Chapter One

1. Introduction

1.1 Background of the study

Foreign direct investment is one of the most prominent issues in the global economy today and
has come to be widely recognized as a major potential contributor to growth and development. It
is assumed to bring capital, technology, management know-how and access to new markets. In
comparison with other forms of capital flows, it is also assumed more stable, with a longer-term
commitment to the host economy. Most developing countries are tries to attract foreign direct
investment by providing various incentives. In Ethiopia Foreign investors are encouraged to
invest in all economic sectors, except those currently reserved for domestic private and state
investment, with the domestic private investor category including foreign nationals who are
permanent residents in Ethiopia. The foreign direct investments regulatory issued various
proclamations and establish the economic sectors open to FDI, the financial limits and
requirements (the monetary and reporting requirements) and the financial incentives that are
available. On account of the enabling conducive investment environment and generous incentive
package to private investors foreign direct investment (FDI) flow to Ethiopia has continued
growing especially the FDI flow from China and India and the country has attracted a millions
US dollars of investment. The Ethiopian Investment Agency, which released performance report
(February 4, 2011), indicated that even though the agency has recently introduced strict criteria
to identify genuine investors from fake ones, the east African continues attracting a growing
number of foreign investors. From July 2010 – end of December 2010 the agency has registered
a total of 900 investment projects of which 72 percent are foreign investors, according to
Getahun Negash, communication director of the agency.

The effect of foreign direct investment is wide ranging since its impact on developing countries.
Its contribution to economic development can be transferring advanced technology and
organizational form to the host country, trigging technological and other spillover to
domestically owned enterprises, assisting human capital formation, contributing to international
trade integration, and helping to create a more competitive business environment. However, the
flow of investment by foreign companies can affect domestic based producers negatively.

1
As we know the of industrialization in Ethiopia is the recent history and most of productions in
Ethiopia basis itself on the cottage industry and that of not more sophisticated production
technologies that are updated from time to time in the developed world. Because of the
productivity of this producers are less as compared to that of developed countries producers.
Their financial strength, the quality of the product they produce encounter difficulty in
competing with products produced by most technologically advanced companies. Because of the
entry of foreign investors in the domestic sector, producers in the host country encounter intense
competition which may force them to leave the market. The flow of investment may also assume
to have impact on the price of factors of production. Most researchers conducted on the foreign
direct investment largely shows the positive impact of foreign direct investment on domestic
based producers .however the side effects must be analyzed and works must be done to finance
in this area to take the advantage of foreign direct investment. The research tries to access the
impact of foreign direct investment and tries to provide recommendation based on the result of
data collected.

1.2 Statement of the problem

Because of the direct investment of foreign investors domestic producers are becoming unable to
compete with them and they face difficulty to stay in the business. In recent years the flow of
foreign investors in developing countries becomes increased and many governments provide
various incentives to attract foreign investors. The government of Ethiopia provides tax
exemption, reduction of import duties, tax holiday and others incentives. Foreign direct
investment has both positive and negative impact on domestic based producers. Fornicate, some
of its contribution includes: transferring advanced technology and organizational form to the host
country, assisting human capital formation, help to create more competitive business
environment and also it creates additional demand for local inputs.However,foreign direct
investment have plenty of negative impact on domestic based producers .Those companies come
from outside world (MNE'S) tends to have higher production capacity because of their financial
strength, skilled man power, experience or their technological advancement. So the entry of
those foreign investors in domestic sector may increase the intensity of competition, which may
force some domestic companies to leave the market .Those companies exist in this competition
may be forced to pay higher for factors of production specially that of labor cost and this may

2
lead to the negative impact of inward foreign direct investment because of the loss of export by
domestic companies that may not be compensated by foreign companies exports.

1.3 Basic Research Questions

The reasons to conduct research on the impact of foreign direct investment on domestic based
producers are to find out the problems and reduce them and to make suggestion and
recommendation through the following basic research questions.

