Effect Of Foreign Direct Investement On The Groth Of Ethiopian Economy

Abstract

The main purpose of this paper is to examine the impacts of foreign direct investment on the growth of Ethiopian Economy based on time series data over the period 1992 to 2022 using aggregate national data. It measures particularly how Foreign Direct Investment affects Gross Domestic Product growth; and other variables such as gross domestic saving, trade, inflation, domestic Investment and Employment have been incorporated. Other major determinant of economic growth that was included in the model was domestic saving, government consumption and domestic investment. In order to fully account for feedbacks, autoregressive distributed lag (ARDL) model was used. The results show that there is short range as well as long-run relationship between foreign direct investment and economic growth and it is significant and affects positively. Results further show that the positive impact of domestic investment on economic growth becomes less when Foreign Direct Investment assumes positive significant impact, implying the crowding out effect of Foreign Direct Investment on domestic investment. These variables also show that they have a positive and significant effect on Gross Domestic Product. Results in this study imply the need for the government to setup institutions with clears regulation to control after operation and avoid any damage and lags in utilizing benefits arise from Foreign Direct Investment. Besides, the government should be able to create the right environment to realize the benefit from spillover effects of between domestic investment and Foreign Direct Investment to adjust the crowding out effect. Hence, the researcher therefore recommends that, a host country receives a diversified Foreign Direct Investment or non-resource-seeking Foreign Direct Investment when it has reached a certain minimum level of development. The implication of this for Ethiopia, the least developed country, is that a certain minimum level of development is a necessary condition to attract and control negative impacts of FDI. Key words: FDI, Investment, Impact, GDP, ARDL