Impact of Foreign Direct Investment on Economic Growth in Ethiopia

Abstract

This article analyses the impact of foreign direct investment (FDI) on Ethiopia’s economic growth.
 For this purpose, it uses Vector Autoregressions (VARs) model for the period comprised by years
 1981-2017. It finds that FDI had a significant positive impact on Ethiopia’s economic growth for
 both the short and long-run periods. Adequate human capital and stable macroeconomic
 envirornment have catalysed the contribution of FDI to economic growth. Gross fixed capital
 formation and government consumption exerted a negative and significant effects on economic
 growth during the period of interest. Moreover, the study reveals that there is no causal relationship
 between FDI and economic development. Ethiopia needs to open up the economy and restructure
 the financial sector to attract foreign multinational companies (MNC), especially in the manufacturing
 and agro-industry sectors. Human capital investment should be strength to absorb more foreign
 direct investment and transform the agricultural-based economy to a modern one. Effective
 budgeting system and prioritisation of government consumption will support a more rapidly growing
 economy.