Abstract:
This paper examines the impact of foreign direct investment on poverty reduction in Ethiopia.
The study seeks to test the hypothesis that foreign direct investment has no contribution in
economic growth and has no direct effect on poverty reduction in Ethiopia. The methodology
involves estimating error correction model using time series data for the period 1981-2010. The
results indicate that foreign direct investment has significant positive effect on economic growth
as well as on the poverty reduction of Ethiopia. Domestic economic conditions such as domestic
investment and infrastructure have significant positive effect on both human development index
and economic growth, where as openness has a positive effect merely on economic growth. The
study recommended that effort should be made to encourage the inflow of foreign direct
investment. Even if, foreign direct investment contributes to poverty reduction, parts of the
revenues from the investment, which are collected through tax revenue, rental fees, and export
and import activities, should be used to promote further economic activities, safety nets as well
as investment in infrastructure.
