The impact of foreign direct investment (FDI) on agriculture sector growth of Ethiopia: Time series empirical analysis (1985-2016)

Abstract

Ethiopian government has been paying special attention on attracting FDIs in order to enhance agricultural and rural development. Besides the increasing trend of FDI inflow, the performance of the agricultural sector has been poor to an extent that its average growth rate for the past 2 decades (1998-2016) is 2.4% while the population average growth rate for the same period is about 2.7 %. Although agriculture is one of Ethiopia’s most promising resources, the sector has been slowed down by periodic drought, high levels of taxation and poor infrastructure that often make it hard and expensive to get goods to market. This motivated the researcher to investigate whether and how FDI has an impact in rural setup of agriculture in Ethiopia This study analyzed the impact of FDI inflow on the growth of agriculture sector in Ethiopia over the period 1985 to 2016. Owing to the non stationarity of macro variables used in the model and the existence of co integration, Vector error correction model was used. The model was tested for serial correlation, multicollinearity, hetroscedasticity and omitted variable to validate it. FDI was found to have a positive impact on Agriculture growth in Ethiopia. The study recommends that Ethiopian government should come up with policies which will create an enabling environment for more FDI inflows to the country. The policies should be undertaken with caution because unregulated influx of foreign investors kills local infant industries. Policy makers should also review existing policies to control excessive profit repatriation and divestments.