Original Research

SAGE Open
January-March 2023: 1–12
Ó The Author(s) 2023
Economic Impact of Transport DOI: 10.1177/21582440231162055
journals.sagepub.com/home/sgo
Infrastructure in Ethiopia: The Role of
Foreign Direct Investment

Bayissa Badada1,2 , G. Delina1, Sun Baiqing2,

and Ramaswamy Krishnaraj3

Abstract
This article examines the relevant relationship between transport infrastructure and foreign direct investment (FDI) in
explaining economic growth from the road and air transport perspectives in Ethiopia over the period 1981 to 2017. To deter-
mine the economic effect of transport infrastructure, first, we assess the co-integration between transport infrastructure and
economic growth using the autoregressive distributed lag bound test model. Once co-integration is established, the elasticity
of economic growth is estimated using Ordinary Least Square estimation techniques. Second, we perform the hierarchical
multiple regression to estimate the mediation impact of FDI in the association between transport infrastructure and eco-
nomic growth. Initially, we have standardized all variables. Then, we estimate the mediating effect of FDI. To validate the con-
sistency of our method, we check the robustness of our model. The obtained result shows that transport infrastructure has
a significant long-term economic effect, and the short-run dynamics show the speed of adjustment is corrected by 81% each
year toward the long-run path, and thereby transport infrastructure attracts FDI in Ethiopia. Moreover, FDI plays a significant
mediating role, thereby increasing the economic growth performance of the country in Ethiopia. The study extends previous
research and increases the validity of the findings by investigating the economic impact of transport infrastructure in the
Ethiopian context. Moreover, this study is the first research study that explores the mediating role of FDI in the relationship
between transport infrastructure and economic growth in Ethiopia.

Keywords
economic growth, transport infrastructure, FDI, GDP

Introduction economy by minimizing the cost of manufacturing

(Deng, 2013; Magalhães et al., 2015), increases global
Transport infrastructure is one of the predominantly trade, industrial development, and competitiveness by
strategic economic areas among the various types of pro- tumbling inequalities within and among countries
vision in developing countries (Pojani & Stead, 2015); (Damania et al., 2018; Pojani & Stead, 2015).
the fundamental basis for attaining inclusive growth,
supports all economical sectors and is widely recognized
as the engine of efficient growth in the developing 1
Kalasalingam Academy of Research and Education, Krishnankoil, Tamil
nations (Thacker et al., 2019). The development of the Nadu, India
2
transport network eliminates constraints on production Harbin, China
3
Dambi Dolo University, Ethiopia
and improves growth in the economy (Mehmood Alam,
2017). Hence, spending on new construction and Corresponding Authors:
improvement of the existing transport infrastructure net- Bayissa Badada, Department of Management Science and Engineering,
work can create employment (Thacker et al., 2019), School of Management, Harbin 150001, China.
reduce transport and input costs (A. Ford et al., 2015), Email: bayissabadada@yahoo.com
attracts FDI and minimize the cost of imports and utili- G. Delina, Department of Business Administration, Kalasalingam Academy
ties while doing business (Wekesa et al., 2016). Similarly, of Research and Education, Krishnankoil, Tamil Nadu 626126, India.
the expansion of the transport network stimulates the Email: delina.phd@gmail.com

Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License
(https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of
the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages
(https://us.sagepub.com/en-us/nam/open-access-at-sage).
2 SAGE Open
Several attempts have been made to transport-led eco-
nomic growth, and a number of studies underscore
transport infrastructure prominence on growth in differ-
ent countries’ economies (Banerjee et al., 2012; Banister
& Berechman, 2001; Deng, 2013; Khadaroo, 2015;
Meersman & Nazemzadeh, 2017; Pradhan & Bagchi,
2013). A study by Meersman and Nazemzadeh (2017)
Examined the influence of transport network expansion
in boosting economic activities in industrialized nations.
The result reveals that the development of the transport
network and investment in the transport sector can gen-
erate considerable employment and add value to eco-
nomic growth. Another study by Deng (2013) focused
on assessing the effects on competitiveness and economic
activities of transport infrastructure. The study found
that the expansion transportation network positively
contributes to the country competitiveness and growth.
Similarly, the study by Khadaroo (2015) evaluates the
role of transport infrastructure availability in 33 African
economies. The study confirms that transport infrastruc-
ture network expansion determines Foreign Direct
Investment (FDI) attraction inflows from countries.
Also, more studies (Shrestha, 2017; Smith et al., 2017)
recognized that an inadequate transport infrastructure
poses a substantial restraint to economic performance in
developing economies. According to Gebre and Nigussa
(2019), Ethiopia is a developing country having weak and
low-level standard transport infrastructures. As a result,
this will lessen affordability among individuals, limit
industrial growth, limit job creation, diminish export size,
and in general, hinders the speed of economic perfor-
mance in the nation. In the meantime, many existing stud-
ies concerning transport infrastructure have focused on
the direct impact of the countries transport infrastructure
network (Bae & Joo, 2016; Guillen et al., 2013; Zhang &
Zhang, 2016), no attention paid to the current economic
research in the context of Ethiopia. Besides, in previous
transport-led economic studies, the mediator effect of
FDI on the association between transport infrastructure
and economic growth has been overlooked in the context
of Ethiopia. Such studies have made an essential contri-
bution to understanding investment decisions in transport
infrastructure as an engine for economic activity in the
country. However, no one of the previous studies have
considered the expansion of transport infrastructure and
the mediating role of FDI in the Ethiopian context.
Hence, in this study, we attempt to mitigate these gaps
by exploring the mediating roles of FDI toward the trans-
port infrastructure impact on Ethiopia’s economic
growth. Transport infrastructure expansion can acceler-
ate both FDI and high economic growth by attracting
more investors who have access to the much-needed capi-
tal to supplement the low domestic savings (Rungqu,
2014). We used the principal component analysis (PCA)
to define the value of the transport infrastructure index
(i.e., from the total road density per 100 people and air
transport freight in million-ton kilometers) from 1981 to
2017. To attain given purposes, the present study proxy-
ing the transport infrastructure index, investment in the
road and air transport infrastructure, and foreign direct
investment (i.e., net capital inflows). Moreover, to con-
firm the outcome results and their consistency, robustness
checks are executed through testing the residual diagnos-
tic and stability tests of the model. We examined the
model through diagnostic tests by adding, eliminating, or
varying the variables of the study (Lu & White, 2014). To
explore the serial correlation, heteroscedasticity, and
model stability, we first conducted a residual diagnostic
using the Lagrange multiplier to test the model structural
stability; then, we conducted the cumulative sum and the
cumulative sum square for the study. Hence, from a resi-
dual diagnostic test, the result shows that autocorrelation
and heteroscedasticity were not found. In addition, the
graphic representation of the cumulative and cumulative
square lies inside the 5% critical bound; thus, the results
are robust and reliable in the models, and the structural
integrity of the model does not suffer from any shakiness
over study time. In this context, the paper contributes to
transport-led economic growth literature from the situa-
tion of Ethiopia. The outcomes of this study can be help-
fully in supporting future decisions in terms of transport
infrastructure investments in Ethiopia.
In general, the contribution of our work can be sum-
marized as follows:
(1) The first contribution of our work is from the lit-
erature point of view. That means, in this work,
we build theoretical knowledge on the mediation
role of FDI on the economic impact of transport
infrastructure and use it as input for further
studies.
(2) Secondly, the main contribution of this paper is
the development of an econometric model that
estimates the mediation effect of FDI and the
impact of the transportation network on the
entire economy.
(3) Finally, the third contribution of this paper is the
construction of the transport infrastructure devel-
opment index. This is another novelty aspect of
this paper, which takes the status of transport
infrastructure variables into consideration.
Accordingly, to address the significance of transport
infrastructure, FDI, and economic growth in the context
of Ethiopia, the current studies assess the following
research questions (RQ1): Does the transport infrastruc-
ture of a country has any significant impact on
Ethiopia’s economy? (RQ2): Does FDI play a mediating
Badada et al.
role in the association between transport infrastructure
and economic growth in Ethiopia? To answer RQ1, We
used the ARDL bound test approach to observe the co-
integration between the index of transport infrastructure
and economic growth (GDP). Seeing the entire variables
are co-integrated, we used the ordinary least square
(OLS) method to evaluate the economic effects of trans-
port infrastructure development in Ethiopia using the
ARDL error correction model (ECM). To answer the
research question (RQ2), we used the hierarchal multiple
regression model to evaluate the mediating effect of
FDI. We have used the annual aggregated time series
data from 1981 to 2017. The empirical evidence shows
that the transport infrastructure network contributes to
economic growth and FDI; thereby, FDI plays a mediat-
ing function in transport—leading to economic growth
in Ethiopia.
The other section of this article is organized as fol-
lows: Section 2 presents a comprehensive review of the-
ories and the research hypothesis of this study, and
materials and methodological issues are offered in
Section 3. In Section 4, we present results and discus-
sions, and Section 5 concludes the article.
Transport Infrastructure, FDI, and
Economic Growth: Theories and
Hypotheses
The ultimate goal of this section is to briefly review
numerous previously diverse aspects of the empirical and
theoretical works on the economic consequences of
