Determinants of Private Investment in Ethiopia

Abstract

In Ethiopia, various economic and political reforms which are expected to stimulate the role of private sector in the economy have been made over the last couple of decades. Though some improvements have been registered as a result of such reforms, the performance of private sector has remained very low thus far. Hence, this study was conducted with the main objective of investigating and analyzing factors that determine private investment in Ethiopia (proxy for private sector performance in the economy).To this end, a 30-years secondary data (i.e. from 1981 to 2010) was collected from various national and international institutions. Then, multiple regressions using OLS model was applied after the data sets were transformed to log form. And, to account for inherent problems of time series data, different tests such as correlation and autocorrelation tests, stationarity test, integration and co-integration tests, and Engle & Granger Two Step Error Correction Model/ECM/were applied.

The regression results show that public investment, real GDP per-capital, and external debt have significant positive long run effect on private investment, while lagged private investment(proxy for investment climate) has significant negative long-run effect. In the short run, real GDP per-capita and external debt have significant positive contribution to private investment, while inflation has significant short-run negative effect on private investment after two lags.

Hence, to promote the performance of private sector in the country, it is essential to take measures that can improve real income of people, and make public investment in basic infrastructures and institutions that are crucial to attract private investment. Besides, ensuring stable investment environment (such as consistent investment policies and requirements/regulatory frameworks/, and macro-economic and political stability), and addressing bureaucratic inefficiencies and poor governance problems are necessary to build lasting confidence of private investors.

Key words: Determinants, Private Sector, Performance, Ethiopia