The effect of foreign direct investment on economic growth in Ethiopia; an empirical investigation

Recent evidences indicate that a large increase in FDI inflows to African countries including Ethiopia. And this FDI has seen as a crucial source of capital inflows and stimulants of economic growth in the country. And in order to attract this FDI, Ethiopia took some steps towards liberalizing trade and the macroeconomic regimes as well as introducing some measures aimed at improving the FDI regulatory frame works. But empirical literatures find mixed evidence on the impact of FDI on Economic growth in the host country. So, the main aim of this study is to empirically investigate the impact of FDI on economic growth by incorporating a simultaneous equation econometric model and 3SLS estimation technique based on time-serious data over the period 1974–2014. Following this empirical analysis, the study found a positive and statistically significant impact of FDI on economic growth in Ethiopia though the impact is weak in magnitude which is below the relative impact of domestic capital investment on economic growth. Thus, this study implies that Ethiopia could enhance its economic growth by improving the amount of FDI inflows and its contribution in the growth process.