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

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Kidanemariam Gidey


Economic growth among other depends on the level of saving. However, in developing countries
the level of saving is low. Under such condition foreign direct investment (FDI) is an important
engine of economic growth. Accordingly, the objective of this research was to investigate the
long run and short run effects of FDI on Total Factor Productivity (TFP), export, and
employment creation. To address this objective, Autoregressive Distributed Lag Model was
applied. 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 run
coefficients predicted that, as the ratio of FDI to GDP increases by 1%, TFP increases by about
1.245% per year while the ratio of manufacturing employment to total employment increases by
approximately 0.28%. The short run effect of FDI on employment is consistent with its long run
effect, but contrary to its positive long run impact, FDI has a negative impact on TFP, in the
short run. On the other hand, the result showed that FDI do not have any significant effect on
the export sector both in the long run and in the short run. Therefore, our findings clearly
showed that Ethiopia is benefiting from increased inflows of FDI, at least in terms of productivity
and employment creation. Hence, the government has to continue its effort to attract FDI
through enhancing conducive business environment and encouraging export-oriented

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