Determinants and Impediments of FDI inflows in Ethiopia- A Firm Level Investigation

From a neo liberalist’s perspective FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps to create a more competitive business environment and enhances enterprise development. This will contribute to higher economic growth, which is the most potent tool for poverty alleviation. To realize these benefits, many African countries including Ethiopia, have liberalized their trade regime and attempted to create an investment friendly climate through improving their infrastructures and adjusting microeconomic instabilities. Ethiopia has shown significant increase in FDI inflows, though it accounts among the least share (as a percentage of GDP) in sub-Saharan Africa, after the adoption of liberalization measures with the fall of Derg regime in 1990’s. Therefore, this paper seeks to examine the determining factors of FDI inflow and potential factors that hinder it. Accordingly, sample of foreign firms based in the capital Addis Ababa and the nearby cities, and public servants of EIA were taken to collect information. The empirical results derived from the study shows that domestic and regional market seeking, political and social stability and investment incentives were found as the main determinants of FDI. Whereas, exchange rate volatility, corruption, and lack of clear policies and regulatory impediments were identified as the three main factors that have the potential to deter foreign investment in Ethiopia.