Determinants and Constraints of private Investment in Ethiopia

This paper attempts to identify the macro - economic determinants of private investment. Using investor level information some of the constraints to entry, operation and expansion of private investment in Ethiopia were also identified. Private investment during the period 1975 - 1989 declined sharply and started to increase slightly during 1990 and 1991 as the previous government started reform in 1989. The rate of private investment continued substantially from 1992. These trends of private investment are analyzed using both econometric and survey methods. The econometric analysis, using time series data for the period 1975-1994, shows that private investment in Ethiopia is determined by the availability of finance, the real exchange rate, policy and extremely debt, The real interest rate, growth of precipitate GDP, public investment and change in terms of trade did not affect private investment during the period of the study. The survey of investors/enterprises which have acquired investment certificates from 1992 1995 in the two regions( Region 14 and Region 1) shows that bureaucratic procedures, lack of infrastructure particularly power ad access to finance are the leading constraints for entry, operation and expansion. In addition to the above constraints access to and cost of land are the specific leading entry constraints in Region 14. The other areas of business environment such as political/policy uncertainty and labor regulations are relatively of lesser importance. Hence both the econometric analysis and the survey have confirmed that the availability of finance rather than interest rate is a crucial determinate of private investment in Ethiopia which support the hypothesis of credit rationing. Whereas both the domestic inflation rate a proxy for macro-economic instability in the econometric analysis, and political/policy uncertainty in the survey are not significant determinants of private investment.