The Role of Host Country Factors and Institutional Framework for FDI Spillovers in Ethiopia: Evidence from Manufacturing Industry

Abstract

This study is aimed at assessing the role of host country factors and institutions in mediating the intra-industry productivity spillovers in the manufacturing industry. In this study, we use firm-level survey data on large and medium scale manufacturing industries collected by the Central Statistics Authority (CSA) of Ethiopia. Panel data econometrics with fixed effects estimation technique is used as a method of analysis. After addressing all the estimation issues, we estimate the baseline model containing only the interaction terms as an explanatory variable and the extended model incorporating observable and unobservable control variables. The observable control variables, industry fixed effects and firm fixed effects are included in the model after checking their respective significance. We incorporate these variables in our estimation to be more confident in isolating the spillovers effect of FDI on productivity of domestic firms.The estimation result revealed that the intra-industry spillovers effect of FDI on productivity of domestic firms is positive except through the labor mobility channel which will not be reversed even in one year. In contrast, the estimation result suggests that the degree of openness, human capital stock and financial sector efficiency positively and significantly mediates the productivity effect from FDI. Concerning the control variables included in the model, capital intensity and age positively and significantly affects domestic firms’ productivity.

Keywords: FDI Spillovers, Panel Data Econometrics, Fixed Effects Estimation

DOI: 10.7176/JESD/10-17-06

Publication date:September 30^th 2019