Impact of Foreign Direct Investment on Economic growth of Ethiopia A Time Series Empirical Analysis, 1974-2011

Abstract

Abstract This paper measures the impact of foreign direct investment (FDI) on economic growth in Ethiopia based on annual time series data over the period 1974 to 2011. It in particular examines how FDI affects GDP growth, both directly and also conditioning on trade liberalization that Ethiopia adopted in early 1990s. I estimate three different growth model specifications to investigate these relationships using Ordinary Least Square (OLS) method. Results show that two years lagged FDI has a positive and statistically significant effect on contemporary economic growth. On the other hand, FDI after trade liberalization has positive but statistically insignificant effect on economic growth. Results further show that the positive impact of domestic investment on economic growth becomes less when FDI assumes positive significant impact, implying the crowding out effect of FDI on domestic investment. Other major determinants of economic growth that I controlled in the estimated models show expected sign and statistical significance. Export and absence of war and drought increase growth, whilst import remains insignificant. Results in this study imply the need for the government to build infrastructure and invest in human capital to avoid any lags in utilizing benefits of FDI. Besides, the government should be able to create the right environment to realize benefit from spill over effects of between domestic investment and FDI.