transport infrastructure. In the 1970s, the theoretical
study included the effect of the transport infrastructure
network on growth theories (Arrow & Kurz, 1970).
Krugman (1991) argues that access to transport influ-
ences global paths of development and can improve the
economy but also reduce the gap toward economic
growth (Krugman, 1991). In more recent studies, the role
of the transport network and its connection with eco-
nomic activity have received considerable attention in
economic literature and were widely recognized as sup-
porting the advancement of nations (Meersman &
Nazemzadeh, 2017; Palei, 2015; Skorobogatova &
Kuzmina-Merlino, 2017).
Moreover, several studies have argued the importance
of the transportation network in boosting growth in the
economy (Damania et al., 2018; Tripathi & Gautam,
2010). Research conducted by Tripathi and Gautam
(2010) estimates the influence of transport systems in
terms of economic growth using panel data in Pakistan.
The study establishes that, apart from enhancing avail-
ability, infrastructure development brings investment
opportunities and trade to formerly disconnected areas.
It also offers access to resources, facilities, and job
3
opportunities in these areas through the multiplier effect.
According to Damania et al. (2018), improving the road
infrastructure brings significant economic benefits by
improving market access and reducing transportation
costs in different countries. Likewise, more studies
(Aschauer, 1989; Donaldson, 2018; Sahoo, 2010) con-
firm that increased investment in transport infrastructure
would reduce the cost of economic activities, reduce sys-
temic problems in the movement of raw materials or
goods throughout the country, and increase economic
growth (GDP). In a study by (Tripathi & Gautam,
2010), using a panel data analysis, the unit root, and co-
integration model, the transport system has a positive
influence on Pakistan’s GDP. The study discovered that,
in addition to improving accessibility, the development
of infrastructure provides opportunities for investment
and trade in formerly isolated areas. It also delivers
access to resources, facilities, and opportunities for
advancement in such countries via multiplier impact.
On the other hand, several studies are simultaneously
questionable in terms of timeframes, differences in
country-specific analysis, and causality and methodologi-
cal strands. The number of studies confirms that among
the central contributors to economic growth, the expan-
sion of the transport system has a substantial outstanding
impact on GDP driven by investment in the transport
sector (Achour & Belloumi, 2016). Another study by
Achour and Belloumi (2016), using as a road density
transport infrastructure parameter based on the panel
evidence from 48 US states over the span of 1960 to 1985
and OLS, TSLS, WLS, WTSLS methods shows that the
quantity and quality of the highway has a substantial
and constructive economic impact and production elasti-
city of 0.2 to 0.30. During the same time, when Moomaw
and Williams (1991) used the size of the national highway
network as transport infrastructure variables, the OLS
noticed that highway assets had a positive influence on
industrial expansion, having a production elasticity of
0.25 across 48 US states.
Nevertheless, the transport-led literature on economic
growth receives little interest in the context of Ethiopia
(Birhanu, 2017; Dercon & Hill, 2009; Shiferaw et al.,
2015). The study conducted by Dercon and Hill (2009),
found that improving road quality improved access to
farming, and expansion services, resulting in a 16% rise in
consumption and a 6.7% decrease in poverty. Similarly,
Birhanu (2017) discovered that the expansion of the pub-
lic infrastructure network had a positive influence on eco-
nomic activity either by lowering the price of intermediate
products or by having an external effect. On the other
side, research by Shiferaw et al. (2015) showed that
strengthening the infrastructure correlated with favorable
outcomes and positive trends and increased the firm scale
in the Ethiopian manufacturing sector.
4 SAGE Open
Hence, taking these concepts into account and consid-
ering the country of Ethiopia, the first hypothesis follows:
Hypothesis 1: Transport infrastructure has a signifi-
cant positive effect on economic growth.
The developed transport system is crucial for attracting
private capital and promoting economic growth. Better
transport infrastructure provision reduces transaction
costs in the manufacturing or service sector by enabling
entrepreneurs to communicate easily with their manufac-
turers and clients. Through increasing access to markets
and hence growing the actual size of the available market-
place, decent infrastructure is especially valuable to foreign
companies that are typically attracted to broader markets
(DK, 2011). Similarly, numerous studies have shown that
transport infrastructure facilitates economic growth by
drawing lower international inflows by eliminating differ-
ent bottlenecks to discourage higher FDI inflows through-
out developing countries (Donaubauer et al., 2016). Better
quality and significant improvements to the transport sys-
tem can save a lot of time and expenses for foreign inves-
tors. Decreased travel time and expenses could be
particularly substantial for international companies in
deciding the viability of FDI capital flows (Astatike &
Assefa, 2006; Khadaroo, 2015; Khadaroo & Seetanah,
2009, 2010). Thus, we hypothesized that:
Hypothesis 2: Transport infrastructure has a positive
effect on FDI.
The attraction of FDI has now become an indispensable
part of the expansion of infrastructure strategies among
unindustrialized countries, and several authors have tried
to explore the influence of FDI on the receiving country’s
monetary system (Farole, 2011; Kotlewski & Dudzińska-
Jarmolińska, 2017). Kotlewski and Dudzińska-
Jarmolińska (2017), evaluate the role of capital inward in
the countries’ development. The study result shows that
FDI could play an essential role in raising the supply of
domestic investment resources to the receiving country.
This could be done via the production chain when over-
seas investors purchase locally produced products or sec-
ondary consumer components from local businesses.
Moreover, according to the study by Farole (2011),
inward FDI can boost the export capability of the host
nation, contributing to the third-world country boosting
its foreign currency earnings. FDI can also support the
creation of new employment, support to improve tech-
nology, transfer, and enhance the productivity growth of
respective countries. FDI also creates effects on the econ-
omy by technology transfer to the host nation.
Likewise, multiple reports analyze the effects, func-
tions, and interactions between FDI and growth in the
economy (Abbes et al., 2015; Kahouli & Maktouf, 2015),
specifying that the improvement of FDI has a remark-
able effect on economic activity. According to Abbes
et al. (2015), FDI is viewed as a catalyst for economic
activities and development in developing countries, nar-
rowing the imbalance between capital requirements and
domestic savings, raising levels of expertise in the recipi-
ent area, boosting access to the market, and leading to
technology development. Similarly, Kahouli and
Maktouf (2015), identified the FDI as affecting economic