• Is the negative impact of foreign direct investment overweight the positive

impact?
• Does foreign direct investment have influence on the export performance of
domestic based producers?
• Is the competitive environment created by the entry of foreign investors beneficial
or not for domestic based producers?
• What is the impact of foreign direct investment on the price of factors of
production?
1.4. Objective of the study
1.4.1 General objective
The main objective of the research is to analyze the impact of foreign direct investment on
domestic based producers In Ethiopia.
1.4.2 Specific objective
The specific objectives of the research are to:
 To understand the positive and negative impact of foreign direct investment on
domestic based producers in Ethiopia.
 To access the impact of foreign direct investment on the export performance of
domestic based producers.
 To access the impact of competitive environment created by the entry of foreign
investors.
 To access the impact of foreign direct investment on the price of factors of
production specially that of labor.

3
 1.5. Significance of the study

The research on the impact of foreign direct investment on the domestic based producers in
Ethiopia will contribute to understand the general essence of flow of foreign investment and
what must be done to diminish the negative impact. The researcher shows the conducting the
research will have the following significances:

 It will be useful in providing relevant information about the impact of foreign direct
investment on the domestic based producers.
 The research will clearly show the positive and negative impact of foreign direct
investment.
 The result of the research will help in determining whether foreign direct investment is
major factor for the improvement of domestic investment or not.
 The result will be used as indication to developing countries that they must consider the
negative impact on domestic based producers. When they attract foreign direct
investment.
 The result will be indication of the need to implement new policies , rules and
regulations on the flow of foreign direct investment.
1.6. Scope of the study
The study will be delimited to:
 Cover the overall impact of foreign direct investment on the domestic based producers in
Ethiopia, rather than it’s social and economic impact on the society.
 The research will give more emphasis to the negative impact of foreign direct investment.
 In the research the main investment offices and their website used as a main source of
data about the current flow of foreign direct investment and different domestic companies
who are competing with foreign companies are used.
 Different types of industries that are becoming in competition with foreign investors are
the main source of information about what they benefit from competing with foreign
companies and what they lose
 The research will be completed within seven weeks from September to fifteen to March
fifteen

4
 Chapter Two

2. Review of Literature

2.1. Conceptual framework

2.1.1 Definition of Foreign Direct investment

Foreign direct investment (FDI) is direct investment by a company in production located in

another country either by buying a company in the country or by expanding operations of an
existing business in the country.

According to the International Monetary Fund, foreign direct investment commonly known as
FDI, "... refers to an investment made to acquire lasting or long-term interest in enterprises
operating outside of the economy of the investor." The investment is direct because the investor,
which could be a foreign person, company or group of entities, is seeking to control, manage, or
have significant influence over the foreign enterprise.

2.1.2. Why Is FDI Important?

FDI is a major source of external finance which means that countries with limited amounts of
capital can receive finance beyond national borders from wealthier countries. Exports and FDI
have been the two key ingredients in rapid economic growth. According to the World Bank, FDI
and small business growth are the two critical elements in developing the private sector in lower-
income economies and reducing poverty.

2.2Emperical framework

2.2.1 The impact of Foreign Direct Investment in developing countries

There is increasing interest in development circles on measures to promote foreign direct

investment in developing countries. Thierry Mayer at the OECD has published October 17, 2006
a new study (other interactions between aid, trade and investment policies to inform donor
decisions about how to maximize foreign direct investment and its broader benefits.

5
The study draws some unexpected and disconcerting conclusions:

• The relationship between FDI and economic growth is not as strong as was previously
claimed – indeed, while there is a correlation between inward FDI and growth, it is not
possible statistically to invalidate the hypothesis that those two outcomes are results of a
common cause – namely the pursuit of sound economic policies.
• The benefits to the local economy of FDI are limited – and indeed FDI can have a
negative effect on local industries.
• There is no statistically significant relationship between bilateral aid and the amount of
FDI (once you control for country characteristics).

The paper concludes that for FDI to have a beneficial impact, it is important to increase
absorption capacity, by increasing human capital accumulation, increasing and improving
transport infrastructure, improving market access for poor countries to increase trading
opportunities, and facilitating trade between developing countries. Mayer also calls for more
detailed examination of the impact of investments in infrastructure and in education and the
interaction with the benefits from FDI.

It is true that this paper looks only at middle income countries (because of data constraints in
least developed countries). Nonetheless, it should challenge to the development industry to
consider carefully what we know about the impact of foreign direct investment on development,
and to reappraise the policies we pursue both to promote FDI and to increase its beneficial
impact.

