Determinants of Foreign Direct Investment Flows in Ethiopia

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Addis Ababa University


This paper attempts to examine the determinants of Foreign Direct Investment flow in Ethiopia. The study applies multivariate ordinary least square regression by using time series data covering over the period 1974 to 2015. In order to point out the main factors that can highly affect the inflow of FDI in Ethiopia and to know how much these factors affect FDI leading to an oscillating trend, the study took the determinant of FDI in Ethiopia such as infrastructure development, the domestic market size and growth potential, macroeconomic stability, human capital development, openness, and external debt and evaluate as to how they affect the inflow of FDI. In the analysis there are findings. Firstly, I found that the explanatory variable such as macroeconomic stability measured by inflation rate, and openness have significant and negatively related to FDI. Second, exchange rate and school enrollment rate proxy of macroeconomic stability and human capital development respectively are found positively related and statistically significant to the inflow of FDI. Thread, gross fixed capital formation and real GDP growth rate proxy of infrastructures and market size respectively have statistically significant and positively related to FDI. Last, foreign debt has negative and insignificant effect on FDI. These findings imply that inflation and trade openness should be controlled and improved by giving special attention. Key words: FDI, FDI determinants, time series, ordinary least square regression



FDI; FDI determinants; time series; ordinary least square regression