www.absronline.org/journals
ISSN: 2313-6758
*Demeke Atlaw 1 Dereje Teklemariam2 Han Dong-Geun3
Volume 2, Issue 2 Pages: 85-95
Determinants of Foreign Direct Investment: Reflections from Ethiopia
1. Deputy Head, Amhara Region Bureau of Agriculture, Bahir Dar, Ethiopia. 2. Department of Management, Mekelle University, Mekele, Ethiopia 3. Park Chung Hee School of Policy and Saemaul of Yeungnam University, South Korea.
Ethiopia was under command and closed economy system until 1991. The period 2001-2011 is characterized by the remarkable flow of foreign direct investment (FDI) to despite the fact that the rate of accumulation has slowed since the onset of the global crisis in 2008. The level in 2011 was almost five times the level in 2000. What was the reason for such a remarkable boost in FDI? Which factors contribute for the growth of FDI in the country? And what were the roles of the government in the achievement? This paper tries to seek data based explanations for these questions. Both secondary and primary data were applied to analyze the trend of FDI development in Ethiopia. The paper systematically reviewed and presented those factors evidenced as determinants for the flow of FDI. It also identified and explained those factors which are determining the flow of FDI in the context of Ethiopia. Massive supply of infrastructure such as electricity, road access, telecommunication and excellent airway in the country is directly associated with the recorded FDI growth. To this end, exerting efforts on improving the quantity, maintaining the quality of infrastructure, and enhancing good governance can have significant contribution for the enhancement of FDI which again have direct positive contribution for economic advancement.
Keywords: Capital flow, Ethiopia, FDI, GDP, Infrastructure, Email for correspondence:
[email protected]
85 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia
Atlaw et al.,
INTRODUCTION In order to get rid of poverty in the developing countries saving and investment plays great role. This required asset for economic development is not found sufficiently in such countries basically due to the existence of persistent poverty which makes saving impossible. Additionally the lack of knowledge and commitment in developing countries creates another burden for saving to happen. The solution for such problem is working hard to alleviate poverty and leading the public in to continuous saving movement. However, a measure like this will take some time. So the best way to fill the gap for the investment should lie on the development of Foreign Direct Investment (FDI). FDI development played important role in the success of many Asian countries. The now advanced countries in the Asian continent as well as the emerging economies of this region gave lesson to the rest of the world for how to use FDI in development path. They used FDI to fill the gap of saving for investment until they create sufficient saving culture, and the main strong point they transferred to the rest of developing countries is how to be a conveyor belt for technology transfer by using FDI. The stock of inward FDI in Ethiopia has grown steeply in the past decade, although the rate of accumulation has slowed since the onset of the global crisis in 2008. The level in 2011 was almost five times the level in 2000 (Henok et al, 2012). The country was under command and closed economy system until 1991. Several factors can be stated for this success in Ethiopia but the most important determinants are natural resource except petroleum, the presence of high economic growth which gives bright future for firms and the presence of skilled human resource in the country. The situation regarding FDI development is changing as the government gives better attention towards FDI development. As the level of economic growth rate in Ethiopia is increasing the number and types of FDI also increasing. However, the significance and contribution of FDI in the Ethiopian economic growth is not well studied.