2.2.2 FDI and domestic market

Foreign direct investment may enhance the productivity not only of companies earning
investment of the host country as a consequence of technology transfer .this kind of spillover
impact where made from both intra-industry(within the same industry) and externalities through
forward linkage. Foreign direct investment may create in expertise that the country doesn’t have
and access to global market is easier with foreign direct investment .there are many strong
evidences about foreign direct investment which helps improve economic growth through
technology diffusion and development of human capital (International Journal of Business and
Social Issues, volume.3,January,2012).If domestic firms and multinational enterprises become in

6
competition in the domestic market it will have considerable impact on domestic based
producers .

2.3 Foreign Direct investment in Ethiopia

2.3.1. Organizing a Private Business Investment

Foreign participation in investments may be carried out either through the establishment of
branches or through locally incorporated enterprises. All foreign investors intending to invest in
Ethiopia are required to obtain investment permits. Foreign investments are governed by a
number of codes, proclamations and regulations. The Ethiopian investment regime identifies
three types of investors:

• Domestic investors;

• Foreign investors (wholly owned); and

• Investors in joint ventures.

The legal regime makes a distinction among the different classes with regard to areas of
investment and capital requirements during licensing. In all other respects, the law treats all
classes of investors in the same manner during and after licensing

3.2.2 Institutional framework

The Investment Proclamation of 2002, as amended in 2003, and the 2003 Regulation on
Investment Incentives constitute the main legal framework for both foreign and domestic
investment in Ethiopia. Included in the framework are: forms of investment and capital
requirement, investment permits, concessions, incentives and facilities, including one-stop
service to investors.

An industrial development strategy issued in 2002 aimed at:

• Accepting the fact that private investment is the engine of industrial development;

• Using agricultural development-led industrialization (ADLI) strategy as the road map to

industrialization;

7
 • Promoting export-led and labor-intensive industrial development; and

• Seeking to exploit joint ventures in industrial development.

2.3.3 National determinants of investment flows into Ethiopia

There are a number of positive strategic factors that makes Ethiopia an attractive location for
foreign Investment. Some of these positive elements include:
 A large domestic market and a unique geographical location enabling investors in
Ethiopia to service markets and customers in East Africa, North Africa and the Middle
East and to competitively supply specific products to selected European markets. These
are all reasonably affluent markets with positive growth prospects over the medium-term;
 A unique history, national culture and tradition with a pool of highly educated and
dedicated elite to draw upon as managers and advisors, with English (the language of
business) widely spoken;
 A resurgent private enterprise ethos, with a portfolio of local and regional enterprises
established by indigenous entrepreneurs that deserves to be better promoted including an
emerging group of internationally recognized companies (e.g. Ethiopian Airlines) that
have already established a competitive market presence;
 .A comparatively safe and less corrupt business and social environment that stands out in
stark contrast to many other countries and a generally friendly and helpful attitude to
foreigners;
 A capital city that hosts the headquarters of the Organization of African Unity, the
economic Commission for Africa and other regional organizations as well as a significant
cosmopolitan middle class with experience in international business; Attractive climate
and an evolving tourism sector that combines antiquities with wildlife and visual beauty.

8
 Chapter Three

3. Research design and methodology

3.1 Types of Research

The research will be designed in descriptive research form. Descriptive research does not fit
neatly into the definition of either quantitative or qualitative research methodologies, but instead
it can utilize elements of both, often within the same study. The term descriptive research refers
to the type of research question, design, and data analysis that will be applied to a given topic.
Descriptive research is a statistical research that describes the data and the characteristics about
the population being studied as exist at present.

3.2 .Data type and Source

The researcher will use both primary and secondary data sources to conduct the research:
Primary data sources: Primary sources are original sources from which the researcher directly
collects data that have not been previously collected, such as: direct observation, interview,
survey, and questionnaire etc. The researcher will use the following primary sources of data.
Direct interview officers in Ethiopian Investment Agency (EIA), Ministry of Trade and Industry
(MOTI), Ministry of Foreign Affairs (MoFA), and managers of different industries.

Secondary data sources: These are sources containing data that have been collected and compiled
for another purpose. The secondary sources consist of readily available and already compiled
statistical statements and reports whose data may be used by researches for their studies The
researcher will use world vision documents, books, and public materials, works of various
researches on the area of investment, business sites, annual reports of various international
organizations and internet.

