DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN ETHIOPIA

Abstract

Foreign Direct Investment (FDI) plays a vital role in accelerating economic growth and development in developing countries like Ethiopia by supplementing domestic capital, creating employment, and enhancing technology transfer. The main objective of this study is to investigate the determinants of foreign direct investment in Ethiopia during the period 1990-2022. The analysis employed both descriptive and econometric techniques to identify the key macroeconomic and institutional factors influencing FDI. This study examines the determinants of foreign direct investment (FDI) inflows in Ethiopia using recent data and extended variables such as government expenditure and political instability. The ARDL model used in this study is specifically tailored to capture the dynamic relationship between FDI and its determinants, allowing for the analysis of both short-run and long-run interactions despite policy reforms, FDI inflows remain low compared to the country’s potential. The findings aim to provide insights for policymakers to design strategies that effectively attract and sustain foreign investment.Variables such as gross domestic product per capita (GDPk), inflation rate, exchange rate, trade openness, government expenditures (EXPN), and political stability were included in the model. The regression results reveal that GDPk, trade openness, and EXPN have a positive and significant effect on FDI inflows, while inflation, exchange rate volatility, and political instability have a negative and significant impact. The findings imply that maintaining macroeconomic stability, improving infrastructure, and ensuring political and institutional stability are crucial for attracting and sustaining foreign investment in Ethiopia. The study recommends that policymakers focus on creating a stable investment environment and strengthening economic reforms to enhance the country’s competitiveness in the global investment market.