DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN ETHIOPIA

Abstract

This study deals with identifying the determinants of foreign direct investment inflow into Ethiopia for the period of 1974 to 2012. The study used single regression equation model for testing the formulated hypothesis of each independent variable and multiple linear regression models are also used for analyzing the impact of all independent variable on foreign direct investment inflows. The main contribution and challenges of foreign direct investment to the country economic development has also evaluated. The existing government incentive directed towards foreign direct investment activities were examined and there is the Council of Ministers Regulations No.84/2003, as amended in 2008, which specifies the areas of investment eligible for investment incentives. The variables used in this study are trade openness, gross domestic product per capita, telephone line (per 1,000 people), rate of adult illiteracy, inflation rate, exchange rate, government expenditure, labour force participation rate, gross fixed capital formation and liberalization using dummy variable are the independent variables while foreign direct investment as a percentage of GDP is the dependent variable. The study findings show that trade openness, export, gross fixed capital formation, exchange rate, availability of skilled human capital, major improvements in infrastructure and trade liberalization are the most significant determinant of foreign direct investment inflow into Ethiopia. On the other hand, rate of adult illiteracy have negative impact on inflow of FDI.