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Macroeconomic, Political, and Institutional Determinants of FDI Inflows to Ethiopia: An ARDL Approach

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Studies on Economic Development and Growth in Selected African Countries

Part of the book series: Frontiers in African Business Research ((FABR))

Abstract

Based on the lines of the eclectic theoretical framework of Foreign direct investment (FDI) flows, this study investigates the macroeconomic, political, and institutional determinants of FDI inflows to Ethiopia for the period 1970–2013. Using the ARDL modeling approach, it finds that political and institutional factors are crucial both in the long run and the short run in FDI inflows to the country. On the macroeconomic side, the market size of the country, availability of natural resources , openness to trade, and deprecation in the nominal exchange rate are found to positively affect FDI inflows to the country. On the other hand, macroeconomic instability is found to effect FDI inflows negatively. In addition, better political stability , government effectiveness and regulatory quality , and better performance of the rule of law are found to positively affect FDI inflows to the country. A careful liberalization of the foreign exchange market and that of external trade, sustaining the current growth momentum of the economy, improving institutional quality , and strengthening the political stability of the country, among others, are fundamental areas that the government could work on to strengthen Ethiopia’s position in FDI inflows on the continent.

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Notes

  1. 1.

    Details on the underlying data sources, the aggregation method, and the interpretation of the indicators, can be found in Kaufmann et al.’s (2010) WGI methodology paper.

  2. 2.

    In this study, the Augmented Dickey-Fuller unit root testing procedure (which does not take into account a structural break in the data) and the Lumsdaine and Papell (1997) unit root test (which captures two structural breaks in a series) are used. Though the latter is not reported here, both tests are in conformity.

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Author information

Authors and Affiliations

  1. Department of Economics, Addis Ababa University, Addis Ababa, Ethiopia

    Addis Yimer

Authors
  1. Addis Yimer
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Corresponding author

Correspondence to Addis Yimer .

Editor information

Editors and Affiliations

  1. Jönköping International Business School, Jönköping University, Jönköping, Sweden

    Almas Heshmati

Appendices

Annexure 1: Correlation Matrix of the Political and Institutional Indicators (Polinst)

Covariance analysis: ordinary

Sample: 1970–2013

Included observations: 43

Correlation*

RoL

POLSTAB

GOVEFFE

CORR

RQ

VOIACC

RoL

1.00

–

     

POLSTAB

−0.84

(0.00)

1.00

–

    

GOVEFFE

0.71

(0.00)

−0.90

(0.00)

1.00

–

   

CORR

0.77

(0.00)

−0.69

(0.00)

0.75

(0.00)

1.00

–

  

RQ

0.71

(0.00)

−0.89

(0.00)

0.96

(0.00)

0.69

(0.00)

1.00

–

 

VOIACC

−0.67

(0.00)

0.88

(0.00)

−0.84

(0.00)

−0.65

(0.00)

−0.77

(0.00)

1.00

–

  1. Note *p values in parenthesis
  2. where
  3. RoL Rule of law
  4. POLSTAB Political stability and absence of violence/terrorism
  5. GOVEFFE Government effectiveness
  6. CORR Control of corruption
  7. RQ Regulatory quality
  8. VOIACC Voice and accountability

Annexure 2: Parameter Stability Tests

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

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Yimer, A. (2017). Macroeconomic, Political, and Institutional Determinants of FDI Inflows to Ethiopia: An ARDL Approach. In: Heshmati, A. (eds) Studies on Economic Development and Growth in Selected African Countries. Frontiers in African Business Research. Springer, Singapore. https://doi.org/10.1007/978-981-10-4451-9_7

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