In this study both secondary data and primary data are used to analyze the situation of FDI development in Ethiopia. In the secondary data case the study tried to analyze by getting data concerning FDI from governmental and nongovernmental organizations. Concerning the primary data’s survey was conducted by developing questionnaire and getting response from foreign firm owners. The data’s obtained from both sources indicated that the government of Ethiopia is working its level best to attract more FDI and also to maintain the already established foreign investments. From this study it is possible to conclude that FDI development is in the right track and FDI is playing great role in the current economic development of the country. However, there are also problems that should be solved in the near future for better use of FDI as a source of growth in the country. Among the problems identified in this study inflation problem takes the leading factor, and respondents mentioned tax burden as another source of problem for their investment activity. In general, in this study the status of FDI, the contribution of FDI development in the economic growth, the possible determinant factors for the huge FDI development in the country are clearly stated. On the other hand the study also tried to identify the obstacles in the current FDI development and also the possible solutions are mentioned in the study. There are few studies conducted in Ethiopia about FDI development. However, factors that determine the inflow of FDI in the context of Ethiopia are less available or found scattered. To this end, this paper contributes in unveiling the factors that govern the flow of FDI to the nation by reviewing available evidences and soliciting data which was collected for a master’s thesis report by the same author. WHAT DETERMINES OF FDI Market size Market size is a fundamental determinant of FDI. The wealth and development of a country can be used as proxy to measure the size of the domestic market. Most commonly, per capita income, which is an 86 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia indicator of effective demand, is used to measure the size of local market. In addition to per capita income, the GDP of a country and the population size are also used as an indicator to measure the size of local market. However, if the firm is export-oriented and not market seeking, the size of domestic market will not be an important determinant of FDI (Root and Ahmed, 1979). A large market can help firms producing tangible products to achieve scale and scope economies. The domestic market growth rate which is measured in terms of population and GDP growth rate also determines the inflow of FDI in to a country (UNCTAD, 1998b). Moreover, Fayyaz (2012) found and concluded that amongst all the indicators market size is the most important determinant of the FDI. Abdoul, 2012, also found that market size is one of the five most important determinant factors of FDI. Study conducted in Korea, Han (2005) also indicated that a channel through which Free Trade Agreement (FTA) may promote the FDI to Korea is growing domestic market size. He further mentioned that growing consumer’s purchasing power under the Free Trade Agreement (FTA) could attract more FDI to Korea. Natural Resources Natural resources, historically, are the most important determinants of FDI. From the 19th century up to the eve of the Second World War about 60 % of the world stock of FDI was in natural resources. The need to secure economic and reliable sources of mineral and primary products for the (then) industrializing nations of Europe and North America, natural resources were the major reason for the expansion of FDI (Dunning, 1993). Level of Infrastructure In today’s globally competitive business environment, absence and lack of efficient infrastructure means not only high transaction costs for those that are already in business but also a barrier to entry for new firms. Infrastructure development has high importance for the expansion of FDI because efficient and adequate infrastructure implies better access to natural resources and potential market (John, 2012). In the same way, Abdoul (2012) concluded that to improve the return to investment for FDI in Africa, African countries should work more on the development of infrastructure.
Atlaw et al.,
Low Labor Cost As noted by neo-classical economists labor cost is one of the factors that affect the investment decision of foreign investors and this fact has been proven in numerous locations. UNCTAD (2004a) reported that availability of cheap labor in China is taking jobs from Europe and United States. In addition to cheap labor, the out-put labor ratio (labor productivity) also determines the inflow (Solomon, 2008). The effect of FDI on economic growth is dependent on the level of human capital available in the host economy and there is a strong positive interaction between FDI and the level of educational attainment (Borensztein, 1998). Fayyaz et al, 2012, also concluded that availability of skilled labor force encourages the FDI inflows. Political Stability The economic process of a country and in particular the inflow of FDI into a country can be disrupted by unsettled, implicit or explicit, internal or external political disputes and crises. Without stable political conditions, whatever the economic environment may be, a county’s effort to create a more hospitable environment for oversea investors cannot be fruitful. Political instabilities can delay FDI until the storm weathers away or diverts away for good (Solomon, 2008). Abdoul ( 2012) also founds that political stability is one of the five most determinant factors of FDI. Inflation According to Solomon (2008), through its effect on the cost of inputs and the price of