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

Abstract

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.