Determinants of Sectoral Private Investment in Ethiopia: Panel Data Analysis

Abstract

Investment is a key to economic growth. While there are number of studies on determinants of private investment in Ethiopia, sectoral level studies are largely neglected. Yet understanding the diversification in Ethiopian sectoral private investment is important as they economy remains agrigarian. For this purpose, we investigate the determinants of private investment in six Ethiopian economic sectors for the period of 1992-2015. The study utilizes a flexible accelerator model of investment. The estimation technique was based on Panel Corrected Standard Error (PCSE) estimation model over other techniques because of cross sectional dependency, heteroskedasticity and serial correlation problem in our data. To account for global business cycle, we have controlled for time fixed effects. We have also accounted for sectoral heterogeneity by incorporating sectoral fixed effects. We find that that trade policy has positive effect on private investment flows in all the sectors of the economy while higher external debt and inflation have negative effects. Therefore, further trade liberalization, reducing external debt, and moderating inflation would attract private investment activities in the sectors.

Keywords: sectoral private investment; sectoral fixed effect; flexible accelerator; PCSE