Exploring the Linkage and Impact of Foreign Direct Investment and Economic Growth in Ethiopia: (Evidence from ARDL model)

Abstract

Many economists wonder why countries grow at different rates. Leaders and policymakers strongly believe that Foreign Direct Investment (FDI) is one of the tools for a nation's economic growth. However, existing studies have not reached a consensus on the impact of FDI on economic growth. This study aims to examine the long-term relationship and causality between FDI and economic growth, as well as analyze the short-term and long-term effects of FDI on economic growth from 1995 to 2015. The data sources for this study were the Ethiopian Investment Agency, the National Bank of Ethiopia, and the World Bank database. The researcher used Johannes, VEC, and ARDL modeling approaches to answer the research questions. According to the Johannes model, there is a long-term relationship between FDI and economic growth. The Vector Error Correction model shows that causality is unidirectional, from economic growth to FDI. The ARDL model indicates that in the long term, the impact of economic growth on FDI is not significant. However, the estimation results from the ARDL model reveal that in the short term, economic growth has a positive and statistically significant impact in attracting FDI to the country. Therefore, it is recommended that policymakers and decision-makers in Ethiopia devise mechanisms to sustain the positive impact of economic growth in terms of attracting FDI.

Keywords: Foreign Direct Investment, Economic Growth and ARDL model

DOI: 10.7176/JPID/64-01

Publication date: January 31^st 2025