growth through rising national income, labor productiv-
ity, and jobs, transfer of technologies, progressive strate-
gic planning, and modern manufacturing techniques.
Overall, the FDI is an essential element that has a benefi-
cial influence on growth in the economy, allowing FDI
as a cornerstone underlying efficiency growth so that the
attraction of FDI is the prime driver of countries’ eco-
nomic growth (Adeleke Kunle et al., 2014; Pegkas,
2015). Thus, we hypothesized that:
Hypothesis 3: FDI has a positive impact on economic
growth.
Interaction among transport network expansion and
other significant parameters, including FDI, and eco-
nomic expansion, has drawn a considerable number of
scholars across the world and has contributed to an
extensive and growing literature. Cxelebi et al. (2015),
examine the mediator impact of FDI on the association
between logistics efficiency and growth in the economy
using the hierarchical regression method. The study dis-
covered that the mediator impact of FDI on the relation-
ship between logistics efficiency and GDP is conclusive.
In line with this, Erdoğan and Ataklı (2012), stressed
the importance of investments in the countries’ economic
growth. FDI is an investment tool that is described as
moving capital and individuals to another state. States are
trying to attract foreign capital through exceptions and
opportunities for international companies and business
preferences, public programs, and even monopoly privi-
leges. Another study by Donaubauer et al. (2016) estab-
lishes that transport infrastructure attracts foreign direct
investment inflows by eliminating common bottlenecks
that inhibit higher levels of FDI in third-world countries,
which indicates that the transport system has an indirect
economic effect in the countries. In the same vein, accord-
ing to Dethier et al. (2014), infrastructure improvements
are crucial to rising capital flows—thus increasing healthy
economic development in developing countries.
Hypothesis 4: FDI plays a mediation role in the asso-
ciation between transport infrastructure and eco-
nomic growth.
Badada et al.
Materials and Method
Materials
In this study, we intended to estimate the significance of
transport infrastructure, FDI, and economic growth in
the context of Ethiopia from 1981 to 2017. We used the
ARDL model to evaluate the economic effect of trans-
port infrastructure (i.e., from road and air transport).
On the other side, we used the hierarchical regression
method (Baron & Kenny, 1986), to investigate the med-
iator effect of the FDI on the association between trans-
port infrastructure (TRA) and economic growth (GDP)
in Ethiopia over the study period. We used aggregated
time-series annual secondary materials to evaluate the
relevance of the transport infrastructure index (i.e., from
the road and air transport components), FDI inflows,
and Ethiopian economic growth. The entire materials
used in the evaluation congregated from available
sources: The World Bank database, the Ethiopian Road
Authority, and the Ethiopian Investment Commission.
Transport infrastructure articulated as the principal
component analysis (i.e., from the road density per 1,000
people, and air-transport freight defined in (the million
ton-km) within the study period in Ethiopia). We mea-
sured FDI using capital stock and Economic growth
(GDP) (Tripathy et al., 2016). To attain the heterogeneity
of transport infrastructure components, we constructed
the transport infrastructure index using the PCA from
the road density per 100 people and the air transport in
millions of ton kilometers throughout the study time in
Ethiopia.
In this paper, we used the Akaike Information
Criterion (AIC) to decide the optimum lag length.
Besides, we used the augmented Dickey-Fuller (ADF) to
test the stationarity of variables. The outcome result
shows that the transport infrastructure index (TRA) is
stationary at the level, whereas the entire variables (i.e.,
transport infrastructure index (TRA), economic growth
(GDP), and FDI stock are static at the first difference.
We performed the analysis of data using the ARDL
bound test method to assess the co-integration between
the transport infrastructure index and economic growth
(GDP) in Ethiopia. Moreover, we employed the
Ordinary Least Square (OLS) to evaluate the extent of
GDP using the ARDL-ECM model. Furthermore, we
add the FDI to the model to assess the mediating impact
of FDI on the association between transport infrastruc-
ture and economic growth in Ethiopia. We performed
the hierarchical regression method to examine the media-
tor effect of FDI on the association between the index of
the transport infrastructure (TRA) and economic growth
(GDP) in Ethiopia over the study period. Accordingly,
the transport infrastructure index (TRA) and FDI have
a direct impact on economic growth (GDP). Besides,
5
transport infrastructure (TRA) has a direct effect on the
mediator variable (FDI).
Empirical Modeling
Using an earlier mentioned framework that FDI is used
as a mediator variable to specify the condition under
which a given predictor (i.e., transport infrastructure) is
associated with an outcome (i.e., economic growth). The
mediating effect of FDI could be complete mediation or
partial mediation. We analyzed the relationships among
TRA, GDP, and FDI on the bases of economic trans-
port infrastructure relevance.
Given the nature of the study, we used autoregressive
distributed bound testing and ARDL-ECM to assess the
economic impact of transport infrastructure. Besides, we
performed the hierarchical multiple regression to evaluate
the mediation impact of FDI in the association between
transport infrastructure networks and economic growth,
as noted by Baron and Kenny (1986), over the study
period in Ethiopia. We used the ARDL-ECM and hier-
archical regression approach because of the following:
Firstly, the ARDL-ECM estimates the relationships irre-
spective of integration order over other methods (Bank,
1992; Pesaran et al., 2001). Secondly, this model can be
appropriate for the limited data and provide robust results
over the other methods (Abbasi & Riaz, 2016; He et al.,
2019; Pesaran et al., 2000). Thirdly, ARDL captures a
large number of lags than other time series models
(Laurenceson & Chai, 2003). Finally, the re-parameterized
ARDL-ECM allows for assessing short and long-run
impacts of parameters in the study (He et al., 2019). At
the same time, multiple regression allows the evaluation
of the mediating effect of foreign direct investment.
We adopt six steps to explore the relevant relationship
among transport infrastructure, FDI, and economic
growth; this study followed the empirical framework in
Figure 1 for the direct relationship, using STATA 12.
In the first step, we measure the co-integrating rela-
tionship via ARDL bounds-testing (Pesaran et al., 2001).
We employed the next ARDL [m, p, q] model to decide
the appearance of long-term associations between the
study variables on the bases of the above discussions;
X
m X
p
DlnGDPt = b0 + a1i D(lnGDPti ) + d1j Dln(TRAtj )
i=1 j=0
+ b1 (lnGDP)t1 + b2 (lnTRA)t1 + et
ð1Þ
where D represent change; b0 denotes the constant para-
meter, i and j denotes the lag length, et denotes the resi-
dual terms; the coefficients a1i and d1j represent the
short run effects, whereas, b1 and b2 denote the long-run
impacts.
6 SAGE Open

