Determinants of Foreign Direct Investment in Ethiopia: a time-series analysis

Abstract

In their attempt to attract Foreign Direct Investment (FDI), most African countries have liberalised trade and attempted to create enabling environment in recent decades.Ethiopia, like many African countries, took some steps towards liberalising trade and the macroeconomic regime as well as introducing some measures aimed at improving the FDI regulatory framework.This paper attempts to study the nature and determinants of foreign direct investment in Ethiopia over the period 1974-2001.The study gives an extensive account of the theoretical explanation of FDI as well as reviewing the policy regimes, the FDI regulatory framework and institutional set up in the country over the study period.It also undertakes empirical analysis to establish the determining factors of FDI in Ethiopia.Our findings show that growth rate of real GDP, export orientation, and liberalisation, among others, have positive impact on FDI.On the other hand, macroeconomic instability and poor infrastructure have negative impact on FDI.These findings imply that liberalisation of the trade and regulatory regimes, stable macroeconomic and political environment, and major improvements in infrastructure are essential to attract FDI to Ethiopia.