outputs, inflation reduces the real return on investment and firms’ competitiveness. Hence, countries that pursue policies that reduce inflation rate have better chance in attracting FDI. Low and predictable inflation rate is central for the long-term investment of both domestic and foreign companies. Therefore, higher and unpredictable inflation will decrease the inflow of FDI (Solomon, 2008). On the other hand, Fayyaz et al (2012) also found that macro-economic environment as depicted by low and stable inflation also encourages FDI inflows. Exchange Rate Variability Frequent and erratic changes in exchange rate of the domestic currency affect the inflow of FDI (Goldberg and Klien, 1997). Exchange rate 87 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia devaluations have a twofold role in explaining variations in FDI. On the one hand, the real value of foreign investors’ capital increases when the host country’s currency is devalued. On the other hand, frequent and continuous declines in the value of host country’s currency would decrease FDI inflow, as it creates high uncertainty (Accolley et al, 1997). A study conducted in Korea revealed that real exchange rate against source country’s currency has a positive effect on the inward FDI. This means that depreciation of Korean Won promotes the inward FDI. This result strengthens other results that the multinationals utilize cost advantages or real wage and interest differentials of the host country and tend to export their final products (Han et al, 2005). Foreign Debt Excessive foreign debt is one source of instability and uncertainty in macroeconomic environment of underdeveloped countries and hence this foreign debt is likely to affect adversely the inflow of FDI. Excessive foreign debt may signal imminent fiscal crises and foreshadow the future economic situation in a county (John, 2012). Fiscal Deficit The fiscal deficit of a government, whether it is financed through printing additional bank notes or through taxation (which equally leads to inflation), decreases the real return on investment (John, 2012). Moreover, in many developing countries it is apparent that due to excessive government borrowing the financial resources available for the private sector are limited and the interest rate is high. On the other hand, expansionary fiscal policy may be important for the expansion of public sector investments on infrastructure (UNCTAD, 1998a). Geographical Proximity Jinayu (1997) noted that in the current global economic structure, geographical proximity and cultural and linguistic affinities are becoming one important determinant of foreign direct investment. The IFC&FIAS (1997) study as well confirmed that FDI from developed to developing countries are influenced by geographical proximity. For instance, while Japanese firms tend to open subsidiaries in China and newly industrialized Asian countries, the West European
Atlaw et al.,
firms tend to open their subsidiary in East Europe (Solomon, 2008). Legal and Regulatory Framework While stable, transparent and reliable legal and regulatory frameworks promote both domestic and foreign investment, an inefficient and ineffective legal system is an impediment to enforce laws and contacts (Solomon, 2008). However, UNCTAD (1999) indicated that an efficient and transparent legal system, and in particular LDCs, does not automatically make a country more attractive for FDI. Regional Integration (Access to Regional Markets) Regional trade agreements can play an important role in terms of enhancing FDI inflows to member countries, through creating access to regional markets. Thus, strong regional integration through trade agreements can influence the investment decisions of TNCs. Mwilima (2003) point out that regional integration is a determinant of marketseeking FDI. The benefits of regional integration depend on a respective country’s domestic market size, level of infrastructure development and availability of skilled and cheap labor force compared to other member countries (Solomon, 2008). Han (2005) tried to study the impact of Regional Trading Agreement (RTA) on FDI among KoreaChina-Japan. The results of his study suggested that FDI in to Korea is both to capture domestic markets and to utilize the Korea economy as a manufacturing base to re-export the final goods to source and/or a third countries. That is, the inward FDI is of both the horizontal and vertical character. This result gives an important clue to evaluate the potential effects of the KCJ FTA (Korea-ChinaJapan Free Trade Agreement) on the FDI. Based on this finding the author argued that the FTA is very likely to encourage FDI inflows to Korea. This study empirically found that the trade volume variable has a positive impact on the inward FDI in all industries, implying that trade and FDI are complements in many Korean industries. Abdoul (2012), in his study found and suggested that African countries can use regional integration to attract FDI because regional integration can increase trade openness, enlarge the size of