3.3 Methods of data collection

To collect data for the various methods of data collection tools will be used by the researcher:

Interview: Interviewing is one of the major methods of data collection. It may be defined as two-
way systematic conversation between an investigator and an informant, initiated for obtaining
information relevant to as a specific study. The researcher will use different types of interviews

9
such as: Personal interview, group interview (method of collecting primary data in which a
number of individuals with a common interest interact with each other ) and telephone interview.

Observation: Observation may be defined as a systematic viewing of a specific phenomenon in

its proper setting or the specific purpose of gathering data for a particular study. The researcher
use this method by using method includes both 'seeing' and 'hearing.' It is accompanied by
perceiving as well.

Focus Group: discussion .the researcher will use the data from focus group discussion of six to
twelve peoples from Ethiopian investment agency and representatives' from various industries.

3.4 Procedures of data collection

The researchers will be followed the procedures to collect data:

• Identify the problem

• Formulate the basic research questions for interviewee
• Collecting both primary and secondary data

• Finally the researcher will be analysis the collected data through interviews,
observation and focus group discussion.

3.5 Method of data analysis

The techniques of the data analysis will be more qualitative. The researcher passes a range of
processes and procedures whereby tries to move from the qualitative data that have been
collected into some form of explanation, understanding or interpretation of the people and
situations he is investigating. Qualitative data analysis is usually based on an interpretative
philosophy. The idea is to examine the meaningful and symbolic content of qualitative data. By
analyzing interview data the researcher may be attempting to identify any or all of:

 Someone's interpretation of the world,

 Why they have that point of view,
 How they came to that view,
 What they have been doing,
 How they conveyed their view of their situation,
 How they identify or classify themselves and others in what they say,

10
 4. Time and budget plan

4.1. Time Schedule

The research will be done according to the following schedule

Main task Sep Oct Nov Dec Jan Feb Mar

Design the 
research
Data collection 

Literature 
review
Data 
processing
Data analysis 

Print the final 

paper.
Presentation 
and submitting
of the paper

4.2 Budget break down

No Description unit Amoun Unit cost Amount*unitcost Total cost(birr)

11
 t
1 Stationary materials
1.1 paper piece 500 0.25 500*0.25 125
1.2 pen piece 10 3 10*3 30
1.3 Correction fluid piece 2 1 2*1 2
Sub total 155
2 Photo copy and printing
2.1 Computer writing pieces 50 3.50 50*3.50 175
2.2 Other Printing service pieces 200 1 200*1 200
2.3 Photo copy service pieces 150 0.35 150*0.35 52.50
Sub total 427.50
3 Transportation
3.1 From Adama to Addis 3 times 100 3*100 300
Ababa investment offices
3.3 From university to 2 times 100 3*150 450
different organizations
Sub total 750
4 Telephone cost
4.1 Telephone card pieces 3 times 25 3*75 225
5 Unexpected costs 150
Total cost 1707

Biblography

12
13
14
FDI to Ethiopia Enhanced

Monday, 07 May 2012 09:18 MeronTekleberhanEthiopian Business News - Investment

Share |

The flow of Foreign Direct Investment to Ethiopia has shown a notable increase in the last nine
months according to the Ethiopian Investment Agency.

An estimated 61 billion birr making up 95% of the nations capital budget is covered from FDI
explained Getahun.

The increase in FDI is due to improvements within the financial sector, enhanced promotion and
better licensing procedures said Getahun Negash, Director of the Agency Corporate
Communications.

The lead in FDI activities in Ethiopia has been taken by Indian and Chinese companies with
companies from Europe, the Middle East and the USA also engaged in investment efforts he
noted.

African investors from countries such as Egypt, Kenya, Nigeria and South Africa are also
engaged in investment in Ethiopia in areas such as the manufacturing and agro-processing
sectors according to Getahun.

15
Significant investment also comes from members of the Ethiopian Diaspora from Europe and the US
who are engaged in a range of investment sectors he added.

The EIA issues licenses to foreign investment projects on the basis of the feasibility of the
projects and the priorities set by the economic development agenda of the nations.

More than 123 companies with a combined investment capital of 11 billion birr have launched
operations in Ethiopia since September 2011 creating more than 31,000 job opportunities noted
Getahun.

