Does Foreign Direct Investment Drive Ethiopia’s Economy? Evidence from Non-Linear ARDL Model

Asymmetric effect; Long-run; Negative shocks; Positive shocks; Short-run

Authors

  • Desta Bati Nuno
    destabati8@gmail.com
    Department of Statistics, College of Computing and Informatics, Ethiopia
June 1, 2024

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Background: Numerous scholars agree that various macroeconomic variables influence economic growth.
However, researchers' empirical findings on whether foreign direct investment boosts or hinders economic
growth are not clear. Thus, there is a need to examine whether Ethiopia’s economic growth is impacted by
Foreign Direct Investment (FDI) as a source of empirical knowledge for sustainable development.
Objective: The objective of this study was to investigate the symmetric and asymmetric effect of foreign
direct investment on Ethiopia’s economic growth.
Materials and Methods: This study applied annual time series data obtained from the years ranging
between 1992 and 2021 to estimate Autoregressive Distributed Lag (ARDL) and Non-linear Autoregressive
Distributed Lag (ARDL) models. Stationarity of the variables under study was checked using ADF and DF
GLS test. To test the long-run relationship of the variables, we employed a bound test for each model.
Results: The empirical results obtained from NARDL revealed that domestic investment have significant
positive effects on economic growth in both short run and long run. This indicates that 1% increase in
domestic investment causes 0.005% and 0.014% increases in economic growth of the country in the short
run and long-run, respectively. The lagged error-correction term indicated that the system corrects its
previous period disequilibrium at the adjustment speed of 36.65% annually in the long run.
Conclusion: The positive and negative shocks in the foreign direct investment had no effects on GDP per
capita in both long-run and short-run dynamics while domestic investments have significant effects on GDP
per-capita. This shows that the government of Ethiopia should give more attention to the efforts of
increasing domestic investments to boost economic growth rather than relying on foreign direct investment.