Impact of Foreign Direct Investment on Agricultural Productivity

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Munich Personal RePEc Archive

The Impact of Foreign Direct Investment on Agricultural Productivity and Poverty Reduction in Tanzania Msuya, Elibariki Kyoto University


Online at MPRA Paper No. 3671, posted 07. November 2007 / 03:23

The Impact of Foreign Direct Investment on Agricultural Productivity and Poverty Reduction in Tanzania Elibariki Msuya, Kyoto University, Japan

In this paper, the impact of Foreign Direct Investment (FDI) on agricultural productivity and poverty reduction are examined. Factors that hinder FDI flow to agriculture in Tanzania are assessed. Specifically, the role of FDI in improving an agricultural firm’s efficiency in Tanzania and reforms required for more effective investment promotion in agriculture are examined. The study uses literature review to draw its conclusions and policy recommendations. It is observed that FDI has a positive impact on productivity especially to smallholder farmers who are linked in integrated producer schemes. The study recommends rethinking of the smallholder institutional setup for increasing productivity and FDI flow to the agricultural sector. An important implication of the results is that FDI to Tanzania and specifically to agriculture has a much more far- reaching economic and social impact than in other sectors.



FDI has been shown to play an important role in promoting economic growth, raising a country’s technological level, and creating new employment in developing countries (Blomström and Kokko, 2003; Klein, Aaron, and Hadjimichael, 2003; Borenzstein, De Gregorio, and Lee. 1998). It has also been shown that FDI works as a means of integrating developing countries into the global market place and increasing the capital available for investment, thus leading to increased economic growth needed to reduce poverty and raise living standards (Rutihinda, 2007; Dollar and Kraay, 2000; Dupasquier and Osakwe, 2005). According to the World Bank’s “World Development Report”, in 2000 over 1.1 billion people were subsisting on less than US$1 a day and around 2.1 billion people on less than US$2 a day of whom between twothirds to three-quarters live in rural areas. In Sub-Saharan Africa (SSA), where about 43 percent of its population is living below the international poverty line, the incidence of poverty is the highest among smallholder farmers residing in rural areas. Thus, if the war on poverty is to be won, developing countries need to place more emphasis on the agricultural sector (Mangisoni, 2006; IFAD, 2002). Growth in agriculture and its productivity are considered essential in achieving sustainable growth and significant reduction in poverty in developing countries. Both developmental and agricultural economists view productivity growth in the agricultural sector as critical if agricultural output is to increase at a sufficiently rapid rate to tackle poverty (Rao, Coelli and Alauddin, 2004). In view of the declining arable land per capita, high production costs, combined with rapid population growth and the resulting need for human settlement, and rising urbanization, significant improvements are required in productivity growth in agriculture in order to increase agricultural output through technological innovations and efficiency. Limited development and adoption of new production technologies essential for improving productivity by the poor are mostly due to limited income and sources of credit. FDI plays a significant role in increasing productivity by offsetting the investment and technological gap. This is shown in the literature (e.g. Chen and Démurger, 2002; FAO, 2001; and Buckley, Clegg and Wang 2006) by significant levels of Total Factor Productivity (TFP) growth between sectors dominated by FDI and those dominated by domestic investment. Much of this productivity is a result of technological improvement through spillover and improved...
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