IMPACT OF FDI ON GDP IN EAST AFRICA AND ETHIOPIA: PANEL AND TIME SERIES DATA ANALYSIS

Abstract

Ethiopia is the second-highest population in Africa, with a 6.1 per cent increase, it also had the continent's strongest economic growth in 2020–21. The growth analysis indicates that Ethiopia experienced positive growth from 2002 to 2021, with annual growth of 16.7 per cent. Ethiopia is a major hub for China's Belt and Road Initiative, and FDI inflows surged there by 79 per cent to $4.3 billion in 2021. This paper analyse, the casual relationship between Ethiopia’s FDI and GDP during 2002-2021 using time series data and also finds casual relation between FDI and GDP in East Africa using panel data. From the Ethiopian point of view, the results of the co-integration test support the conclusion that there is no long-term link between FDI and GDP for the years 2002–2021. The causality test shows that neither FDI nor GDP is the Granger cause for GDP, proving that there is no direct Granger Causality relationship between FDI and GDP in Ethiopia. From the East Africa point of view, FDI into East Africa increased by 35 per cent to $8.2 billion. The highest growth rate in East Africa was recorded in Rwanda, which was 24.6 per cent per annum. Although Madagascar and Malawi have statistically negligible positive growth, 12 out of the 14 countries have statistically significant positive growth overall. The Pedroni co-integration test suggests that there is a long-term relationship between the gross domestic product of East Africa and foreign direct investment. From the panel regression results, in the three computed regression models, probability values are less than 0.01, and observed FDI has positive coefficients. This suggests that the economies of East African countries benefit from foreign direct investment.

Key Words: East Africa, Ethiopia, FDI, GDP, Panel and Time Series Data Analysis, Growth Fixed Effect, Random Effect, Stationarity, Co-integration, Causality.