Does Foreign Direct Investment Drive Ethiopia’s Economy? Evidence from Non-Linear ARDL Model

Background: Numerous scholars agree that various macroeconomic variables influence economic growth. However, researchers' empirical findings on whether foreign direct investment boosts or hinders economic growth are not clear. Thus, there is a need to examine whether Ethiopia’s economic growth is impacted by Foreign Direct Investment (FDI) as a source of empirical knowledge for sustainable development. Objective: The objective of this study was to investigate the symmetric and asymmetric effect of foreign direct investment on Ethiopia’s economic growth. Materials and Methods: This study applied annual time series data obtained from the years ranging between 1992 and 2021 to estimate Autoregressive Distributed Lag (ARDL) and Non-linear Autoregressive Distributed Lag (ARDL) models. Stationarity of the variables under study was checked using ADF and DF GLS test. To test the long-run relationship of the variables, we employed a bound test for each model. Results: The empirical results obtained from NARDL revealed that domestic investment have significant positive effects on economic growth in both short run and long run. This indicates that 1% increase in domestic investment causes 0.005% and 0.014% increases in economic growth of the country in the short run and long-run, respectively. The lagged error-correction term indicated that the system corrects its previous period disequilibrium at the adjustment speed of 36.65% annually in the long run. Conclusion: The positive and negative shocks in the foreign direct investment had no effects on GDP per capita in both long-run and short-run dynamics while domestic investments have significant effects on GDP per-capita. This shows that the government of Ethiopia should give more attention to the efforts of increasing domestic investments to boost economic growth rather than relying on foreign direct investment.