Determinants of Private Investment in Ethiopia

Abstract

The pillar for ensuring economic development is private investment. So that, the primary aim for this paper was to investigate key determinants of private investment in Ethiopia. The author used a quantitative research approach with an explanatory research design to realize the objective. The paper practically investigates whether Real GDP, inflation rate, real interest rate, foreign direct investment, tax rate, exchange rate, population growth rate, unemployment rate, international trade openness, education affect the growth of private investment in Ethiopia or not. The study mainly concentrated on thirty years of secondary data (i.e. from 1991 to 2020) on key variables. The data was obtained from a variety of sources including the NBE, IMF, WDA, CSA, and WB. Multiple regressions using the ARDL model with appropriate software E-views 9 was applied. The ECM is 110.6 percent that depicts the speed of adjustment from short run towards long run. The study also tests unit root (non-stationary), model stability, bounce, Johansson co integration, and diagnostic test. The main finding of the study showed that in real GDP, population growth rate, interest rate, trade openness, and unemployment rate were statistically significant at 5% level of significance in the long run and short-run and also exchange rate was a positive and statistically significant effect on private investment in short-run. And tax rate was insignificant in the short run. While FDI, Education, and inflation were statically insignificant both in short run and long run in this study. Finally, unemployment has a negative effect on private investment, the policy choice on the matter needs a cautious decision. To achieve the great short run and long run goals, it is advisable to employ integrated principle of action tools.