The Effects of Foreign Direct Investment and International Trade on Ethiopian Economic Growth
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Date
2019-04
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Addis Ababa University
Abstract
Foreign direct investment and international trade are considered as essential factors in
achieving sustainable economic growth. Most theories are in support of their positive influence
on the economic growth of countries. However, empirical studies in this area have presented
mixed findings. In the case of Ethiopia, limited number of studies have been conducted on the
individual variables’ effects on economic growth. Thus, their findings are mostly mixed and
inconclusive. In this regard, this study has been conducted with the aim of examining the effects
of FDI and international trade on Ethiopian economic growth over the period 1992 to 2017. The
autoregressive distributive lag model was employed to analyze the annual secondary data
among the variables: real GDP growth, FDI, export, import, remittance, external debt and tax
revenue. According to the results, FDI’s effect was positive but insignificant both in the short and
long run. Exports have a positive and significant effect both in the short and long run. Imports
have a negative effect both in the short and long run but are significant only in the long run.
Remittance has a positive effect both in the short and long run but significant only in the long
run. External debt has a negative and significant effect both in the long and short run. Tax
revenue has a positive and significant effect both in the short and long run. Hence, from the
findings, the Ethiopian government needs to carefully scrutinize its policies regarding FDI as its
effect on economic growth is positive but insignificant. Exports are useful for economic growth
of Ethiopia, hence, policies encouraging exports have to be put in place. However, policies
towards import need to be controlling as the rise in imports is resulting in the widening of trade
deficit.
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Keywords
ARDL, Economic Growth, International Trade