Determinants of Foreign Direct Investment in Ethiopia: Systematic Review

Abstract

The determinants of FDI include any host country’s situations that affect the inflow of FDI, like market size, the economic growth rate, real growth domestic product, infrastructure, natural resource, the political situation etc.  In recent years, Ethiopia has started encouraging the inflow of FDI by improving the investment climate and by providing different incentive packages. The focus of this review is to identify the major determinants of foreign direct investment (FDI) in Ethiopia.  The results show that the variables like real growth domestic product, liberalization, exchange rate devaluation, and trade openness are significant and have a positive correlation with the inflow of FDI in Ethiopia. On the other hand, variables like inflation, poor infrastructure; volatile and high lending interest rate have a significant and negative association with the inflow of foreign direct investment.  Finally, the study recommends possible intervention of the government through infrastructure development and formulation of sound fiscal and monetary policies to control the negative impact of inflation, interest rate and other macro variables.

Keywords: FDI, RGDP, Inflation, liberalization, interest rate, Ethiopia.