88 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia domestic markets, and generate more political stability. Investment Promotion Strategy and Incentive Structure Investment incentives are FDI policy instruments used to attract foreign investors. These include tax reductions and exemptions, special tax allowances, financial incentives such as low interest loans, subsidies as well as grants. Investments guarantees such as guarantees for repatriation of capital and transfer of profits, and guarantees for provision of foreign currencies can also be seen as an incentive to attract TNCs. Bilateral and multilateral investment treaties are also an incentive to increase investment, through creating a predictable investment climate, thereby improving direct foreign investors confidence (Solomon, 2008). However, investment incentives are not substitutes for other determinants like infrastructure and market size. This clearly indicates that the effectiveness of investment incentives is highly determined by the host country’s level of development (UNCTAD, 2000). Regarding promotion some economists argue that if countries would only get their investment policies right, investors would search out all worthwhile investment opportunities (IFC & FIAS, 1997). In reality, not all prospective investors search for opportunities; as a result, investment promotion is vital particularly in least developed countries (LDCs). Image building, investment generation and investors servicing are the three main elements of successful investment promotion. Investment promotion agencies can help the investment process if they identify sectors and clusters of activities where comparative advantages exist and where new ones can be developed (IFC & FIAS, 1997). Privatization Privatization provides a concrete vehicle for TNCs to invest in a country. It has generated substantial amounts of FDI in many developing economies. Sound privatization programs have three main characteristics: political commitment, business orientation, and transparency. Large scale privatization programs send a signal to foreign investors that a government is taking steps to create a climate conducive to FDI. Thus, FDI in
Atlaw et al.,
privatization of infrastructure enterprises like telecommunication, and industrial enterprises would have great impact on other FDI flows (IFC & FIAS, 1997). Other Determinants of FDI In addition to the mentioned macro-level determinant of FDI, numerous other factors are mentioned as host country determinants of FDI in the literature. Some of them are: contract law, the image of the host country, availability of investment fund, governance, human resource development, degree of openness, urbanization, coherent and stable macro & sectoral policies etc (Solomon, 2008; John, 2012; Henok et al, 2012; Xiaochen, 2012). Determinants of FDI in Ethiopia Natural Resource Ethiopia is the 27th largest country in the world by land size and is endowed with significant agricultural resources. Historically, Ethiopia has produced large amounts of maize, sorghum, barely, and wheat along with the Ethiopian staples of teff and coffee. However, its diverse topography and geographical location the country is suitable for growing practically any type of crop and vegetable. Ethiopia’s most important cash crop remains coffee, a product which originated in Ethiopia’s high lands. However, the production of fresh fruits and vegetables, oil seeds and most recently of cut flowers has contributed substantially not only for GDP but also to export performance. Subsectors with substantial opportunities for new investment include: plantation crops (such as tea, and tobacco), oil crops, and cotton, fish farming, horticulture and floriculture (fruits, vegetables and flowers), livestock and poultry (Ethiopia’s livestock resource are the largest in Africa and the tenth largest in the world), and forestry and forest by-products. Ethiopia has already learned the business model for developing export-oriented time sensitive industries such as cut flowers and fresh vegetables (Henok et al, 2012). FDI inflows in to the agricultural sector account for 32 % of the total Ethiopian FDI inflows (Lucie, 2009). It is clear that more FDI already settled in agro processing industries like leather and leather 89 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia products, meat and milk processing activities and cut flower production. However, Solomon (2008), in his study concluded that, the natural resources base of Ethiopia is not strong to attract FDI, as Ethiopia does not have petroleum and sufficient deposit of some minerals that attracts FDI in Africa. He additionally mentioned that absence of these natural resources is by no means the only explanation for the decimal record of Ethiopia in attracting FDI. This conclusion is against the study and conclusion of Xiaochen (2012) who explained the situation as despite the popular view that Chinese investment is largely motivated by natural resource seeking, investment in manufacturing has actually grown faster than mining during the past five years. From 2006 to 2010, manufacturing FDI has grown by 196.6 %, faster than the mining FDI growth rate of 147.06 %, and he mentioned Ethiopia is the fifth largest share received of the flow of FDI from China. I also argue that FDI flow to Ethiopia increases through time irrespective of the absence of petroleum, and the FDI pattern also diversified depending on the other natural resources the country possesses. Ethiopia has been able to attract investment in agriculture “upstream” production from diversified sources, including from China, India and Saudi Arabia, as well as in to the “downstream” food and beverage processing and marketing sectors. Given the growing number of commercial scale investments in the agribusiness sector, the opportunity for ancillary and supporting service business, as well as joint ventures, is also becoming sizable. The existing supply web for agribusiness in Ethiopia remains inadequate to meet all needs, leading some firms to self-supply across the entire agribusiness value chain, beginning with production of inputs, then processing, and finally marketing/distribution, at the same time, they have expressed interest in outsourcing many non-core functions. There is accordingly a wide range of opportunities upstream and downstream of the sector’s core operations (Henok et al, 2012). Currently investment in agro-industrial sector is expanding and foreign firms are engaged in export purpose high value crops and animal products.
