Determining Factors of Flow of the Foreign Direct Investment in Ethiopia

Abstract

Many developing countries are competing to attract foreign direct investment with a belief that it can be a tool for poverty reduction. The Ethiopian government has opened several economic sectors to foreign investors and issued several investment incentives for foreign investors. Since the market oriented economic reforms took place in 1992 emphasis has been given to attracting FDI. In this study determining factors for foreign direct investment in Ethiopia is analyzed empirically. It is based on secondary data which was collected from the Ethiopian investment agency, UNCTADs database and the World Bank’s world development indicators. The period covered in the study is 1982-2012. The model was estimated using the Autoregressive Distributed Lag Model. Based on our estimation result the past economic growth positively and significantly affect the FDI inflow to the Ethiopian economy during the time under consideration. While past FDI inflow, past institutional quality and macro economic instability (i.e. inflation rate) are also have expected sign but they are insignificant as far as this data is concerned. And the surprising result is openness to international economy turn out with unexpected negative sign and also insignificant in the model.  But this doesn’t mean that these variables are not important at all in influencing FDI inflows to Ethiopia. Ethiopia has the potential to attract a large amount of foreign investment as the economy continues to grow, with its large potential natural recourse (like minerals, arable land and water resources), livestock population and its cheep man power.

Keywords: Foreign Direct Investment, Economic growth, Autoregressive Distributed Lag Model, Ethiopia