Abstract
The Foreign Direct Investment has been recognized one of the main tools that can drive the host country to achieve industrialization due to multiple roles of bringing capital investment, technology, and skills, which are vital, the industrialization process.The motivation behind this study is to research the effect of Foreign Direct Investment inflow Industrialization in Ethiopia, utilizing the time series data from 1992-2017 and employing the Vector Autoregressive model (VECM). The result of the Johanson cointegration test demonstrated that there exists a long-run equilibrium relationship between the variables. Moreover, the outcome of VECM for Long-Run analysis shown that FDI has a positive impact and significant on Industrialization while the result of the short-run analysis showed that the FDI has insignificant but positive in impact on Industrialization, which means that the FDI inflows have a significant impact on Ethiopia's industrialization in the end. Similarly, the variance decomposition outcome reveals the impact FDI in the short-run is not too significant, but its impact increases in the long –run. Therefore, this study recommends that the government to give a suitable strategy and policies, which would give the first priority to attract more FDI and associate with the industrialization, process that ongoing on in the country.
Highlights
As many scholars’ consensus, one of the first steps to achieve sustainable development is industrialization, which has long last benefits on economic growth
The average value of industry value added is around 12.55 while its a minimum value of is around 6.25 and its maximum is around 22.5. the normal portion of Foreign direct investment is around 3.4 percentage of GDP and the lowest Foreign Direct Investment (FDI) that the country received is around 0.005 percentage of GDP while the highest maximum FDI that country ever received is around 5.4 percentage of GDP
FDI has a positive impact and significant on IVA which means whenever one percentage increases the Foreign Direct Investment will cause to 2.7 percentage increase of Industry, value added (% of GDP)
Summary
As many scholars’ consensus, one of the first steps to achieve sustainable development is industrialization, which has long last benefits on economic growth. (Szirmai & Verspagen, 2015) And (Rodrik, 2012) While Ethiopia realizes the importance of industrialization carried out significant economic reforms in 1992. The government implemented a new economic policy in which the push of the reform, which was aimed from controlled to a market economy. Despite this rapid growth, the structural transformation of the economy remains the country’s central challenge to get a handle for that obstacle the Ethiopian government has founded Industrial policies, and along with that, the government realized that without getting Foreign Direct Investment (FDI) it is unlikely to overcome that barrier. If ongoing economic development and comprehensive industrial policy to be continued, the country might very well be on route to turning into Africa's manufacturing powerhouse. I believe that this study will give a new direction of studies to research the relationship between Foreign Direct Investment and Industrialization in Ethiopia
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