Atlaw et al.,
Most of the investments related to agribusiness are carried out in remote and far areas of the country. Apart from their contribution in job opportunities, these investments are playing great role in the structural transformation of such areas. The working culture of the people near to such investments is changing; the residents are now adopting new production technologies in their daily life. Additionally the facilities prepared for the investments are also becoming useful for the residents. The people near to such investments are getting benefit from road construction, telecommunication access and also electricity available for the investors. All these activities help to introduce off-farm activities to the local farmers. In general, the expansion of agro-industry based on the available natural resources is playing its great role in the income increase of the people in Ethiopia as a whole, and creating multidirectional opportunity to the local farmers. Minerals, Oil and Gas Ethiopia’s varied geology endows it with variety of minerals including gold, platinum and platinum group elements (PGE); tantalum and other metals such as copper, iron, lead, nickel and zinc; gemstones such as ruby, emerald, sapphire, garnet, opal, etc.; decorative and dimension stones such as marble and granite; and various industrial minerals such as potash, phosphorous, coal, marble, limestone, and soda ash. There is also significant potential in oil and gas (as well as in commercial-scale geothermal energy within the Rift Valley, where pilot exploration drilling has proven the existence of stream capable of generating geothermal power). Despite the mineral potential suggested by its geology, Ethiopia was not a mining hub until very recently. The accelerating mining sector boom is being driven by several factors. The mining, oil and gas sector is strategically important to Ethiopia’s growth. The goal of the government of Ethiopia is to facilitate the establishment of a large and diverse private sector based minerals industry to help underpin industrial development, generate foreign exchange earnings, provide employment opportunities, and help to alleviate poverty (Henok et al, 2012). The use of mining, oil and gas resources in the economic development of Ethiopia is led by a 90 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia strategy which is protecting rent seeking activities. Using mining, oil and gas in economic development needs great care. Most African countries tried to have development based on mining without having well designed strategies how to use this sector to bring the required development. Best example for the failure of using mining, oil and gas is Congo in Africa. This sector instead of serving as an economic impetus to Congolese, it was a source of conflict for decades. Since the sector can be a source of such complications, Ethiopian government was not in a hurry to exploit this sector. After designing suitable strategy to use such resources, currently the mining, oil and gas sector is playing its role in the economic development of the country. Mining, oil and gas sector is becoming great source for foreign direct investment. As a result many firms are engaged in extracting different minerals and are participating in export sectors. The economic boom in Ethiopia is accompanied by a huge construction development in the country. All constructions need cement for their building purpose. Road construction is intensive in all direction of the country, government and private sky rocketed buildings need huge amount of cement for construction, as the income of people increases the housing construction is also increasing. All these activities are meaningless without having cement. The cement needed for all these activities were imported from different countries of the world before two years. Importing cement for such fast growing economy is unimaginable because the amount needed is very high. Moreover, the imported cement is becoming more expensive through time because of obvious global oil prices. Therefore, shortage of cement in construction industry was a big issue in Ethiopia before three years. However, currently many Chinese firms are operating in different corners of Ethiopia and they already started to produce and supply cement to the construction industry. Surprisingly enough now the country already stopped importing cement. The presence of limestone is becoming a factor for FDI development.
Atlaw et al.,
Gold is also a source of FDI in Ethiopia. Among the export items gold is ranked second next to coffee for long years. There are companies’ engaged in extracting gold and providing it to the world market. Opal is also another source of foreign exchange in Ethiopia and also it is a source of FDI too. There are foreign firms who are engaged in finding oil and gas in Ethiopia. It is believed that there is huge potential of oil and gas in this country. However, there is no success story in extracting and providing gas for market even for domestic use. In general, mining, oil and gas sector started to play its great role in the economic development of the country. The Domestic and Regional Market With more than 80 million inhabitants (2010), Ethiopia is the second-most populous nation in Africa after Nigeria. The average age of the population is 17 years. With an annual population growth of more than 2%, Ethiopia will have more than 120 million people by 2030 (EPA, 2012). Most firms migrating from China to Africa are after the rapidly growing African market and want to take the first mover advantage for future competition in the promising continent. Chinese investors in Addis Ababa repeatedly mentioned this motivation during interviews. The automobile assembly factory, the pad factory, and the glass factory indicated that the low competition, the optimistic perspective of African growth, and the first mover advantage attracted them to come to Ethiopia in the beginning. Lifan, the automaker from Chongqing, noticed that its major competitors in China, Chery and Geely, have