Abstract:
This study examined the relationship between foreign direct investment, environmental quality and economic growth in Ethiopia over a period of about 41 years that spans from 1981 to 2022 by using ARDL and vector error correction model. The result of co-integration test applying the bounds cointegration test approach shows the presence of long run equilibrium relationship between the variables under consideration. Based on economic growth equation, the study found that gross capital formation, labor force, financial development, trade openness and inflation have statistically significant impact at 1% significance level on economic growth in the long run. Except for, financial development and trade openness they have positive impacts on economic growth. But, foreign direct investment, carbon-dioxide emissions and human capital were found to have statistically insignificant impact 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. 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 proper national policies and 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
