The Impact of Foreign Direct Investment on Economic Growth. The case of Ethiopia

Abstract

This study examines the impact of foreign direct investment on economic growth of Ethiopia using yearly time-series data for 1974 through 2013.  Economic growth is proxies by real per capita gross domestic product and foreign direct investment proxies by the inflow of foreign direct investment. Other control variables such as gross domestic saving, trade, government consumption and inflation have been incorporated. In order to fully account for feedbacks, a vector autoregressive model is utilized.  The results show that there is a stable, long-run relationship between foreign direct investment and economic growth.  The variance decomposition results show that the main sources of Ethiopia economic growth variations are due largely own shocks. The pair-wise Granger  causality  result  show that  there  is a unidirectional causality  that  run from FDI  to economic  growth of Ethiopia.   Hence,  the researcher therefore  recommend  that, FDI  facilitate  economic  growth, so the government  has  to exert  much effort in order  to attract more FDI into the country.

Keywords: Real per capita GDP, FDI, Co-integration, VECM, Granger causality.