been taking aggressive moves in Africa and South America, and Ethiopia is the few spots left for them to seize as an anchor to seize larger market shares in East Africa. The pad factory was initially attracted by the high profits from pad imports from China to Ethiopia. After several rounds of TV advertisement and free gift campaign, their brand, “Eve”, became the number one high-profile brand in not only Ethiopia, but nearby countries such as North Sudan. They make a deal with the UN last year to purchase “Eve” pads for sanitary aid use in Ethiopia (Xiaochen, 2012). Apart from the Chinese companies several other companies from different 91 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia corners of the world are making their investment base in Ethiopia. Several investment opportunities are flowing from the emerging economies like India basically in agro-processing areas. It is clear that Ethiopia is in a state of rapid economic growth and this in turn is leading in the development of huge infrastructure. Therefore, currently several foreign companies basically from Europe are involving in the construction industry. The country is using advanced technologies for the construction of road, generation of electricity as well as the construction of rail road by participating these foreign firms in such basic infrastructure development areas. The result of this study and the practical situation in Ethiopia shows that the domestic market is a potential source of FDI inflow to the country. The economic growth which sustained for the last ten consecutive years gives an indication for the high potential of the country. Economic Infrastructure Ethiopia is mounting a highly ambitious economic infrastructure development program. The program has already resulted in significant expansion of installed electricity capacity and distribution, road length, water and sanitation supply, and telecommunication services throughout the country. Its infrastructure indicators now comparable relatively well in some areas with low income country peers. As well, it is starting to develop its infrastructure connections to neighboring countries, including transportation and power links (Henok et al, 2012). For the development of FDI sound infrastructure is very important. It was the major obstacle in the development of FDI in the history of Ethiopia but now the situation is totally different. According to the GTP the government gives much attention to expand road, electricity, telecommunication and other facilities for the new and already existing firms in Ethiopia. One of the incentives for the FDI in Ethiopia is the provision of infrastructure. It was obvious that firm’s location where specified in and near Addis Ababa until recently but now firms are moving where ever they imagine it is profitable to go and that is why some critics are coming about those FDI situated in far low land areas. Moreover, the road network with neighboring countries such as Sudan and Kenya already
Atlaw et al.,
established and it will strengthen the regional market network between countries and also it will be an additional incentive for future FDI development. Apart from road construction new rail road is under construction. The rail road will connect the potential market areas in different regions of Ethiopia. This rail road construction is also expected to connect Ethiopia with the other main African markets. The construction of the rail road from the neighboring Djibouti to Ethiopia is currently under construction. The development of economic infrastructure is multidirectional in that generating hydroelectricity and providing it to industries is a key in FDI development. Regarding this the country is doing well both in generating and expanding the access of electricity. Since Ethiopia has high potential for hydroelectric generation the government is working hard to build big dams to provide sufficient power for local consumption as well as for export purpose. Currently the country started exporting electricity to Djibouti and the basic transformation line for exporting electricity to Kenya is completed. Above all the presence of Ethiopian airlines which is now becoming the hub of African continent and competent enough globally gives great incentives for FDI. Since the airline is also expanding the domestic stations it creates an additional impetus for the expansion of FDI in different regions of the country. Especially those FDI types which are engaged in the production of time sensitive and easily perishable products are confidently flowing to Ethiopia due to the presence of excellent service in the air line. The other aspect of economic infrastructure is identifying growth corridors and centers for industries and also construction of industrial zones and complexes. It is well known that having industrial zone which are fully equipped with infrastructure like road, telecommunication, and electricity will facilitate the flow of foreign firms to Ethiopia. Therefore, the current government gives much attention for the construction of such industrial zones and complexes. This work is already started in two ways. Building such zone is performed by the government itself in key areas, and the government also privatized such works to foreign firms. As a result it is common to see 92 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia industrial zones in different strategic areas of Ethiopia which are established by the government and the private foreign firms. Many Chinese companies are engaged in the development of industrial zones in Ethiopia. Contrary to this well-known fact, Solomon (2008) concludes his study as inadequate supply of basic infrastructure services discourages the inflows of FDI to Ethiopia. But this cannot hold water since the infrastructure development is contributing great role in attracting FDI from different countries of the world. Human Resource Development The government developed the education and training policy in 1994, and launched the Education Sector Development Program (ESDP) in 1996/7, which is