Determinants of Domestic Private Investment In Amhara National Regional State

Abstract

Private investment in the Amhara National Regional State in real terms, as well as a ratio to Gross Domestic Product (GDP) has been falling in some periods of 2003-2010. Viewed against the background of growing evidence of a link between investment and economic growth, an inconsistent and downward trend in the region’s private investment is a matter of concern. The question of what determines private investment behavior in the region, therefore, becomes an important issue. Several studies in developing countries emphasizeon the importance of macroeconomic policy in explaining variations in investment, and in particular, for identifying the macroeconomic determinants of private investment. The paper examines the macroeconomic determinants of private investment in the Amhara region by means of a regression analysis. For econometric analysis, the data used for the study is mainly secondary data collected from different regional government organizations. The model used for econometric regression is an eclectic version of flexible accelerator model designed to capture some of the key determinants of private investment behavior. Econometric results of the study support the existence of a short-run dynamic adjustment and the long run equilibrium relationship between these macroeconomic variables and private investment level. Public investment, bank credit to the private sector and the real interest rates affect private investment level in the short run, while GDP growth and real exchange rate affect private investment in the long run.