Determinants of Foreign Direct Investment (FDI) Inflows to Ethiopia: An ARDL Model Approach

FDI plays a critical role in Ethiopia's economic growth and development. However, despite government reforms designed to promote stability and economic expansion, FDI inflows have exhibited a declining trend, marked by volatility and unpredictability. Thus, this study aims to examine the key determinants of FDI inflow into Ethiopia. To attain this objective, the study employed a time series analysis using the ARDL model to investigate the short-run and long-run relationships among the variables. Data spanning thirteen years, from 2012 to 2024, was provided by the NBE, WB, EIC, and MoFED datasets. The study's main findings indicate that macroeconomic stability, trade openness, inflation rate, real GDP per capita, infrastructure, GDP growth, and exchange rate are all significant factors that affect FDI inflows to Ethiopia. In the short run, the empirical findings of the study show that exchange rate, infrastructure, market size, and trade openness are significant positive determinants of FDI. On the other hand, the inflation rate negatively affects FDI; a 1% rise in inflation corresponds to a 1.03% decrease in FDI inflows, suggesting that higher inflation may deter FDI due to economic instability. The long-run equation, on the other hand, revealed that the real GDP per capita, inflation rate, exchange rate, infrastructure, and GDP growth all exhibit the expected signs and are statistically significant at the 5% level. However, at the 5% level, macroeconomic stability and the trade openness index are positive but statistically insignificant. Finally, based on the study's findings, appropriate policy measures have been recommended.