IMPACT OF FOREIGN CAPITAL INFLOW ON DOMESTIC SAVINGS IN ETHIOPIA

Abstract

The purpose of this research was to analyze the impact of capital inflow (FDI, foreign loan and foreign aid) on domestic savings. A Time series data of 33 years ranged from 1982 to 2015 were employed. To analyze the data, Vector Error Correction Model was employed and all the required procedures were applied. The results of the study show that loan, foreign aid and FDI had both long and short run effect on domestic saving. However, government expenditure had only a short run effect on domestic saving; Conversely, GDP had only long run effect Government should strive to increase its domestic saving via loan, as well as aid. Apart from the aid the government should encourage FDI into other sectors of the economy in order to support the domestic saving apart from the aid.