THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ETHIOPIAN ECONOMY: THE CASE OF ETHIOPIA

Abstract

The main purpose of this paper is to examine the impacts of foreign direct investment in Ethiopia based on time series data over the period 1992 to 2018 using aggregate national data. It measures particularly how FDI affects GDP growth; other control variables such as gross domestic saving, trade, government consumption, inflation, domestic Investment and Employment have been incorporated. In order to fully account for feedbacks, autoregressive distributed lag/ARDL/ model is utilized. The results show that there is short range as well as long-run relationship between foreign direct investment and economic growth and it is significant and affects positively. Results further show that the positive impact of domestic investment on economic growth becomes less when FDI assumes positive significant impact, implying the crawling out effect of FDI on domestic investment. Other major determinant of economic growth that was included in the model was domestic saving, government consumption and domestic investment; these variables also show that they have a positive and significant effect on GDP. Results in this study imply the need for the government to setup institutions with clear regulation to control after operation and avoid any damage and lags in utilizing benefits arise from FDI. Besides, the government should be able to create the right environment to realize the benefit from spillover effects of between domestic investment and FDI to adjust the crawling out effect. Hence, the researcher therefore recommends that, therefore, a host country that receives a diversified FDI or non-resource-seeking FDI when it has reached a certain minimum level of development. The implication of this for Ethiopia, resource poor least developed country, is that a certain minimum level of development is a necessary condition to attract and control negative impacts of FDI.