Abstract
The objective of this study is to investigate the relationship between foreign direct investment and economic growth in Ethiopia by employing an Autoregressive Distributed Lag (ARDL) model. For the purpose of examining the relationship between FDI and economic growth a time series data was collected for the period 1992/93-2018/19. According to the findings of this study, foreign direct investment is found to influence economic growth positively and significantly both in the short run and long run. Moreover, in order to identify the direction of causality between economic growth and foreign direct investment a Granger Causality test were undertaken. The result from the causality test shows that there is a unidirectional causality running from economic growth to FDI. Thus, policies that aim to expand infrastructural facilities and good management skill have to be implemented to attract more foreign direct investment in Ethiopia. Keywords: Economic growth, FDI, ARDL DOI: 10.7176/RJFA/12-9-013 Publication date: May 31 st 2021
Highlights
During the early periods of 1950s and 1960s, foreign direct investment was viewed at with great doubt by some developing countries (DCs)
Recommendations This study was conducted to investigate the effect of foreign direct investment on economic growth in Ethiopia by employing Autoregressive Distributed Lag (ARDL) model
For the purpose of examining the relationship between foreign direct investment (FDI) and economic growth; a time series data for macro-economic variables like gross capital formation, national saving, human capital, FDI, Real Gross Domestic Product (GDP) per capital and trade openness were collected for the period 1992/93- 2018/19
Summary
During the early periods of 1950s and 1960s, foreign direct investment was viewed at with great doubt by some developing countries (DCs). FDI was seen as a dictating factor and transnational corporations (TNCs) were suspected of reducing social welfare by manipulating transfers prices and the formation of economic enclaves. At present there are some witnesses showing a radical change in the attitude of developing countries towards FDI. The behavior of suspicion is replaced by a promoted attracting policy aiming at substantial inflows of FDI (Oman, 2000). This change in attitude was abundant in part made possible by a global economic environment increasingly liberal and an economic literature highlighting the virtues of FDI. Several scholars (Dunning, 1993), (Moran, 1998), and (Lall, 2000) granted the important role of FDI to economic development
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