Analysis of Determinants of Private Investment in Ethiopia

Abstract

To make private investment more attractive, most African countries have liberalized market and attempted to create enabling environment in recent decades. Ethiopia, like many African countries, took some steps towards liberalizing market and the macroeconomic regime as well as introducing some measures aimed at improving the investment regulatory framework. This study analyses the determinants of private investment in Ethiopia using a time series analysis over the period of 1975 to 2009.The study gave an extensive account of the theoretical explanation of private investment as well as reviewing the policy regimes, the investment regulatory framework and institutional set up in the country over the study period. It also undertakes empirical analysis to establish the determining factors of private investment in Ethiopia. Our findings show that growth rate of real GDP, availability of credit, and public investment among others, have positive impact on private investment. On the other hand, macroeconomic instability (liberalization), lending rate, and consumer price index (CPI) have negative impact on private investment. The results suggest that policies that address only some components of macroeconomic instability may not be enough to revive private investment. Thus, the findings imply that liberalization of the market and regulatory regimes, stable macroeconomic and political environment, and major improvements in infrastructure are essential to attract private investors to Ethiopia.

DOI: 10.7176/JESD/12-7-03

Publication date: April 30^th 2021