Impact of Foreign Direct Investment on Economic Growth in Ethiopia

Empirical evidence


This article analyses the impact of foreign direct investment (FDI) on Ethiopia’s economic growth.
For this purpose, it uses Vector Autoregressions (VARs) model for the period comprised by years
1981-2017. It finds that FDI had a significant positive impact on Ethiopia’s economic growth for
both the short and long-run periods. Adequate human capital and stable macroeconomic
envirornment have catalysed the contribution of FDI to economic growth. Gross fixed capital
formation and government consumption exerted a negative and significant effects on economic
growth during the period of interest. Moreover, the study reveals that there is no causal relationship
between FDI and economic development. Ethiopia needs to open up the economy and restructure
the financial sector to attract foreign multinational companies (MNC), especially in the manufacturing
and agro-industry sectors. Human capital investment should be strength to absorb more foreign
direct investment and transform the agricultural-based economy to a modern one. Effective
budgeting system and prioritisation of government consumption will support a more rapidly growing

Author Biographies

School of Social science, Universiti Sains Malaysia

Centre for Global sustainability Studies and School of Social Sciences, University Sains Malaysia & Jigjiga University, Ethiopia.


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Keywords Economic growth, Foreign Direct Investment, VECM, Ethiopia
How to Cite
Muse, A., & Mohd, S. (2021). Impact of Foreign Direct Investment on Economic Growth in Ethiopia. Latin American Journal of Trade Policy, 4(10), 56 - 77. doi:10.5354/0719-9368.2021.61853