An Analysis of Foreign Direct Investment: The Case of Ethiopia: Co-Integrated VAR Approach
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2015-06
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Abstract
paper gives analysis on Foreign Direct Investment (FDI) in Ethiopia based on study using Co-integrated VAR approach over the period 1974/75 to 2013/14. It in particular examines the trend of FDI inflow on regional, sectoral and by country of origin bases. The study also discusses why Ethiopia is conducive for Foreign Direct Investment, the area of opportunity, the problems faced by foreign investors and the institutional and regulatory framework.
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 in the long run explanatory variable such as infrastructure development, the domestic market size, Human Capital, openness, and external debt are found positively related and statistically significant while inflation rate is negatively related and statistically significant. Secondly, in the short run Gross Fixed Capital Formation and inflation become negatively related and they are statistically significant while Gross Domestic Product is positively related and statistically significant that supports the hypothesis that the growing economy attracts more FDI. While the remaining variables of debt servicing, openness, and human capital has a positive coefficient but is insignificant in the short run. Thirdly, there is bi directional causality between Gross Fixed Capital Formation and FDI and the variables of inflation, Gross Domestic Product, Debt Servicing, Openness and Human Capital does Granger- causes foreign direct investment but not the other way around. Overall, the major policy implication of this study is that, foreign direct investment is more determined by infrastructural activities, market size, macroeconomic stability, and openness in long run case. Hence, in order to increase the inflow of FDI first it is very crucial to concentrate on the above economic activities. On the other hand, I found that economic growth has positive and significant effect on FDI. These suggest the decisive role of growth in stimulating investment by foreign as well as domestic investors. Hence, the current fast economic growth of the country signals a country’s economic prospects and encourages foreign investors
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Foreign Direct Investment