Determinants and trend of foreign direct investment in Ethiopia: an empirical investigation

Abstract

Foreign direct investment plays an important role in transferring and diffusing technologies, creating job opportunities, assisting capital formation, fostering international trade integration, establishing marketing and procuring networks for efficient production and boosting sales. This paper investigates the determinants and trend of foreign direct investment in Ethiopia for the period 1980 – 2010. A Vector Error Correction Model (VECM) approach in line with stationarity test, co-integration test and impulse response analysis is employed to dismantle relationship between foreign direct investment and its determinants both in the short run and long run periods. The finding assert that the economy’s market size, domestic investment, openness of the economy, government consumption expenditure, inflation, exchange rate, debt servicing burden, interest rate, road infrastructure and governance quality are the main determinants of foreign direct investment in Ethiopia. The implication of this study is that even if there are no mere policy options that can trusted, policy prescriptions designed to affect certain variables in the economic, financial and socio-political models of foreign direct investment has to be examined carefully before they are put in effect.