Figure 1. Framework for the economic impact of transport infrastructure analysis (direct relationship).

To examine the presence of the long-term relationship, Fourthly, we performed diagnostic and structural sta-
we perform an F- static using the estimation of Equation bility tests to verify the model’s validity and robustness:
1 (Iheanacho, 2018). we estimated the serial correlation and heteroscedasticity
Secondly, once co-integration is recognized, the fol- via the Lagrange multiplier test (Lu & White, 2014).
lowing ARDL (m, n, and p) long-run model for GDPt is Likewise, we carried out the cumulative sum and the
estimated by using the OLS method: cumulative sum square to examine the model’s structural
stability.
X
m X
n
Finally, a hierarchical Multiple Regressions Analysis
lnGDPt = b0 + b1i (lnGDPt1 + b2i (lnTRA)t1 + ut
i=0 i=0
(HMR) was identified to examine the effect of FDI capi-
tal flows on Ethiopian economic growth. We performed
ð2Þ
HMR by entering FDI inflows in the regression equation.
where b0 b1i , b2i , and ut denotes the constant term, It enables us to examine the contribution of mediating
coefficients of GDP, coefficient of TRA, and error term, FDI. Thus, it might find any weakening or strengthening
respectively. impacts behind the basic analysis of the multivariate rela-
Thirdly, we estimate the short-term effect of the ECM tionship by examining the changing methods and con-
form of adjusted ARDL through the Ordinary Least trasting various outcomes. This step followed the
Square (OLS) method. We implemented ECM estimat- empirical framework in Figure 2, using STATA 12. The
ing by the following equations: regression equation is written as follows:
Economic growth (GDP) is regressed on both the
X
m X
p
transport infrastructure and FDI as follows:
DlnGDPt = a0 + a1 D(lnGDPti ) + a2 Dln(TRAtj )
i=1 j=0
Y = b0 + bX ðXÞ + bM ðMÞ + e ð4Þ
+ hECMt1 + zt
ð3Þ where b0, bX, bM, X , M, Y, E denotes the constant, coef-
ficient of transport infrastructure, coefficient of FDI,
where D is the operator of the difference; ECMt1 is the transport infrastructure index, FDI, GDP, and a stochas-
term of error correction obtained from the ut Equation 2 tic error term respectively. In the equation, M represents
above. g + bX(X) + h (i.e., FDI regressed on transport
Badada et al. 7

