Determinants of Ethiopian Foreign Direct Investment Inflows: Bounds Testing Approach
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Date
2019-06
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Addis Ababa University
Abstract
The very purpose of this research paper is to investigate the long run relationship between foreign direct investment (FDI) and its determinants in Ethiopia. Accordingly, bounds testing approach to Auto Regressive Distributed Lag (ARDL) model has been utilized to test co-integrations among the variables of interests in Ethiopia for the period 1992-2017. Taking foreign direct investment as a dependent variable and real GDP per capita, consumer price index, exchange rate, public debt, gross fixed capital formation and human capital as independent variables, co-integration test has been conducted. The result confirm long run association among these variables. Subsequently, from the long run estimation result output, real GDP per capita as a proxy for market size, gross fixed capital formation as measure of infrastructure development and exchange rate depreciation have positive significant effect on foreign direct investment inflows; but negative and significant effect of consumer price index on foreign direct investment inflows to Ethiopia have been found in the long run. The short run relationship and error correction model (ECM) result reveals positive and significant impact of consumer price index and gross fixed capital formation on FDI inflows. Exchange rate is affecting FDI inflows negatively in the short run as it is shown by the study. The policy of promoting the economy through creating enabling investment climate to increase the output of the economy, maintaining macroeconomic stability, ensuring market determined exchange rate and developing the infrastructure to increase FDI inflows have been recommended.
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Bounds testing, Co-integrations, Ethiopia