The Effects of FDI on Export: The Case of Ethiopia

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Although there is considerable evidence on the link between FDI and export in developing countries, the causal relationship of these variables still remain an important question. Significantly, there is an overall agreement that inward FDI has a positive effect on the host country's export performance. However, the results on this issue were inconclusive and require more evidence. The Ethiopian case is more relevant to this topic because Ethiopia consistently encouraged FDI inflows. The objective of this paper is to investigate the remaining barriers of FDI and to examine the effects of inward FDI on Ethiopian export performance from 1974 to 2006. The major hypothesis is that inward FDI has had a positive impact on Ethiopian export performance. The paper attempts to examine the possible effect of FDI and export in Ethiopian economy with a focus on the relationship between FDI and host country exports. It has reviewed the evolution of various FDI regimes and linked them with long term FDI performance and exports. The empirical part of the paper examines the association between FDI and host country exports. A cointegration analysis in a multivariate VAR model is applied for causality test. The Johansen cointegration test procedure and error correction mechanism are employed to capture the linkage between the variables interest. The results of the regression analysis provide much support for the link between export and FDJ in Ethiopia. It shows not only a long run relationship between the variables but also the existence of causality in the short run. Thus, it is an evidence for bi-directional causality between FDI and export. It also indicates that ,FDI inflows have a significant and positive effect on the host country exports. Hence, providing more incentives to export oriented foreign firms into a more strategic core is a plausible means to stretch the positive linkage of FDJ and export performance



FDI of Export