The Effect of Foreign Direct Investment on Economic Growth in Ethiopia: A Granger Causality Analysis

Abstract

The objective of this study is to investigate the relationship between foreign direct investment and economic growth in Ethiopia by employing an Autoregressive Distributed Lag (ARDL) model. For the purpose of examining the relationship between FDI and economic growth a time series data was collected for the period 1992/93-2018/19. According to the findings of this study, foreign direct investment is found to influence economic growth positively and significantly both in the short run and long run. Moreover, in order to identify the direction of causality between economic growth and foreign direct investment a Granger Causality test were undertaken. The result from the causality test shows that there is a unidirectional causality running from economic growth to FDI. Thus, policies that aim to expand infrastructural facilities and good management skill have to be implemented to attract more foreign direct investment in Ethiopia.

Keywords: Economic growth, FDI, ARDL

DOI: 10.7176/RJFA/12-9-013

Publication date:May 31^st 2021