Title: Unpacking the FDI-Growth Nexus in Ethiopia: Insights from an ARDL Bounds Testing Analysis
Authors: Workenh Eshatuu Sime (PhD)
Volume: 10
Issue: 7
Pages: 147-154
Publication Date: 2026/07/28
Abstract:
Foreign Direct Investment (FDI) is widely considered an important driver of economic growth, particularly in developing countries seeking capital, technology transfer, and improved productivity. However, empirical evidence regarding the relationship between FDI and economic growth remains inconclusive. This study examines the long-term relationship, causality, and short- and long-term effects between FDI and economic growth in Ethiopia over the period 1995-2015. The study utilized secondary data obtained from the Ethiopian Investment Agency, the National Bank of Ethiopia, and the World Bank database. To analyze the dynamic relationship between the variables, the study employed Johansen cointegration, Vector Error Correction Model (VECM), and Autoregressive Distributed Lag (ARDL) modeling approaches. The Johansen cointegration results confirm the existence of a long-run relationship between FDI and economic growth. The VECM results indicate a unidirectional causal relationship running from economic growth to FDI, suggesting that economic performance plays a significant role in attracting foreign investment. Furthermore, the ARDL estimation reveals that economic growth has no statistically significant long-run effect on FDI; however, in the short run, economic growth has a positive and significant influence on attracting FDI inflows. The study concludes that sustaining economic growth and strengthening investment-friendly policies are essential for enhancing Ethiopia's capacity to attract and retain foreign investment.