Determinants and Impediments of Foreign Direct Investment (FDI) inflows in Ethiopia: A Firm Level Investigation

Abstract

FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration and helps to create a more competitive business environment. Hence, FDI can contribute to higher economic growth and serve as a potent tool for poverty alleviation in developing countries. Many developing African countries including Ethiopia, have liberalized their trade regime and attempted to create an investment friendly environment to benefit from the FDI inflows. Ethiopia, in particular, was able to attract a growing FDI inflow in Africa following its economic liberalization measures in the 1990s. However, studies show that the level of FDI-to-GDP ratio is still meager compared to the rest of economies in the region. Therefore, this study tried to analyze the main determinants and impediments of FDI in the country using a survey of existing foreign firms. Accordingly, the empirical results derived from the study show that domestic and regional market seeking, political and social stability, and investment incentives were among the main determinants of FDI. In contrast, exchange rate volatility, corruption, and lack of clear policies and regulatory impediments were identified as the three main factors that have the potential to deter foreign investment in Ethiopia.