Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach

Betselot Addisu Ayal; Kassa Yirga Bekalu; Mulugeta Molla Ayenalem

doi:doi:10.11648/j.sjbm.20241204.12

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Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach

Betselot Addisu Ayal^*

, Kassa Yirga Bekalu

, Mulugeta Molla Ayenalem

Published in Science Journal of Business and Management (Volume 12, Issue 4)

Received: 17 September 2024 Accepted: 6 October 2024 Published: 31 October 2024

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Abstract

FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.

Published in	Science Journal of Business and Management (Volume 12, Issue 4)
DOI	10.11648/j.sjbm.20241204.12
Page(s)	85-98
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Determinants of FDI, Time-Series Analysis, ARDL Model, Bound Test, Ethiopia

References

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APA Style

Ayal, B. A., Bekalu, K. Y., Ayenalem, M. M. (2024). Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Science Journal of Business and Management, 12(4), 85-98. https://doi.org/10.11648/j.sjbm.20241204.12

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ACS Style

Ayal, B. A.; Bekalu, K. Y.; Ayenalem, M. M. Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Sci. J. Bus. Manag. 2024, 12(4), 85-98. doi: 10.11648/j.sjbm.20241204.12

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AMA Style

Ayal BA, Bekalu KY, Ayenalem MM. Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Sci J Bus Manag. 2024;12(4):85-98. doi: 10.11648/j.sjbm.20241204.12

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@article{10.11648/j.sjbm.20241204.12,
  author = {Betselot Addisu Ayal and Kassa Yirga Bekalu and Mulugeta Molla Ayenalem},
  title = {Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach
},
  journal = {Science Journal of Business and Management},
  volume = {12},
  number = {4},
  pages = {85-98},
  doi = {10.11648/j.sjbm.20241204.12},
  url = {https://doi.org/10.11648/j.sjbm.20241204.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.sjbm.20241204.12},
  abstract = {FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.
},
 year = {2024}
}

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TY  - JOUR
T1  - Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach

AU  - Betselot Addisu Ayal
AU  - Kassa Yirga Bekalu
AU  - Mulugeta Molla Ayenalem
Y1  - 2024/10/31
PY  - 2024
N1  - https://doi.org/10.11648/j.sjbm.20241204.12
DO  - 10.11648/j.sjbm.20241204.12
T2  - Science Journal of Business and Management
JF  - Science Journal of Business and Management
JO  - Science Journal of Business and Management
SP  - 85
EP  - 98
PB  - Science Publishing Group
SN  - 2331-0634
UR  - https://doi.org/10.11648/j.sjbm.20241204.12
AB  - FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.

VL  - 12
IS  - 4
ER  -

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Author Information

Betselot Addisu Ayal

Department of Political Science and International Relations, Dire Dawa University, Dire Dawa, Ethiopia

Contact Email

http://orcid.org/0009-0005-5647-6301
Kassa Yirga Bekalu

Department of Political Science and International Relations, Dire Dawa University, Dire Dawa, Ethiopia

Contact Email

http://orcid.org/0009-0003-9399-2255
Mulugeta Molla Ayenalem

Department of Political Science and International Relations, Dire Dawa University, Dire Dawa, Ethiopia

Contact Email

http://orcid.org/0000-0002-1175-1964

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Ayal, B. A., Bekalu, K. Y., Ayenalem, M. M. (2024). Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Science Journal of Business and Management, 12(4), 85-98. https://doi.org/10.11648/j.sjbm.20241204.12

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ACS Style

Ayal, B. A.; Bekalu, K. Y.; Ayenalem, M. M. Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Sci. J. Bus. Manag. 2024, 12(4), 85-98. doi: 10.11648/j.sjbm.20241204.12

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AMA Style

Ayal BA, Bekalu KY, Ayenalem MM. Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach. Sci J Bus Manag. 2024;12(4):85-98. doi: 10.11648/j.sjbm.20241204.12

Copy | Download

@article{10.11648/j.sjbm.20241204.12,
  author = {Betselot Addisu Ayal and Kassa Yirga Bekalu and Mulugeta Molla Ayenalem},
  title = {Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach
},
  journal = {Science Journal of Business and Management},
  volume = {12},
  number = {4},
  pages = {85-98},
  doi = {10.11648/j.sjbm.20241204.12},
  url = {https://doi.org/10.11648/j.sjbm.20241204.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.sjbm.20241204.12},
  abstract = {FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.
},
 year = {2024}
}

Copy | Download

TY  - JOUR
T1  - Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach

AU  - Betselot Addisu Ayal
AU  - Kassa Yirga Bekalu
AU  - Mulugeta Molla Ayenalem
Y1  - 2024/10/31
PY  - 2024
N1  - https://doi.org/10.11648/j.sjbm.20241204.12
DO  - 10.11648/j.sjbm.20241204.12
T2  - Science Journal of Business and Management
JF  - Science Journal of Business and Management
JO  - Science Journal of Business and Management
SP  - 85
EP  - 98
PB  - Science Publishing Group
SN  - 2331-0634
UR  - https://doi.org/10.11648/j.sjbm.20241204.12
AB  - FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.

VL  - 12
IS  - 4
ER  -

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