FACTORS AFFECTING FDI FLOW IN ETHIOPIA: AN EMPIRICAL INVESTIGATION

Abstract

The study was carried out to establish the possible factors that determine the inflow of Foreign Direct Investment in Ethiopia. In this study, the researcher used secondary time series data from 1992 to 2015.Vector Autoregressive Model (VAR) and Vector Error Correction Model (VECM) estimation were used. The time series properties of the variables were examined in the process. It first tests for unit root using the Augmented Dickey Fuller (ADF) test and Phillips-Perron (PP) unit-root test. The VAR technique was employed to derive the long-run relationship. The result of long run dynamic model shows that infrastructure development, trade openness, external debt, market size and inflation rate significantly and positively affect the inflow of FDI. From a policy point of view, the results suggest that, to promote FDI, Ethiopia should develop and introduce policies that increase the level of trade openness, infrastructure development, macroeconomic stability and market size.