DETERMINANTES OF FOREIGN DIRECT INVESTMENT IN ETHIOPIA: TIME SERIES ANALYSIS

Abstract

Numerous studies in recent years have focused attention on the determinants of foreign direct investment in developing countries. This paper contributed to this body of knowledge by filling a noticeable gap. Principa lly, this paper examines the determinant of foreign direc t investment in Ethiopia for the period 1981 - 2014 . In recent years, most developing countries have liberalized their trade and attempted to create enabling environment to attract Foreign Direct Inv estment (FDI). Ethiopia, like many developing countries, have taken remarkable measures towards liberalizing trade and the macroeconomic regime as well as introducing some measures aimed at improving the FDI struc tural and regulatory framework. The study g ives an extensive look at the theoretical underpinnings and conducts empirical analysis across various developing countries to establish the determining factors of FDI in Ethiopia. The results show ed that real GDP (Gross Domestic Product) and liberalizatio n, among others, have positive impact on FDI. On the other hand, macroeconomic instability, real effective exchange rate, adult illiteracy rate and poor infrastructure are found to have adverse impact on FDI. These results entail that liberalization of th e trade and regulatory regimes, stable macroeconomic and political environment, and significant improvements I , n infrastructure are indispensible to attract FDI to our motherland. On the other hand, the annual capital flight out of the country is also found to be significant in this study.