Foreign Direct Investment and Economic Development in Ethiopia

Selamawit Berhe Woldekidan

Student thesis: Master thesis


Scholars have long debated the impact of foreign investment on the economies of least developed countries. Many argue that foreign investment is beneficial for the investment receiving country (host). On the other hand, others argue that dependence on foreign capital is detrimental. The crucial role of FDI is presented in terms of enhancing capital formation, spillover effects, linkage, technology transfer, growth and thereby curing development problems. This has led to the development of several theoretical and empirical literatures studies, and conversely, to the prevalence of mixed empirical evidence. With this in mind, this thesis attempts to add to the body of empirical evidence fueling the debate as to whether FDI has positive influence on economic development or not. The objective of the study is to theoretically and empirically investigate and quantify the relationship between FDI and economic development. Economic development in this thesis is measured in terms of real GDP growth, export, and spillover as FDI is said to affect economic development through these channels. Both quantitative and qualitative approaches have been conducted in order to complement and strengthen the analysis to capture different perspectives. The analysis conducted provides evidence that there is a positive and significant relationship between FDI and real GDP growth, a moderate positive association between export performance and FDI, and a negative and insignificant association between FDI and spillovers in Ethiopia. Since 1992, the current regime has made enormous efforts to attract FDI and to facilitate its positive developmental effects. The government’s policies play a significant role in determining economic development and FDI inflow in Ethiopia. However, although it might seem natural to argue that FDI in Ethiopia has a positive and significant impact on economic growth, such gains differ across primary, manufacturing, and services sector. The findings discussed in this thesis provide a starting point to understand FDI effects on economic development in Ethiopia.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2015
Number of pages96