Is there a Spillover Effect from Foreign Direct Investment to Local Firms? The Case of Manufacturing Sector in Ethiopia

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This study assesses the spillover effects from foreign direct investment on to local firms in the case of manufacturing sector in Ethiopia. Data was collect from central statistical agency of Ethiopia taking period (2013 -1017). The sample includes 11150 medium and large-scale firms from all regions of the country. The study addressed three questions. First, do foreign firms perform better productivity than local firms? Second, do local firms get positive spillover from foreign firms within the same sector? Third, does the spillover effect from FDI differ from regions that have a greater number of foreign firms to regions that have small number of foreign firms? In order to attain these objectives, both descriptive and econometrics analysis has been used. Fixed effect model is used in order to examine the spillover effect from foreign direct investment to local firms. Different diagnostic tests are used in order to verify the correctness of the model. The study found that, foreign firms have higher productivity compared to local firms. In addition, the study found FDI have positive horizontal spillover effects on local firms. Nevertheless, the study showed that positive spillover effects varied across regions. It is higher in regions that have more number of foreign firms than regions that have small number of foreign firms. The findings suggest that need to continue to implement policies that can encourage spillover effects between foreign and domestic firms and, create favorable conditions to maximize spillover effects from foreign firms.



FDI, determinant factors, productivity, spillovers