Table 2. ARDL Bound Testing Result.

Bound testing Lag length F statistics Decision

GDP, index ARDL(3, 0) 11.850*** Co-integrated

Significant level N = 34
I(0) lower I(1) upper
bound bound
5% level 6.840 7.840
Figure 2. The analytical framework for a mediating effect of FDI. t-Bounds Test T-Statistics
Source. authors output from the input data. 5.331*** Co-integrated
I(0) lower I(1) upper
bound bound
5% level 1.950 2.600
Table 1. The ADF Test Result.
Source. Authors output from input data.
Level First difference Note. ***denote 1% level of significance.
Variable
T-stat p T-stat p

LNGDP 2.624 .097 3.880***
LNTRA 5.525*** .000 6.395***
Source. Authors output from input data.
Note. *** denote 1% level of significance.
infrastructure index; M = g + bX(X) + h), where
g and h denotes constant and error term respectively.
As mentioned by (Baron & Kenny, 1986), bX and bXbM,
and the total impact of transport infrastructure is the
sum of direct and indirect effect (bX + bXbM).
Results and Discussion
In this part of the study, we describe the empirical results
and discussions concerning the research questions stated
in Section 1 of this paper. An ARDL model and the
bound test were used to assess the co-integration between
economic growth and the transport infrastructure net-
work in Ethiopia. To estimate the extent of GDP growth,
an ordinary least square (OLS) was used using the error
correction (ECM) model. Moreover, we used hierarchical
multiple regression to estimate the relationship among
the mediating effect of FDI, transport infrastructure
(TRA), and economic growth (GDP) in the country.
We checked the stationarity test of the selected vari-
able using ADF to define the order of the variable’s
.005 integration. The result reflects that all parameters are
.000 constant at the first difference’s five-per-cent significance
level. Hence, the entire variables are integrated in order I
(0) or I (1). The implication is that; we would accept the
null hypothesis of no unit root at 5% significance (see
Table 1).
Based on the integrated series, we established the co-
integration test by using the ARDL bound test Equation 1
above. The F-value (11.850) and T-value (5.330) of the co-
integration test results are higher than the upper bound of
the critical value [6.840, 7.840] and [1.950, 2.600], respec-
tively, indicating that transport infrastructure and eco-
nomic growth are cointegrated, and hence, the parameters
run together in the long term (see Table 2).
We present the empirical outcomes of the ARDL-ECM
model in Equations 2 and 3 of our study in Table 3. The
table result shows the economic impact of transport infra-
structure estimated by the OLS estimator. As one can
observe from the table, the evaluated coefficient of trans-
port infrastructure has a favorable and statistically sub-
stantial long-term economic impact (b = .460, p \ .05),
suggesting that a 1% growth in transport infrastructure in
the previous 1-year leads to an increased GDP by 0.460%.
The result suggests that when a country has an excellent
transport infrastructure reduces the cost of goods and ser-
vices, generates job opportunities, and provides the possi-
bility for the underprivileged while supporting economies

Table 3. The Long-Run Elasticity Results (ARDL-ECM) Model.

Dependent variable Model Variable Coefficient Standard err. T-statistic p

GDP ARDL(3 0) ln transport _infrastructure _index(-1) 0.460** 0.177 2.620 .010

C 0.086** 0.037 2.210 .036
CointEq(-1) 20.810*** 0.226 3.610 .001

Source. Authors output from input data.

