Macroeconomic Determinants of Foreign Direct Investment in Ethiopia: (A Time Series Analysis)
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Date
2016-06
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Addis Ababa University
Abstract
This paper gives an analysis on Macroeconomic determinants of Foreign Direct Investment
(FDI) in Ethiopia based on a time series data using the period from 1982 to 2014G.C. It is also
examines the trend of FDI inflows to the country. The study also discusses why Ethiopia is
conducive for Foreign Direct Investment and the area of opportunity.
In order to point out the main macro level 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 macro level data in Ethiopia, such as, infrastructure development, potential
economic growth, macroeconomic stability, human capital development and Trade openness. In
addition, the study gives an extensive account to the theoretical explanation of FDI based on both
macro and micro perspectives.
Findings show that, in the long run explanatory variable such as infrastructure development,
potential economic growth and Trade openness are found positively related and statistically
significant while Inflation Rate and Human Capital (illiteracy level) are negatively related and
statistically significant. Its parallel with the hypothesis of growing economy attracts more FDI
and higher illiteracy level hampers FDI inflows. On the other hand, in the short run tele per 100,
Gross Fixed Capital Formation, Openness and Potential Economic Growth become negatively
related and they are statistically insignificant where as illiteracy rate and inflation are positively
related and statistically significant.
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In general, the major implication of this study is that, in Ethiopia foreign direct investment is
more determined by sufficient infrastructural activities, higher economic growth, and
macroeconomic stability, educated human capital and unrestricted trade in the long run. Hence,
in order to increase the inflow of FDI, it is very crucial to concentrate on the mentioned macro
economic sectors.
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Keywords
Macroeconomic Determinants