currently in the fourth phase. Over the past 15 years of ESDP implementation, commendable achievements were made in the education sector. To note, number of public universities has increased from 2 to 22 till 2010 and is expected to reach 33 when new universities under construction are completed. The public Technical and Vocational Education Training (TVET) colleges reached 253, while the number of primary schools increased from 11,780 in 2000/01 to 25,217 by the end of 2009/10. The average expenditure on education in the 1980s and early 1990s was around 2.3 % of the GDP. With shifts in government priorities to the pro-poor sectors, it started changing. In 1992, it was increased to 3.6 % and reached as high 5 % of the GDP by 2003/04. The government maintained the high level of spending, always above 4 % of the GDP since then. The overall government expenditure in education has been maintained at around 20 % of the total public expenditure during the last decade (MoFED, 2002). Ethiopia has a surging supply of young, increasing well educated, trainable and inexpensive labor (Henok et al, 2012). The country has reached at a level of accommodating 20 million students per year and this indicates the emphasis given to create educated labor force in the country. However, unemployment is becoming a great challenge for those who are graduating every year from the colleges and universities. This also shows the government of Ethiopia should give emphasis for
Atlaw et al.,
FDI development to utilize the educated young labor force which is emerging from the institutions. Although there is unemployment the existing FDI served as a source of job opportunity for the younger generation in Ethiopia. Most of the graduates are hired and working in the different firms which are operating in Ethiopia. Since the job opportunity is also increasing and diversified the turnover of professionals from the companies is also high, this shows as the capacity of intellectuals increases they are also seeking another option in terms of income. As it is already stated the technological transfer is also becoming visible in that some professional are departing from the companies and opening their own enterprises. This phenomenon is most common in engineering works especially those associated with road works. However, Xiaochen, when he drives the limitations in the Chinese companies working in Ethiopia he mentioned the following problems concerning man power. The working culture and labor productivity gap is key constraint for the Chinese manufacturing investors in Ethiopia. The high turnover rate of workers significantly deterred the on-job training of local workers. As indicated by interviews, there are more and more conflicts with local employees due to the high rate of absence (Xiaochen, 2012). This paper argues that the working culture and labor productivity between the two countries will have great difference but for this gap it is not possible to criticize only Ethiopians because they are not working alone rather they are working together with a number of Chinese workers. The gap is usually arises from language barrier especially to teach or train the Ethiopian workers by the Chinese. The high turnover is of course is not only for the Chinese firms but the Chinese firms are usually criticized for paying very low wage rate, so the companies should look inward. The argument made in this paper can be complemented by the result of the study conducted by Xiaochen (2012) himself as he stated as “the average wage of employees hired by Chinese firms is $50, which is only 1/10 of the wage of Chinese worker’s in China’s coastal areas, and 1/20 of the wage of China’s workers in Ethiopia”. Political Environment 93 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia Since 1991 the Ethiopian political environment can be taken as stable except two short seasoned unstable conditions in the country. First the EthioErtrea war in 1994/95, and the crisis happened after 2005 election in Ethiopia, both of them lived for short period. Now Ethiopia is moving forward in unprecedented very high double digit economic growth for the past nine consecutive years by creating a very high stable political environment. Besides, Ethiopia is working hard to create stability in East Africa especially in Somalia and the two Sudan’s. Apart from this Addis Ababa is the place for the head quarter of AU, and for many international as well as regional organizations. Since Ethiopia is a stable country many international organizations are making their international economic forums in Addis Ababa. Ethiopia is also playing role to African economic development in general and to neighboring countries in particular. The Ethiopian Defense Minister is sending military for peace building activities in different African countries to work with the UN. All this facts clearly shows how Ethiopia is suitable for FDI development. CONCLUSION Now days the FDI flow to Africa is increasing, many African countries are started to use FDI as a solution for filling the gap for investment. Although several determinant factors played role in the flow of FDI to this continent, the two most important factors are the presence of high economic growth in the past few years and also the potential of low cost skilled man power in the continent. Ethiopia is a country which possesses big land-mass, high number of population and plenty of natural resources. The country strived in poverty for the last many decades due to the absence of suitable policy and committed governments. However, the situation and the history of this big sleeping giant is changing starting from 1991 after the current government took power. Now the country is growing more than 10 % economic growth rate each year. Although the main factors for this economic growth are internal the contribution of FDI in the economic growth of the country is very big. In the Federal Democratic Republic of Ethiopia, a number of firms in the agricultural area and also other activities are established and they come from the diverse world.
