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<p>This study examines the impact of foreign direct investment (FDI) on productivity spillovers in Ethiopia’s manufacturing sector, using a comprehensive firm-level panel of 22,820 firm-year observations spanning 1996 to 2021. Employing a refined econometric framework that integrates the Levinsohn–Petrin and Ackerberg–Caves–Frazer methods for total factor productivity (TFP) estimation with a two-step System GMM approach, the analysis addresses endogeneity, unobserved heterogeneity, and dynamic panel bias. The results indicate that a 1% increase in foreign presence leads to a 1.73% increase in labor productivity. While the effect on TFP is less robust in dynamic specifications, this suggests that productivity gains are currently 'embodied' in labor efficiency and operational upgrading rather than in neutral technological shifts.</p><p>Productivity spillovers are conditioned by firm size, absorptive capacity, skill intensity, and export orientation; specifically, the significant positive interaction between foreign presence and skill intensity underscores that human capital is the primary engine for domestic firms to capture FDI benefits. Conversely, negative backward spillovers indicate a ‘displacement effect,’ in which domestic suppliers struggle to meet the stringent quality requirements of foreign entrants, leading to input bypassing. Furthermore, the negative effect of fixed capital stock reflects a structural drag associated with obsolete capital vintage rather than capital accumulation per se. Overall, the findings underscore the importance of targeted policy interventions—especially in workforce skill development, technological modernization, and supplier linkage programs—to mitigate displacement effects and maximize the developmental impact of FDI in Ethiopia’s manufacturing sector.</p>

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Foreign direct investment in the manufacturing sector of Ethiopia (1996–2021): productivity performance and technology spillover perspectives

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  • 出版模式：

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  • 发表日期：

    2026年3月4日

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  • Woretaw Motbaynor Workneh,
  • Rakesh Kumar

摘要

This study examines the impact of foreign direct investment (FDI) on productivity spillovers in Ethiopia’s manufacturing sector, using a comprehensive firm-level panel of 22,820 firm-year observations spanning 1996 to 2021. Employing a refined econometric framework that integrates the Levinsohn–Petrin and Ackerberg–Caves–Frazer methods for total factor productivity (TFP) estimation with a two-step System GMM approach, the analysis addresses endogeneity, unobserved heterogeneity, and dynamic panel bias. The results indicate that a 1% increase in foreign presence leads to a 1.73% increase in labor productivity. While the effect on TFP is less robust in dynamic specifications, this suggests that productivity gains are currently 'embodied' in labor efficiency and operational upgrading rather than in neutral technological shifts.

Productivity spillovers are conditioned by firm size, absorptive capacity, skill intensity, and export orientation; specifically, the significant positive interaction between foreign presence and skill intensity underscores that human capital is the primary engine for domestic firms to capture FDI benefits. Conversely, negative backward spillovers indicate a ‘displacement effect,’ in which domestic suppliers struggle to meet the stringent quality requirements of foreign entrants, leading to input bypassing. Furthermore, the negative effect of fixed capital stock reflects a structural drag associated with obsolete capital vintage rather than capital accumulation per se. Overall, the findings underscore the importance of targeted policy interventions—especially in workforce skill development, technological modernization, and supplier linkage programs—to mitigate displacement effects and maximize the developmental impact of FDI in Ethiopia’s manufacturing sector.