Foreign Direct Investment and its Relationship With Growth and Export in Ethiopia

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Addis Abeba university


The main purpose oflhis sludy is 10 examine the relationship of FDIflow 10 Ethiopia wilh economic growlh, expoI'I bOlh al aggregate and secloral level (manufacluring and agriculiure). A simple descriplive analysis, regression, causality, and correlalion analysises lechniques were employed. Dala over 30 years (1981-2010) was usedfor regression and causality analysis. For secloral level analysises data over 1993-2010 was used. The regression equal ion is modeled wilh RGDP as dependent variable and FDI stock/flolV entered as independent variable of inleresl wilh olher control variables (domeslic investment, labor force, lotal government expenditure, and inflation rate). The largest share of FDI flow to Ethiopia is found to be in manufacluring seclor lvhich accounts about j2 % and Ihe rest 22% and 26% goes to Ihe agriculture and service sector respeclively. Regionally, il is characrerized by uneven dislribution, Ihough Ihere is a differentiated incentive slrategy to encourage investment in leasl developed regions. The long run regression result shows that FDI stock is found to be positively relaled to RGDP where as FDI flow is negatively related. In causality analysis, the Granger no causality test failed to reject the hypothesis thai FDI stock does not granger causes RGDP. Conversely, the hypothesis that RGDP does not granger causes FDf slock is rejecled at j% significance level implying Ihe direction of causality ji'om economic growth to FDI slock. In case of aggregate export and FDI stock, the null hypothesis that both variable does not granger cause each other is rejected al j% significance level implying bidirectional causalily between the variables. In examining Ihe relationship between sectoral FD1 flow and sectoral export share as percenlage of merchandise export, for agriculture it is found to be moderate where as for manufacturing it is quite low



Foreign Direct Investment