The nexus between foreign direct investment, domestic investment and economic growth: Evidence from Ethiopia

Garedew Aweke Gizaw1, Negash Haile Dedeho2, Tariku Lorato Lodamo3
1 Lecturer of Economics, Dilla University, Ethiopia
2 Ph.D Candidate, Maastricht University, Netherland
3 Lecturer of Economics, Dilla University, Ethiopia

Article History
Received: 18 March 2021   Revised: 20 May 2021   Accepted: 31 May 2021   Available Online: 6 June 2021

Keywords: Investment, Economic growth, ARDL Approach.
JEL classification: F21

Citation: Gizaw, G. A., Dedeho, N. H., Lodamo, T. L. (2021). The nexus between foreign direct investment, domestic investment and economic growth: Evidence from Ethiopia, Review of Socio-Economic Perspectives, Vol 6(2), 47-57.

This study is an effort to show the long-run effects of foreign direct investment and domestic investment on economic growth of Ethiopia and tested the hypotheses that whether foreign direct investment crowds-in or crowds-out domestic investment in Ethiopia. A macroeconomic annual basis data covering 1981 up to 2019 is used and an auto regressive distributive lag (ARDL) econometric regression technique is employed. The result from domestic investment equation shows that foreign direct investment crowd-in domestic investment in Ethiopia. The implication is that in order to increase more domestic investment activity in the country, the government and policy makers have to harmonize the countries investment policy by bringing more FDI inflow from the rest of the world. This might be done by securing peace and political stability in the country, reducing the existing problems of access in electricity, transportation and telecommunication services, reasonable devaluation of domestic currency and by decreasing import tariff on intermediate products. Besides, GDP growth rate of the country can increase the domestic investment activity of the country. But, FDI is found to be insignificant in affecting economic growth of the country rather its positive effect is witnessed only on domestic investment of the country. Domestic public investment and private investment are found to be significant in affecting real GDP growth rate of the country. This might induce the government to liberalization of the goods and factor markets for the private sector, public sector and tax reform and diversifying the economy in order to generate more revenue for investment and so as to achieve long run economic growth in the country.



Abdaljawwad, O. N., & Sarmidi, T. (2018). Private sector investment and economic growth in Palestine. Umran-international Journal of Islamic and Civilizational Studies5(1).

Aurangzeb, A., & Haq, U. (2012). Impact of investment activities on economic growth of Pakistan. Business and Management Review, Vol. 2(1), 92-100.

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of political economy98(5, Part 2), S103-S125.

Bouchoucha, N., & Bakari, S. (2019). The Impact of Domestic and Foreign Direct Investment on Economic Growth: Fresh Evidence from Tunisia. Munich Personal RePEc Archive, Working paper.

Chibber, A., Dailami, M., & Shafik, N. (1992). Reviving Private Investment in Developing Countries. Empirical Studies and Policy Lessons.

Ditimi, A., & Matthew, O. (2015). FDI, private investment and public investment in Nigeria: An unravelled dynamic relation. Journal of Economic & Financial Studies3(05), 10-18.

Easterly, W. (1993). How much do distortions affect growth? Journal of Monetary economics32(2), 187-212.

Gizaw, D. (2015). The Impact of Foreign Direct Investment on Economic Growth. The case of Ethiopia. Journal of Poverty, Investment and Development N15, 20015.

Green, W. H. (2003). Econometric Analysis, Person Education. Inc., Upper Saddle River, New Jersey.

Harris, R., & Sollis, R. (2003). Applied time series modelling and forecasting. Wiley.

Ibrahim, O. A., & Hassan, H. M. (2013). Determinants of foreign direct investment in Sudan: an econometric perspective. The journal of North African studies18(1), 1-15.

Jude, C. (2019). Does FDI crowd out domestic investment in transition countries? Economics of Transition and Institutional Change27(1), 163-200.

Lasbrey, A., Enyoghasim, M., Tobechi, A., Uwajumogu, N., Chukwu, B., & Kennedy, O. (2018). Foreign Direct Investment and Economic Growth: Literature from 1980 to 2018. International Journal of Economics and Financial Issues8(5), 309-318.

Lean, H. H., & Tan, B. W. (2011). Linkages between Foreign Direct Investment, Domestic Investment and Economic Growth in Malaysia. Journal of Economic Cooperation & Development32(4).

Melak, A. (2018). The Contribution of Foreign Direct Investment for Economic Growth of Ethiopia: Time Series Analysis. International Journal of Contemporary Research and Review9(02).

Milbourne, R., Otto, G., & Voss, G. (2003). Public investment and economic growth. Applied Economics35(5), 527-540.

Narayan, P. K. (2005). The saving and investment nexus for China: evidence from cointegration tests. Applied economics37(17), 1979-1990.

Ndikumana, L., & Verick, S. (2008). The linkages between FDI and domestic investment: Unravelling the developmental impact of foreign investment in Sub‐Saharan Africa. Development Policy Review26(6), 713-726.

Nguyen, C. T., & Trinh, L. T. (2018). The impacts of public investment on private investment and economic growth. Journal of Asian Business and Economic Studies.

Nurudeen Abu M. Zaini A. Karim (2016). The relationships between foreign direct investment, domestic savings, domestic investment, and economic growth in Sub-Saharan Africa. Journal of Society and Economy, 38(2), 193–217.

Omri, A. (2014). The nexus among foreign investment, domestic capital and economic growth: Empirical evidence from the MENA region. Research in economics68(3), 257-263.

Pesaran, M. H., & Shin, Y. (1998). An autoregressive distributed-lag modelling approach to cointegration analysis. Econometric Society Monographs31, 371-413.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics16(3), 289-326.

Phetsavong, K., & Ichihashi, M. (2012). The impact of public and private investment on economic growth: evidence from developing Asian countries. Hiroshima University.

Romer, D. (1996). Advanced Macroeconomics. McGraw-Hill.

Saglam, B. B., & Yalta, A. Y. (2011). Dynamic linkages among foreign direct investment, public investment and private investment: Evidence from Turkey. Applied Econometrics and International Development11(2), 71-82.

Selmi, N. (2016). FDI-Local Investment Nexus: Evidence from MENA Region. International Journal of Economics and Finance8(7).

Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics70(1), 65-94.

Wang, M. (2010). Foreign direct investment and domestic investment in the host country: evidence from panel study. Applied Economics42(29), 3711-3721.

Yahia, Y. E., Liu, H., Khan, M. A., Shah, S. S. H., & Islam, M. A. (2018). The impact of foreign direct investment on domestic investment: Evidence from Sudan. International Journal of Economics and Financial Issues8(6), 1.