The Impact of Chinese Foreign Direct Investment on the Productivity Growth in the Ethiopian Manufacturing Sector

This study provides a new empirical model on the relationship between Chinese foreign direct investment (FDI) and the total factor productivity growth using panel data for a subset of 24 groups of the Ethiopian manufacturing sector between 2011 and 2016. Our results suggest both positive and negative effects from Chinese and other countries’ FDI through the growth of value addition to domestic firms. Especially, the impact of Chinese investments on TFP is positive and statistically significant regardless of the considerable technology level classification. As for the other countries’ investments, the impact is negative and statistically significant. The FDI impact on TFP is transmitted to local firms through demonstration and competition effects at a moderate level. But the negative impact of other countries’ investment in TFP is in the scope of medium and high-level technology. Finally, it is concluded that the technology gap is a critical factor among the other determinants of FDI.