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Ethiopia’s FDI inflow from India and China: analysis of trends and determinants

Author

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  • Degele Ergano

    (Andhra University
    Hawassa University)

  • K. Rambabu

    (Andhra University)

Abstract

This study analyzes the trends and determinants of FDI inflow to Ethiopia from India and China. It is based on panel data of 2 decades (1997–2016). It employs a gravity model approach and fixed effects estimation technique to identify factors governing the flow of FDI to Ethiopia. Factors affecting the flow of Indian FDI to Ethiopia include Ethiopia’s trade with India, India’s population size, GDP of Ethiopia, GDP PC of India, real interest rate, credit access and FDI openness in Ethiopia. Similarly, factors governing Chinese FDI flow to Ethiopia include Ethiopia’s GDP growth, Ethiopia’s trade with China, FDI openness and secondary school enrolment. Government expenditure in the host country reduces China’s and India’s FDI inflow. The traditional explanatory variable, a resource rent, is not found significant in explaining FDI in flow from China and India. The FDI inflow from India and China showed an increasing trend with an average rate of 82% and 202%, respectively, during the two-decade period. But the overall trend for both partner countries showed fluctuation across years. We can conclude that FDI from India is responsive to macroeconomic variables such as OER, real interest rate and liberalization measures such as trade openness in Ethiopia. FDI and trade flows from China are positively related to one another and cheap labour is an important attraction factor for Chinese FDI inflow. Policy makers in Ethiopia can focus on macroeconomic reform in case of the country’s relation with India whereas they focus on maintaining cheap labour cost, GDP growth and trade transactions with China.

Suggested Citation

  • Degele Ergano & K. Rambabu, 2020. "Ethiopia’s FDI inflow from India and China: analysis of trends and determinants," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 9(1), pages 1-20, December.
    • Handle: RePEc:spr:jecstr:v:9:y:2020:i:1:d:10.1186_s40008-020-00211-7
    DOI: 10.1186/s40008-020-00211-7
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    Cited by:

    1. Logan Cochrane & Eric P. H. Li & Melisew Dejene & M. Mustahid Husain, 2024. "Why foreign agricultural investment fails? Five lessons from Ethiopia," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(1), pages 541-558, January.
    2. Muhammad Zubair Chishti, 2023. "COVID-19 and FDI nexus in Pakistan: fresh evidence from QARDL and time-varying casualty techniques," Future Business Journal, Springer, vol. 9(1), pages 1-18, December.
    3. Morgan, Stephen & Farris, Jarrad & Johnson, Michael E., 2022. "Foreign Direct Investment in Africa: Recent Trends Leading up to the African Continental Free Trade Area (AfCFTA)," USDA Miscellaneous 329077, United States Department of Agriculture.
    4. Arup Kumar Chattopadhyay & Debdas Rakshit & Payel Chatterjee & Ananya Paul, 2022. "Trends and Determinants of FDI with Implications of COVID-19 in BRICS," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(1), pages 43-59, January.

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