The impact of Foreign Capital Inflows on Investment and Economic Growth in Ethiopia

Abstract

As foreign capital inflow plays a great role in boosting domestic saving, investment, and economic development. However, foreign capital inflow does not bring sufficient and sustainable growth of investment and GDP as much as expected. Thus, the main objective of this study is to examine the impact of foreign capital inflows on investment and economic growth in Ethiopia. In this study time series data from 1980 to 2019 was examined by using ordinary least square estimation technique. Economic growth and gross fixed investment were used as dependent variable. Foreign aid, foreign capital inflow, domestic saving, and export were used as independent variables in both models. In addition, labour force and human capital were used in economic growth model. On the other hand, real gross domestic product and external debt are used in gross fixed investment. The result revealed that foreign capital inflow, export, labor force, and human capital have positive significant effect on economic growth. Finally, gross fixed investment is positively affected by foreign capital inflow, export and external debt. Thus it is recommended that the government should diversify export and export both finished and semi-finished goods, using borrowed money and foreign capital inflow for productive investments.