The Effect of FDI on Total Factor Productivity, Export, and Employment in Ethiopia

Abstract

AbstractEconomic growth among other depends on the level of saving. However, in developing countriesthe level of saving is low. Under such condition foreign direct investment (FDI) is an importantengine of economic growth. Accordingly, the objective of this research was to investigate thelong run and short run effects of FDI on Total Factor Productivity (TFP), export, andemployment creation. To address this objective, Autoregressive Distributed Lag Model wasapplied. The result of the study clearly showed, in the long run, Foreign Direct Investment(FDI) has a significant positive effect on TFP and employment. The estimated long runcoefficients predicted that, as the ratio of FDI to GDP increases by 1%, TFP increases by about1.245% per year while the ratio of manufacturing employment to total employment increases byapproximately 0.28%. The short run effect of FDI on employment is consistent with its long runeffect, but contrary to its positive long run impact, FDI has a negative impact on TFP, in theshort run. On the other hand, the result showed that FDI do not have any significant effect onthe export sector both in the long run and in the short run. Therefore, our findings clearlyshowed that Ethiopia is benefiting from increased inflows of FDI, at least in terms of productivityand employment creation. Hence, the government has to continue its effort to attract FDIthrough enhancing conducive business environment and encouraging export-orientedinvestment.