Lower exchange rates and FDI inflows in least developing economies : evidence from Tanzania

The hypothesis that devaluating and depreciating the exchange rate in developing economies will lead to fast growth and economic development has drawn some controversies and debates during the past 20 years in the area of development economics. Mainly, due to the delayed results in some countries especially in the Sub Sahara Africa region. In this study, the key emphasis is on the stochastic trends of the exchange rate and the net FD inflows into Tanzania. We find a significant long-run relationship between the exchange rate of Tanzanian shilling, which is on the list of weak currencies in the world, and the net FDI inflow. We employ the Augmented Dickey Fuller test (ADF), Vector error Correction Model (VECM) and the Johansen’s cointegration test to measure the time series properties of the two variables. To conclude, this study suggests LDC’s to include the level of the exchange rate on the settings of the policies that will attract more FDI to flow in their market. -- FDI ; VECM ; cointegration , unit root ; exchange rate ; SSA