FDI-Growth Nexus in Ethiopia: Is there any Causality?

Abstract

The objective of this paper was to investigate the causal link between FDI and economic growth in Ethiopia. Using annual data ranging from 1974-2010 and employing the Toda-Yamamoto (1995) bivariate causality test, we could not find any causality running from FDI to growth or vice versa. However, there was an evidence of cointegration between FDI and growth. The implications of the results are: first, the flow of the aggregate level of FDI is too small to translate in to growth. Second, perhaps FDI flow has gone in to sectors that could not create linkages and fuel economic growth. Thus, developing countries like Ethiopia should formulate policies attracting FDI in to economic sectors that could harness the benefits of the FDI outweighing the costs of hosting FDI (like profit repatriation to FDI sending economy). Seabra and Flach (2005) document adverse impact of profit repatriation due to FDI. With further availability of data, future research should examine the causal link in a multivariate framework while addressing the issue of structural break.