UNLOCKING ETHIOPIA’S POTENTIAL: KEY DETERMINANTS OF FOREIGN DIRECT INVESTMENT

Abstract

As studies indicate inconclusive findings, the determinants of foreign direct investment (FDI) have been a topic of debate in economic literature. The study investigated the key determinants of foreign direct investment in Ethiopia from 1980 to 2023 and used the Autoregressive Distributed Lag (ARDL) model. The study found a foreign exchange rate had a positive impact on foreign direct investment and the foreign exchange rate in the country. Additionally, the empirical findings of the study indicate a positive significant relationship between economic growth and foreign direct investment, potentially leading to a bi-directional causality, which implies these variables had a significant impact on the determination of FDI. Furthermore, the study indicates that the consumer price index negatively affects FDI, which implies that higher prices lead to lower levels of investment, deterring economic activities and reducing purchasing power. Furthermore, the results of the F-Bound test show there was a long-run relationship between some of the independent variables and FDI in the model, indicating cointegration despite short-run fluctuations. Finally, it recommended that the Ethiopian policymakers should focus on trade liberalization and increasing trade openness, as well as that the government should implement effective monetary and fiscal policies to solve macroeconomic instability to increase the role of FDI and attract foreign investors.