Source: Walta Info

Share |

Recent Articles by Meron Tekleberhan :

• Ethiopian Airlines Wins Bombardier Award

• Indian Jeans Manufacturer to Enter Ethiopian Market
• Du Pont to Diversify in Ethiopia
• Ethiopian Textile Sector Urged to Enhance Environmental Protection
• Ethiopian Airlines Launched Program to Promote Tourism

Investment

FDI to Ethiopia Enhanced

Monday, 07 May 2012 09:18 MeronTekleberhanEthiopian Business News - Investment

16
Ethiopia Attracts 2 Billion US Dollars FDI in Six Months

Friday, 04 February 2011 08:22 NewBusinessEthiopia.com

BY NEW BUSINESS ETHIOPIA REPORTER

Foreign Direct Investment (FDI) flow to Ethiopia has continued growing and the country
has attracted around two billion US dollars of investment in the past six months.
The Ethiopian Investment Agency, which released six month performance report today
(February 4, 2011), indicated that even though the agency has recently introduced strict criteria
to identify genuine investors from fake ones, the east African continues attracting a growing
number of foreign investors.

From July 2010 – end of December 2010 the agency has registered a total of 900 investment
projects of which 72 percent are foreign investors, according to Getahun Negash,
Communication Director at the agency.

He also stated that the 900 investment projects have registered a total of 34 billion birr (around
two billion US dollars at the current exchange rate) of which 94 percent is registered by
foreigners.

Briefing media this morning at the agency’s office here in Addis Ababa at Bole road, he noted
that as compared to the preceding year same period (July 2009- December 2009) the number of

17
projects are now increased by 58.

If all the 900 projects will be implemented, they have the capacity of creating jobs for 42,335
individuals. Manufacturing and agriculture sectors are becoming the main focus areas of the
investors, according to the report.

The report also stated that Ethiopian government so far, has preserved 3.4 million hectares of
land for investors who are interested to be engaged in modern farming.

Commenting on why some investors do not implement their projects on time, Getahun
mentioned absence of strict criteria by the agency to identify genuine investors from tourists as
among the reasons.

“Now that we have put in place strict criteria, which will enable us to separate genuine investors
from some tourists and people who scramble for resources such as land,” Getahun said who also
indicated that the agency has cancelled 217 investment projects of fake investors.

Unless it is a well known international company, the agency now requires foreign investors to
bring letter from Ethiopian embassies their origin or their embassies in Ethiopia or confirmation
of foreign banks statement showing that they really have deposits for investment, according to
Getahun.

Getahun Negash Agency's Communication Director Addis Ababa February 4, 2011- Phot
newbusinessethiopia

18
Foreign direct investment; net (BoP; US dollar) in Ethiopia

The Foreign direct investment; net (BoP; US dollar) in Ethiopia was last reported at
288271568.25 in 2010, according to a World Bank report released in 2011. The Foreign
direct investment; net (BoP; US dollar) in Ethiopia was 221459581.36 in 2009, according to
a World Bank report, published in 2010. The Foreign direct investment; net (BoP; US
dollar) in Ethiopia was reported at 108537543.97 in 2008, according to the World Bank.
Foreign direct investment is net inflows of investment to acquire a lasting management
interest (10 percent or more of voting stock) in an enterprise operating in an economy
other than that of the investor. It is the sum of equity capital, reinvestment of earnings,
other long-term capital, and short-term capital as shown in the balance of payments. This
series shows total net, that is, net FDI in the reporting economy from foreign sources less
net FDI by the reporting economy to the rest of the world. Data are in current U.S.
dollars.This page includes a historical data chart, news and forecasts for Foreign direct
investment; net (BoP; US dollar) in Ethiopia. Ethiopia has been one of the fastest growing
non oil dependent countries in Africa. Ethiopia's economy is based on agriculture, which
accounts for more than 45% of GDP, 80% of exports, and 80% of total employment. The
biggest sources of foreign trade are coffee, flowers and oilseeds. Yet, in spite of high rates of
growth most Ethiopians live in poverty. Periodic droughts, soil degradation, high
19
population density, high levels of taxation and poor infrastructure are main obstacles to
sustainable growth.

20