The Impact of Foreign Direct Investment on Poverty Reduction in Ethiopia: Co-integrated Var Approach
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Date
2012-12
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Addis Ababa University
Abstract
Many developing countries are competing to attract foreign direct investment with a
belief that it can be a tool for poverty reduction. The Ethiopian government has opened
several economic sectors to foreign investors and issued several investment incentives for
foreign investors. Since the market oriented economic reforms took place in 1992
emphasis has been given to attracting FDI. In this study, the relationship between FDI
and poverty reduction is analyzed empirically. It is based on secondary data which was
collected from the Ethiopian investment agency, UNCTADs database and the World
Bank’s world development indicators. The period covered in the study is 1970-2009. The
model was estimated using the Co-integrated VAR approach. The results show that FDI
has a negative, impact on economic growth and hence does not reduce poverty in the
country. This may be due to the under development of human capital, backward
institutions, crowding out of domestic investment or other reasons which require further
investigation. The fact that FDI does not contribute to poverty reduction has an
important implication for policy makers, especially trade and FDI policies must be
checked closely in order to make FDI growth enhancing in Ethiopia
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Keywords
Foreign Direct Investment