Abstract:
This study examines the relationship between foreign direct investment, environmental quality
and economic growth in Ethiopia over a period of 1981 to 2019 by using Autogressive
Distributed Lag approach (ARDL) and vector error correction model (VECM). The result of
bounds cointegration test approach shows the presence of long run equilibrium relationship
between the variables under consideration. Based on economic growth equation, gross
capital formation, labor force and inflation have statistically significant positive impact
whereas financial development and trade openness have statistically significant negative
impact at 1% significance level on economic growth in the long run. On the other hand, only
gross capital formation, CO2 emissions, human capital; trade openness and inflation have
statistically significant impact on economic growth in the short run. In environmental quality
equation, the estimated coefficients revealed that gross domestic product per capita has
statistically significant and negative impact on CO2 emissions in the long run. But the square
of gross domestic product has statistically significant and positive impact on CO2 emissions.
This indicates that the EKC hypothesis is not valid in Ethiopia for the study period since EKC
to hold the sign for GDP per capita and GDP per capita square anticipated to positive and
negative respectively. Foreign direct investment has also negative and statistically significant
impact on CO2 emissions. But, in the short run, only foreign direct investment has statistically
significant impact on carbon-dioxide emissions. Speed of adjustment, -0.492832 for economic
growth equation and-0.798364 for environmental quality equation is showing that around
49.3% and 79.8% shocks happened in short run is restored (converge) to long run
equilibrium per year respectively. The study underlined that the government should adopt
CO2 emissions reduction policy in Ethiopia should focus on environmental friendly growth,
encouraging technology innovation and adopt new technologies that may lead to energy
efficiency and advance low carbon economic growth. The government should be guided by
policy prescriptions like Supporting High-Quality and In-Depth Cooperation with FDIInvested
Enterprises and Projects as well as Strengthening Environmental Standards and
Enhance Environmental Supervision of Foreign-Invested Enterprise.