Note. *** and ** sequentially represent a significance level at 1% and 5%.
8 SAGE Open
Table 4. The Result of the Mediating Effect of FDI on the Economic Impact of Transport Infrastructure.
Variable and statistics Model 1
TRA!GDP 0.460*** (2.630)
TRA!FDI
FDI!GDP
Constant 0.080*** (2.620)
lnTRA 0.460*** (2.630)
R-Squared 0.540
F-statistic
R-Squared change
Source. Authors output from input data.
Note. Model I; before adding FDI; Model II: after adding FDI, TRA regressed over FDI; Model III: after adding FDI, both FDI and TRA regressed over GDP.
The numbers in parentheses show t-values, and *** denotes a significance at 1% level.
in becoming more competitive and efficient. Every day,
transportation infrastructure connects individuals to jobs,
healthcare, and educational opportunities. It makes it eas-
ier to provide goods and services to customers wide and
boost the countries revenue, and as a result, attracts inter-
national investment.
Moreover, the short-run dynamic outcome reports
that the immediate impact of transport infrastructure is
insignificant, even though it does significantly in the long
term. However, the co-integration results come up with
the expected sign and level of significance. In a practical
sense, it implies that 81% of the disturbance in the short
run is corrected each year and adjusted to the long-term
equilibrium at the speed of 81% per annum. Therefore,
hypothesis 1 is supported.
Furthermore, we investigate the mediating effect of
the FDI in the relationship between transport infrastruc-
ture and the economic growth of the country using a
hierarchical multiple regression model. Initially, we have
standardized all variables. Accordingly, the model is free
from heteroscedasticity. Besides, as we have mentioned
earlier, all the variables are stationary, and the variance
in nation factors for the variables in all models was less
than four, which indicates the absence of collinearity.
Table 4 presents the empirical results of Equation 4 in
our study. This table introduces FDI as a mediator in
the association between transport infrastructure and eco-
nomic growth. Model 2 to 3 estimates the significant
coefficients of predictors after adding the mediator vari-
able (i.e., FDI) in the model. As presented in Table 4, we
evaluated model 1, before adding the mediator variable
(i.e., the direct effect of transport infrastructure;
b = .460, p = .01). After adding FDI as a mediator, we
evaluated model 2 and model 3 to test hypotheses 2, 3,
and 4, respectively. Firstly, we evaluated the transport
infrastructure as a predictor of foreign direct investment
(model 2). The result shows a significant favorable influ-
ence of the transport infrastructure on FDI (b = 1.400,
p = .000) over the study period in Ethiopia. Next, both
Model II = FDI Model III = GDP
0.240*** (2.720)
1.400*** (9.400)
0.770*** (15.570)
6.650*** (6.400) 6.530*** (18.500)
1.400*** (9.400) 0.240*** (2.720)
0.700 0.880
84.970 (0.000) 113 (0.000)
0.340 (0.000)
transport infrastructure and FDI were evaluated as pre-
dictor and mediator variables, respectively (model 3).
The result shows a significant favorable impact of trans-
port networks on both FDI on economic growth
(b = .240, p = .010) and (b = .770, p = .000),
respectively.
More specifically, as one can observe from model 1,
the direct effect of transport infrastructure is significant
(b = .460, p = .01). Besides, the R-squared change (with
and without interaction) was statistically significant. We
claim that the better transport infrastructure the country
has, the country attracts more FDI, which adds to the
economic growth of the country. When the mediator
variable and the independent variable (FDI and TRA,
respectively) are both included in the same model, the
effect of TRA (IV) on GDP (DV) decreases while
remaining significant (Model 3). A significant p-value is
also obtained from a hierarchical multiple regression test
in Table 4. The findings indicate that increased transpor-
tation infrastructure spending benefits the Ethiopian
economy by expanding the country’s capacity to produce
goods and services (potential GDP), thereby generating
economic growth above and beyond what would have
occurred in the absence of additional infrastructure
spending. Increased spending on transportation infra-
structure also results in increased productivity and pro-
duction indices compared to what would have happened
without extra spending. This positively affects both busi-
ness earnings and government revenue, enhancing both.
Individual households benefit from increases in earnings,
disposable income, and employment opportunities, the
latter of which is likely the most significant growth.
Additionally, this paper employs FDI as a moderating
variable; as a result of our findings, we argue that
expanding transportation infrastructure attracts FDI by
removing common bottlenecks that prevent larger levels
of FDI in Ethiopia, hence enhancing economic growth.
Thus, to expand its growth potential, Ethiopia should
attract more FDI, which can help sustain economic
Badada et al.
Figure 3. The structural stability results: (a) the cumulative sum and (b) the cumulative sum squares.
Source: Authors output from input data.
Table 5. Diagnostic Tests Outcomes of the Models.
Dependent
variable Model Test F static
GDP ARDL(3 0) Breusch 2.239
-Godfrey
Breusch-Pagan 0.894
-Godfrey
Source. Authors output from input data.
growth in the long run. As a result, all sub-hypotheses
are accepted, and the partialmediator variable role of
FDI in the relationship between TRA and GDP is found
to be statistically significant. That is, FDI positively
mediates the relationship between expansion in the
Ethiopian transport infrastructure and economic growth.
Therefore, hypotheses 2, 3, and 4 are supported.
Finally, to confirm the results and evaluate the relia-
