The Effect of Macroeconomic Variables and Political Instability on Foreign Direct Investment in Ethiopia: A Time Series Analysis Using VECM Model
| dc.contributor.advisor | Tesfa Nega (PhD) | |
| dc.contributor.author | Yifru Yirdaw | |
| dc.date.accessioned | 2026-03-03T05:07:59Z | |
| dc.date.available | 2026-03-03T05:07:59Z | |
| dc.date.issued | 2025-08 | |
| dc.description.abstract | This study analyzes the effect of key macroeconomic determinants and political instability on foreign direct investment (FDI) inflows in Ethiopia from 1992 to 2024. Using annual time-series data and the Vector Error Correction Model (VECM), the study explores both long-run and short-run relationships between real GDP, inflation, real lending interest rates, the period-weighted average exchange rate, political instability, and FDI inflows. The findings indicate the presence of long-run equilibrium relations between FDI and the explanatory factors. High interest rates are found to discourage FDI through increased borrowing costs, and exchange rate volatility has a negatively effect on investor confidence. Political instability also serves as a significant deterrent, eroding economic stability and discouraging long-term investment. Specifically, inflation, interest rates, and political instability are long-run forcing variables, influencing macroeconomic trends without adjusting themselves in the short term. On the other hand, FDI, GDP, and exchange rate variables respond to restore long-run equilibrium after shock. These results highlight the necessity of macroeconomic stability and political certainty in foreign investment inflows. The studies identify the necessities of specific policy responses, including exchange rate stabilization, interest rate moderation, and improving governance, to improve the investment climate in Ethiopia. Policymakers should give priority to long-term economic reforms rather than short-term adjustments to realize investment growth sustainably. By reducing macroeconomic instability and improving institutional stability, Ethiopia can attract and retain foreign investors | |
| dc.identifier.uri | https://etd.aau.edu.et/handle/123456789/7742 | |
| dc.language.iso | en_US | |
| dc.publisher | Addis Ababa University | |
| dc.subject | Foreign Direct Investment (FDI) | |
| dc.subject | Macroeconomic variables | |
| dc.subject | Political instability | |
| dc.subject | VECM model | |
| dc.subject | investment determinants | |
| dc.title | The Effect of Macroeconomic Variables and Political Instability on Foreign Direct Investment in Ethiopia: A Time Series Analysis Using VECM Model | |
| dc.type | Thesis |