Abstract
This study analyzes the trends and determinants of FDI inflow to Ethiopia from India and China. It is based on panel data of 2 decades (1997–2016). It employs a gravity model approach and fixed effects estimation technique to identify factors governing the flow of FDI to Ethiopia. Factors affecting the flow of Indian FDI to Ethiopia include Ethiopia’s trade with India, India’s population size, GDP of Ethiopia, GDP PC of India, real interest rate, credit access and FDI openness in Ethiopia. Similarly, factors governing Chinese FDI flow to Ethiopia include Ethiopia’s GDP growth, Ethiopia’s trade with China, FDI openness and secondary school enrolment. Government expenditure in the host country reduces China’s and India’s FDI inflow. The traditional explanatory variable, a resource rent, is not found significant in explaining FDI in flow from China and India. The FDI inflow from India and China showed an increasing trend with an average rate of 82% and 202%, respectively, during the two-decade period. But the overall trend for both partner countries showed fluctuation across years. We can conclude that FDI from India is responsive to macroeconomic variables such as OER, real interest rate and liberalization measures such as trade openness in Ethiopia. FDI and trade flows from China are positively related to one another and cheap labour is an important attraction factor for Chinese FDI inflow. Policy makers in Ethiopia can focus on macroeconomic reform in case of the country’s relation with India whereas they focus on maintaining cheap labour cost, GDP growth and trade transactions with China.
Highlights
1.1 BackgroundAccording to WB estimates, Ethiopia is one of the fast-growing African economies with an average growth record of 10.6% for the past one and half decades (World Bank Group 2016)
More over this study focuses in indentifying with-in variability of the FDI inflow between a bilateral pair country (Fixed effects estimation) not between the different pair of countries which demands use of random effects estimation
The Beta value indicates that a 1% increase in trade flows increases FDI inflow to Ethiopia by 4.6%
Summary
According to WB estimates, Ethiopia is one of the fast-growing African economies with an average growth record of 10.6% for the past one and half decades (World Bank Group 2016). The Government of Ethiopia is implementing its second phase Growth and Transformation Plan (GTP-II) for the period of 5 years (2015/16–2019/20) with an aim of transforming the country into a manufacturing hub (World Bank Group 2016). China with its second largest economic size is becoming the global game changer with an increasingly important role in Africa’s investment in general and Ethiopia’s FDI inflow in particular. India, which was ranked as the 8th largest economy in real GDP terms in 2013 by WB GDP statistics, is one of the fast-changing global economies with its significant role in Africa in general and Ethiopia in particular through its FDI flow and trade relations
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