Ethiopia: Winning Pull Factors in Drawing FDI to Ethiopia

One of the many construction sites in Addis Ababa reflecting the capital city’s rapid economic growth and population rise.

The last couple of years have been quite challenging for the Ethiopian economy as natural and man-made problems posed themselves as obstacles to efforts of sustaining the rapid growth of the last fifteen years. The El-Nino induced drought and political unrests in various parts of the country took their toll on various sectors of the economy. Notably, the drought slowed down agricultural growth while various investment projects were vandalized throughout the political unrest.

Various sources on the forces driving FDI identify both policy and non policy factors as drivers of FDI. Policy factors include openness, product – market regulation, labor market arrangements, corporate tax rates, direct FDI restrictions, trade barriers, human development and infrastructure. Non-policy factors include market size of the host country (often measured by the GDP), distance/transport costs, and political and economic stability.

The time after the natural and man-made challenges was, therefore, a period of fierce competition between the pull forces of policy and the push forces of political instability. Setting horticultural green houses and the properties of other investments on fire is only going to discourage FDI flow into the country. The uncertainty that is associated with such unrests is a threat to those who seek to make money off their investments. Therefore, the lack of political instability in the country serves as a push factor keeping foreign investors away.

On the other hand, the policies that set out to draw in FDI act as pull factors. As Ethiopia has opened its market for foreign investment over a couple of decades ago, the expected expansion and maturity that comes with age is now evident in the country. With an educational system that plans to make education accessible to most of the people, the country produces enough skilled manpower to satisfy the demands of foreign investors. The great deal of attention granted towards radically changing the state of infrastructure also serves well in drawing FDI. The availability of energy, water, roads and other forms of infrastructure has shot up in the last couple of decades due to the pro-poor nature of Ethiopia’s development schemes and the key role foreign investment is expected to play in them.

The tax and land incentives provided to foreign investors in Ethiopia are also internationally known for their generosity. Some even question the feasibility of the scheme that provides long periods of tax exemption and extremely cheap lease of land. For instance, the country exempts business income tax from five to fifteen years depending on the sector the business operates in. Businesses can also carry forward their losses for five years and beyond. There is also a personal income tax exemption of up to five years to expatriate employees of sourcing companies located in industrial parks. The price of land appropriated for investors is also one of the cheapest, if not the cheapest, in the world.

As disheartening as damage to property can be, the policies and incentives put forward by the government prove to be far more appealing. There is also the little matter of belief in the capability of the Ethiopian law enforcement to put things back to normal within a short period of time.

The result of the meshing of all these variables is a sustained fast growth in foreign investment coming into the country. Investment Commissioner, Fitsum Arega, recently noted that FDI flowing into the country is increasing despite global and national challenges. He cited falling commodity prices as the main global challenge while the national challenges are represented by the above discussed realities in the country over the last couple of years.

The Commissioner explained that FDI flow has reached 4.17 billion USD this year and created 16,000 jobs. That is a five fold increase on FDI flows a decade ago. Xinhua reported that FDI inflow in the Ethiopian Fiscal Year (EFY) 2007/2008 was 814.6 million U.S. dollars but that figure has increased to 4.17 billion dollars in EFY2016/17.

The official website of the Ethiopian Investment Commission indicates that manufacturing, agriculture, construction, hotel and real estate services as well as horticulture are the sectors foreign investors have invested in. It also quotes the Commissioner Fitsum as saying: ” We are one of the few countries to register such a high FDI.” It also identifies investors from China, India and the Netherlands as being at the forefront in their engagement in industrial parks, textile manufacturing and horticulture.

A 2012 study presented by the International Journal of Financial Research indicated that FDI has expanded strongly over the past three decades. The study cites UNCTAD as saying that the growth in FDI accelerated in the 1990s, rising to 331 billion USD in 1995 and 1.3 trillion USD in 2000. The study states that Africa’s share in total FDI flows dropped significantly from 36 percent in 1970 – 74 to ten percent in 1980 – 84 and to three percent in 1995 – 99. A 2007 UNCTAD report indicates that Africa’s share of global FDI inflows decreased from 3.3 percent in 2003 to 2.7 percent in 2006.

The recent invigorated quest for development in the African continent has brought the continent forward as infrastructure and social services such as health and education have all enjoyed a tremendous bask of sunshine. Accordingly, the state of FDI inflows to the continent has gained a positive momentum.

The World Investment Report 2015 by UNCTAD clearly depicts the steady rise in Africa’s share in global FDI inflows to reach 4.4 percent in 2014. The report shows that despite a 16 percent global FDI fall in 2014, inflows to Africa remained stable at 54 billion USD. “North Africa saw its FDI flows decline by 15 percent to 12 billion USD, while flows to Sub-Saharan Africa increased by five percent to 42 billion USD. In Sub-Saharan Africa, FDI flows to West Africa declined by ten percent to 13 billion USD , as Ebola, regional conflicts and falling commodity prices negatively affected several countries. Flows to Southern Africa also fell by two percent to 11 billion USD. By contrast, Central Africa and East Africa saw their FDI flows increase by 33 percent and 11 percent, to 12 billion USD and seven billion USD, respectively.” The report goes on to state that East Africa saw its FDI flows increase by 11 percent, to 6.8 billion USD and singled out Tanzania and Ethiopia for claiming a considerable stake of the increased inflows.

With five fold increment in FDI inflows in the past decade, Ethiopia has demonstrated its capacity to serve as a positive influence in the region. The tremendous growth is also a testament to the triumph of the pull factors of policy over the push factors of political instability in Ethiopia.

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