Impact Of Foreign Direct investment On Economic Growth In Ethiopia

Abstract

This study examines the impact of foreign direct investment on economic growth of Ethiopia using annually collected time series data for 1980/81-2014/15. Economic growth is representations by real gross domestic product and foreign direct investment proxies by the inflow of foreign direct investment. Other control variables such as fixed capital formation and export have been incorporated. A unit root test was used to determine whether or not the data was stationary. The Johansen co-integration test was then used to test for co-integration. Additionally the Granger causality procedure was used to test the direction of causality between foreign direct investment and economic growth. In order to fully account for feedbacks, a vector autoregressive model is utilized. It was exposed that all the variables were non-stationary in level and first difference form but were all found to be stationary after second differencing. Further, the variables were integrated of order two, I (2). The results show that there is a stable, long-run relationship between foreign direct investment and economic growth in Ethiopia from the period 1980/81-2014/15.becuase that, a unit increase in the FDI encourages on average, leads to an increase of about 4.157028 units in GDP. The pair-wise Granger causality result shows that there is a unidirectional causality that runs from FDI to economic growth of Ethiopia. The results indicate that foreign direct investment has highly significant positive effect on economic growth. Hence, the researcher therefore recommend that, FDI facilitate economic growth, so the government has to apply much effort in order to attract more FDI into the country.