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

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.