Title: - Determinant of foreign investment in Ethiopia: Systematic review

Author: - Habtamu Legesse

Published date: - November 28, 2018

Published at: - a Journal of academy business and retail management

Reviewed by: - Endeshaw Yibeltal (1901584)

Civil service University, College of Finance, Management and Development

Department of Public Financial Management

For an assignment International Public Financial Management (PFM 611)

Reviewed date: - April 9, 2021

Introduction

Attracting FDI is served as source of capital in most list developing countries (Genet and Hailu 2006) and
it contribute to economic development poverty reduction .Human capital formation and international
trade integration. Ethiopia has registered double economic growth over the past 13 year. It increase the
per capital income (MOFEC 2007). FDI is significant source of capital for the least developed countries.
It is also important for transferring technology advancement for domestic enterprise.

The major objective of the research review is to review sample empirical studies conducts in Ethiopia and
draw logical conclusion and recommendation. Its significance is to review the expected to come up with
convincing and significant information for government, policy maker and other institutions.

Summery

FDI has benefited to host county; creating job, bringing new technology, knowledge transfer. It has its
own contrast; fail the re investment from profit ,discourage saving and investment adopting sound fiscal
and monitoring policy than FDI, it also participate tax avoidance and tax evasion beside to tax holiday,
Tariff protection and investment allowance for FDI. It has three broad purpose, Market seeking
(horizontal), Asset seeking (resource) and efficiency seeking. These three motives of FDI are under
economic determinant of FDI.
Factor that affect FDI include any host country’s situations that affect the inflow of FDI, like market size,
the economic growth rate, real growth domestic product, infrastructure, natural resource, the political
situation etc. In recent years, Ethiopia has started encouraging the inflow of FDI by improving the
investment climate and by providing different incentive packages. The focus of this review is to identify
the major determinants of foreign direct investment (FDI) in Ethiopia. The results show that variables like
real growth domestic product, liberalization, exchange rate devaluation, and trade openness are significant
and have a positive correlation with the inflow of FDI in Ethiopia.

On the other hand, variables like inflation, poor infrastructure, the volatile and high lending interest rate
have a significant and negative association with the inflow of foreign direct investment. Finally, the study
recommends possible intervention of the government through infrastructure development and formulation
of sound fiscal and monetary policies to control the negative impact of inflation, interest rate and other
macro variables.

The government of Ethiopia has established Ethiopian Investment authority (EIA) in the year 1992 among
other thing to promote coordinate and facilitation FDI in the county. According to EIA, the area with the
most promising potential for investment are; agriculture, agro processing, garment, leather, tourism,
mining and hydropower.

Analysis and Result

The trend of economic growth of Ethiopia in the past decades recorded annual average GDP growth of
about 10% and this growth mainly driven by public investment agriculture and infrastructure. As the
result, the poverty rate has fallen from 44% in 2000 to 23.5% in 2015/16.In order to enhance export
sector, the government has established Ethiopian commodity exchange (ECX). The government also
offers different incentives like holidays or Exemption, which range from 2-10 years depending on the
nature of investment (Tesyae) 2017. However, there are a number of obstacles to invest here in Ethiopia,
enhance trade regulation, perceived foreign exchange rate risk, restriction on foreign currency transaction
and conversion, inconsistent and inefficiency in the tax administration and insufficient finance access in
Ethiopia also known by nationalize lucrative business .example enterprise undertaken by government and
all financial institution are handled by the Ethiopians only.

Real growth domestic product (RGDP), investment in the basic element of growth domestic product
(GDP) it has a power to attract FDI. Currency devaluation is considered as an opportunity for FDI to
purchase asset a reduce cost. Through its effect on the cost of input and the price of out puts, inflation
reduces the real return on investment and firm competitiveness. Countries that reduce inflation rate have a
better chance of attracting FDI, IR and EXR used to proxy variable for macroeconomic stability.

Well develop infrastructure well reduce the cost of doing business for foreign investor and enable them to
maximize the rate of return on investment. Interest adjustment to reflect change inflation and it
determinant FDI, trade liberalization are the reason to expect that different kind of trade would influence
FDI flow differently. Trade association with cross boarder vertical integration may boost FFDI by
providing incentives of cost reduction.

Variables
No Author RGDP INF PINFRA INT L ER TO
1 Rozina + - - +
2 Haregwoin - + + +
3 Gelawdiwose + - -
4 Teshome + - -
5 Amanuel - +
6 Genet&Hirut + - - + +

Tesfaye, 2017 and Henok, 2014 also made description analysis of the factors that affecting The FDI in
Ethiopia. Their finding reviled that Ethiopia relatively stable in macro economy, secure and safe in the
horn of Africa (political and social). Strategic geographic locations, favorite climate, inexpensive,
sufficient labor, potential on local market opportunity are main driver FDI in Ethiopia. On the other hand,
the major obstacles or challenges that constraint flow of FDI are trade regulation ,custom clearance (lack
of clear policy and regulatory impediment) shortage of foreign exchange and rate volatility, tax
administration inconsistent and in efficiency ,inefficiency local access to finance ,openness to business
and culture(Tesfaye,2017).

Strengthens of the review and the author

The author has written very well in good paragraphs. He read enough literature on his topic, He analyzed
and summarized in short, clear and smart way, He recommended a good recommendations for us. So, the
authors have detail knowledge on the topic and he has a good communication skill.
Weakness of the review and the author

There are many variables to determine the FDI in Ethiopia. But, He reviewed six researches and studied
only seven variables. However, Corruption, bureaucracy, perception, labor market, political stability,
natural resource availability, intellectual property right and regulation frame work of the host country.
The other weaknesses are, he was not address the theory and model of FDI. Although, He studied on
seven variables, it is not applicable on all models. Some Issues are redundant twice a. Also, He did not
show the sample, his hypothesis, type of methodology for the readers.

Contributions of the articles

This article is very useful to us. It contribute the lesson, International public financial management, that
we going to attained in chapter four, the course extensively deal with all international finance aspects. The
articles contain merit and demerit of FDI, factors that affect FDI with author’s recommendations. So, it
needs as a reference for the course.

Conclusion and Recommendation

Performance of host country in terms of GDP is important for investors in economy, most developing
countries are trying to attract FDI and Ethiopia as a nation with low domestic saving and with high budget
deficit needs to be part of this computation’s stated in the methodology part reviewed applied two stage
screening process: title and abstract screening and full text screening.

Real growth domestic product, liberalization and trade openness are among the major determinant of FDI,
which affect the inflow of FDI positively. On the other hand, variables like inflations, poor infrastructure,
and level of interest rate are negatively related to the inflow of FDI.

My arguments against FDI

It brings about the loss of political and economic sovereignty, it controls key industries and export
markets, it exploits local natural resources and unskilled workers; it undermines indigenous cultures and
societies by imposing Western values and lifestyles on developing countries.

Generally, in my opinion it is not advantageous for developing country, like Ethiopia. Because of it is the
mechanism to get unhealthy wealth due to tax evasion and other benefits for the foreign investors.