwell Fry Macro 

16 countries 

1966-88 

Time Series 

Structural Model 

3 SLS 

1992 Katikati Ghana Time Series 

Granger Causality 

1992 Faroque & 

Bougrine 

1989 Rhee & Belot Asia & Africa 

Latin America 

1986 Encarnation & 

Wells 

Morocco Structural Model 

Time Series 

11 country 

case studies 

+ 

+ 

+ Joint Venture 

- No local 

partner 

+ 

+/- depends 

on policies 

in place 2 

Asia Case Studies +/- depends 

on policies 

in place 2 

1977 Matos Venezuela Case Study - 

Notes: (1) For a good survey of other studies and prior to 1975, see (Grieco, 1986). 

Source: Adopted from Phillips et al. 2000:23 (Table 2.2), from which details of the cited bibliography can 

be obtained. 

- 

- 

+ 

118

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