Abstract:
Foreign direct investment refers to the purchase of an asset in another country, giving the purchaser direct control over the asset. Understanding the major determinants of FDI can be crucial in advancing our knowledge of how changes in these variables impact FDI inflow in developing countries, specifically in Ethiopia. Past studies are of a mixed and often contradictory nature when it comes to the FDI determinants in developing countries, and the researches on the subject are scarce. The objective of the Research was to identify determinants of Foreign Direct Investment inflow to Ethiopia by analyzing time series data. Data was obtained from the World Bank’s World Development Indicators. A theoretical and empirical review was conducted. An autoregressive distributed lag model analysis was conducted on these variables to identify their impact on Ethiopia’s FDI inflow. Market size, macroeconomic stability, human capital, infrastructure level, trade openness, and financial health were identified as factors most associated with FDI inflow to Ethiopia. The analysis results indicated that FDI inflow to Ethiopia is positively and significantly impacted by the level of infrastructure, human capital development, and higher level of external debt (lower level of financial health). The result also indicated that a high level of inflation rate (a measure of the country’s macroeconomic stability) significantly and negatively affects FDI inflow into the country. Based on these findings of the study, the Ethiopian government should adopt policies to control inflation, the Ethiopian central bank should raise interest rates the Ethiopian government should prioritize infrastructure projects, and the government should invest in improving the quality of education have been recommended