Atlaw et al.,
The gap between investment and saving is minimized by using the FDI development in the country. Many nations are now getting hired in the companies coming as FDI in Ethiopia. Both the skilled and unskilled labor forces are started to benefit from the rapid economic growth registered in the country. As the economy of the country increases the level of infrastructure also increases. The provision of electricity, road access, telecommunication and excellent airway in the country is directly associated with the recorded growth. The FDI flow can be taken as the result of all the above mentioned accesses emanating from the rapid economic growth of Ethiopia. Therefore, capitalizing efforts on the above factors can have significant contribution for the enhancement of FDI flow in particular and national economic growth in general. ACKNOWLEDGMENT My sincere appreciation should goes to my wife Hiwot and my daughter Rediet for encouraging me to stay strong in Korea during my study. I would also like to thank my brother Kidane Tafa who helped me in data collection and editing my paper during writing. I also like to thank Nigussu Tilahun, Kinde Alemayehu, and Getinet Amare who helped me to get necessary data's from Amhara region. REFERENCES Abdoul, G.M., (2012), “What Drives Foreign Direct Investments in Africa?”, An Empirical Investigation with Panel Data, Paper Presented on African Conference on Nov. 2012, AEC. Accolley, D. and Pearlman, J. (1997), “The Determinants and Impact of Foreign Direct investment”, London: London Metropolitan University. Dunning, J.H., (1993), “Multinational Enterprises and the Global Economy”, 1993, Wokingham, U.K: Addison Wesley publishing company. Borensztein,E., De Gregorio, J., Lee, J-W., (1998), “How Does Foreign Direct Investment Affect Economic Growth?”, Journal of International Economics 45, P 115-135. EPA, “National Report of Ethiopia”, (2012), the United Nations Conference on Sustainable Development 94 | P a g e
Determinants of Foreign Direct Investment: Reflections from Ethiopia (Rio+20), Federal Democratic Republic of Ethiopia, Addis Ababa. Fayyaz, H., Constance, K. K., (2012) “Determinants of Foreign Direct Investment Flows to Developing Countries”, SBP Research Bulletin, Volume 8. Goldberg, Linda, S., and Kelin, M.W., (1997), Foreign Direct Investment, Trade and Real Exchange Rate Linkages in South East Asia and Latin America. NBER Working Paper No.6344. Massachusetts, USA. Han, D.G., Taek-Dong Y., Shiyong, Y., and YoungMan, Y., (2005), “On The Impacts of Regional Trading Arrangements on FDI: The Case of The Korea-ChinaJapan FTA, Korea Trade Review, Vol. 30. Henok, A., Derk, B., and Dan, C., (2012), “Ethiopian Investment Prospects: A sectoral Scan”, Trade and Development Discussion Paper no. 02/2012, Munich. IFC and FIAS (1997). IFC lessons of Experience 5, Foreign Direct Investment. Washington D.C ,USA. Jinayu, Ouyang (1997), FDI in China and its Impact on Manufacturing Growth. ISS Working paper, series no 237. The Hague, Netherlands. John, C.A., (2012), “Why Does FDI Go Where It Goes? : New Evidence from African Countries”, ANNALS OF ECONOMICS AND FINANCE 13-2, 425-462. Lucie, W., (2009), “Foreign Direct Investment in the Agricultural Sector in Ethiopia”, Discussion paper, No. 12. MoFED., (2002), “Sustainable Development and Poverty Reduction Program, Ministry of Finance and Economic Development (MOFED), FDRE, Addis Ababa.
Atlaw et al.,
Mwilima, Ntwala, (2003), Foreign Direct Investment in Africa. Labor Resource and Research Institute (LaRRI). Africa labor Research Network. Root, F.R., and Ahmed, A., (1979), “Empirical Determinants of Manufacturing Direct Foreign Investment in Developing Countries: Economic Development and Cultural Change”. Solomon, M.W., (2008), “Determinants of Foreign Direct Investment in Ethiopia”, Msc. Thesis, Maastricht Graduate School of Governance, Maastricht University, The Netherlands. UNCTAD, (1998a), “Trends and Determinants”, World Investment Report, New York and Geneva: United Nations. UNCTAD, (1998b), World Investment Report: Trends and Determinants. New York and Geneva: United Nations. UNCTAD, (1999), Foreign Direct investment in Africa: performance and Potential. New York and Geneva: United Nations. UNCTAD, (2000), Tax Incentives and Foreign Direct Investment: A global survey. New York and Geneva: United Nations. UNCTAD, (2004a), World Investment Report 2004: The Shift towards Services. New York and Geneva: United Nations. Xiaochen, F., (2012), “Promoting Manufacturing Foreign Direct Investment from China to Ethiopia”, Msc. Thesis, John F. Kennedy School of Government, Harvard University.
95 | P a g e
