THE DETERMINANTS AND TREND OF FOREIGN DIRECT INVESTMENT IN ETHIOPIA

Abstract

Many developing countries are competing to attract foreign direct investment with a belief that it can be a tool for poverty reduction. However, developing countries are not only lagging behind in attracting FDI, but also the pattern of FDI inflow to the developing countries is highly uneven. Numerous studies in recent years have focused attention on the determinants and trends of foreign direct investment in developing countries; however, previous studies conducted in Ethiopia were not adequate when it compared with the importance of the issues. This paper assessed the determinants and trend of Foreign Direct Investment (FDI) in Ethiopia. The study employed time series data from the period 2000 – 2017 to identify and assess the trend and potential determinants of FDI inflow, such as, market size, market potential, macro–economic instability, infrastructural facilities, trade openness, exchange rate and government expenditure. The data were collected from relevant sources such as, Ministry of Finance and Economic Cooperation (MoFEC), National Bank of Ethiopia (NBE), Ethiopian Investment Commission (EIC) and Central Statistics Agency (CSA). The study first discussed the trend of FDI growth rates. In addition, data were also analyzed using regression analysis to identify the cause - effect relationship of dependent and independent variables. The result disclosed that there is no consistent growth of FDI in the country. Hence, inflow of FDI to the country can easily be affected by various macroeconomic variables. It is observed that FDI is distributed unevenly throughout the different sectors of the country with the highest share going to the manufacturing sector (68%). The evaluation of the regional distribution of FDI shows that despite the many reforms made to encourage FDI flow to less developed regions, the performance of these regions in attracting FDI is quite low and high number of FDI is concentrated in Addis Ababa city administration and in proximity town around Addis Ababa. The findings of the study further showed that economic growth, Trade openness, exchange rate and infrastructural development have significant positive impact on FDI inflows, while macroeconomic instability such as, inflation, government expenditure, and low level of market size have negative impact on FDI inflow. The study recommended that it requires a thoughtful commitment to address all variables having negative impact on the inflow of FDI, as these factors increase the transaction costs of doing business in the country and affect the image of the country in the eyes of potential investors. As a satisfied investor is an important promoter for potential investors, the government should also support the existing investors by introducing an aftercare program aims to identifying and resolving the problems encountered by the existing investors.