Ethiopia. The role of foreign direct investment in economic development

In this article the impact of foreign direct investment (FDI) on economic development of Ethiopia is studied. Starting from 2012 FDI inflow to Ethiopia, primarily from China, Saudi Arabia, Turkey, India, and European Union, is growing significantly. The role of the Government in attracting FDI to the country is important. The Government continues to open Ethiopian economy to the foreign capital. In the article specific measures implemented by the Government, like generous investment incentives to FDI, infrastructure development and construction of industrial parks, are addressed. The analysis of the impact of FDI on economic development of Ethiopia in the article includes discussion of how FDI contributes to creation of new businesses, jobs, human capital enhancement, transfer of technologies, as well as export promotion. Sector analysis shows that FDI has an important impact on employment via job creation in launched greenfield projects and spillover effects in related value chain industries. New industries, like cut flowers industry, are created from the scratch. Human capital enhancement goes through training of skilled workers and wider “learning-by-doing”. New forms of business training, for example, e-commerce training program are commenced. The analysis shows that in all of these directions the results are positive, though the efficiency of technology transfer is limited by the absorption capacities of the host country, and increased competition among exporting businesses may lead to crowding out of traditional domestic exporters. In general, the results show that FDI has a positive impact on Ethiopia’s economic development. The effect may be higher with the improvement of the business climate in the country.