bility of the study, we performed the robustness checks
using residual diagnostic and stability tests of the
ARDL-ECM model. The diagnostic tests examined how
the model estimate behaves after the modified variables.
From a residual diagnostic test shown in Table 5, the
result indicates that autocorrelation and heteroscedasti-
city were not found; hence, the results are robust and
reliable in the models.
Similarly, we conducted the cumulative sum and the
cumulative sum square to examine the model struc-
tural stability, the graphic representation of the cumu-
lative and cumulative square lies inside the 5% critical
bound; thus, the structural stability of the model does
not suffer from any shakiness over study time (see
Figure 3).
9
Conclusions
In the current study, we have assessed the economic effect
of transport infrastructure development in the context of
p Ethiopia over the study period. The ARDL Bound test
of co-integration is applied in order to explore the co-
.128 integration test between the entire variables selected in
.499
the study. Seeing the entire variables of this study are co-
integrated, the OLS method is used to evaluate the auto-
regressive distributive lag and ECM to evaluate the long
and short-run economic impacts of transport infrastruc-
ture development using aggregated annual time series
data over the study period in Ethiopia. The empirical
findings reveal that transport infrastructure (i.e., index
from the components of the road and air transport) and
GDP are co-integrated, indicating that the entire vari-
ables move together in the long run. Besides, the expan-
sion of transport infrastructure has a significant long-
term economic effect in Ethiopia. Moreover, FDI adds
value and plays a significant mediating role, thereby
increasing the economic growth performance of the coun-
try. Furthermore, from the outcome result, we conclude
that transport infrastructure expansion attracts FDI by
eliminating common bottlenecks that inhibit higher levels
of FDI in Ethiopia and thereby increase economic
growth; therefore, in order to create more opportunities
for growth, Ethiopia ought to attract more FDI.
The theoretical findings reveal that investments in
transportation infrastructure positively impact total fac-
tor productivity by increasing micro-production effi-
ciency and resource allocation efficiency, which promotes
increases in labor productivity through extensive and
intensive marginal effects in economic growth. It
improves the economic growth environment, processes,
and outcomes by boosting technological innovation,
industrial structure, and productivity. Moreover,
10
investment in transportation infrastructure boosts techni-
cal innovation capacity by extending R&D size, enhan-
cing R&D efficiency, and facilitating the transition of
scientific and technology innovation achievements
through foreign direct investment.
Hence, transport infrastructure development in
Ethiopia can be deemed to be the paramount policy vari-
able for forecasting economic growth in Ethiopia. Policy
restructuring in transport infrastructure advances the
investment in the private sector, linking resources and
marketplaces and attracting FDI that can sustain
Ethiopian economic growth for the long run. This paper
makes some theoretical contributions to existing
research. The first theoretical contribution is to
transport-led economic growth literature. Previous
transport-led growth studies lose to consider the mediat-
ing effect of the FDI. Thus, this paper used the FDI as a
mediator variable that stimulates transport-led economic
growth. The second theoretical contribution is to con-
sider the findings of previous studies to establish an
econometric model to assess the FDI and the economic
effect of transport infrastructure.
Moreover, another relevance to this paper of this
paper is the creation of a transport index, taking into
account the variables regarding the state of transport
infrastructure. The paper thus contributes to transport-
led economic growth literature that provides a general
view of the economic effect of transport infrastructure
development from an FDI point of view. These results
also have important policy implications for supporting
not only future decisions on transport infrastructure
investment but also illustrate the need to develop a sus-
tainable strategy that makes poor public policy results
more viable. Besides, as transportation infrastructure
investments impact the quality of economic growth, tech-
nological innovation and comprehensive digitization of
the supply chain can increase economic growth through
technical innovation, industrial structure, and productiv-
ity, especially during the Covid-19. This includes cloud
and internet of things (IoT) technology, advanced analy-
tics tools to optimize freight scheduling and routing, and
biofuel adoption. Because of this, future studies may
combine the repulsiveness of this aspect.
On the other hand, just like other studies, the study
has some limitations—in the case of control variables
and the outcomes described in this study delimited to
Ethiopia. However, countries have diverse political, eco-
nomic, social, and technological backgrounds that could
affect the transport infrastructure and in turn, affect eco-
nomic growth. Hence, replication is welcome based on
the backgrounds of the countries and using control vari-
ables. Such knowledge could be merged into future
studies.
SAGE Open
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with
respect to the research, authorship, and/or publication of this
article.
Funding
The author(s) received no financial support for the research,
authorship, and/or publication of this article.
ORCID iD
Bayissa Badada https://orcid.org/0000-0001-7657-1086
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