Download Prospect of FDI-Led Industrialization in Ethiopia

Wazema Institute
ProspectofFDI-LedIndustrializationinEthiopia(Critical
analysis)
April2017
1
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WazemaInstitute:
WazemainstituteisWazemaRadioaffiliatedresearchgroupcomprisingexperts
workingonpertainingissuesinEthiopiaandacrosstheEastAfricaregion.
www.wazemaradio.com
Contact-DereseK.Getachew(PhD)–[email protected]
AbouttheAuthor:
SileshiTennaisanEconomistbytraining.HereceivedhisBachelorsinEconomic
degreefromAddisAbabaUniversityandMastersDegreeinPublicAdministration
andInternationalDevelopmentfromHarvardUniversity.Heiscurrentlyworking
forBankofAmerica.SileshiisalsoregularcontributortoWazemaRadio.
ProspectofFDI-LedIndustrializationinEthiopia 2
I.
Introduction
Historically,industrialdevelopment–particularlytheonethroughtheexpansionofthe
manufacturingsubsector-wasthefirstmilestonethatcontemporarydevelopedcountries
attainedintheirjourneyofeconomicdevelopment.Thisisbecausethemanufacturing
subsector-withrelativelylittleefforttoimprovelaborskills-iscapableofabsorbinglarge
amountoflaborforcethatisreleasedfromthetraditionalsectorlikeagriculture.Inthesecond
halfofthe20thcentury,mostofthecountriesthatcaughtupthedevelopedeconomies
managedtodosobyincreasingtheproductivityoftheirlaborforcethroughshiftingitfromthe
traditionaleconomyintothemanufacturingsubsector.Inthisregard,itcouldbereasonableto
developingcountrieslikeEthiopiatofocusonthemanufacturingsubsectorintheirendeavorto
transformtheirtraditionaleconomyintoamodernone.
However,thereisnosinglemodelforindustrializationthatalldevelopedeconomiesemployed.
Tracingbackthehistoryofindustrializationrevealsindividualaswellasdifferentgroupsof
countriesmanagedtoindustrializetheireconomiesatdifferentpointsintimefollowing
differentapproachesthatfittheirspecificcontexts.Thepioneersofindustrialization-namely
WestEuropeandNorthAmerica-followedprivatesector-ledindustrializationthatinvolved
inventionandexpansionofnewtechnologieswhileJapan-takingadvantageofbeingafollower
-industrializeditseconomybyfollowingexport-orientedandstate-ledindustrializationby
imitatingandinnovatingthealreadyinventedtechnologiesbythepioneers.ThesocalledEast
AsianTigereconomiesincludingHongKong,Singapore,SouthKoreaandTaiwanmoreorless
followedapaththatissimilartothatofJapan.However,inadditiontobenefitingfromthe
politicsoftheColdWarera,theTigerswereabletotakeadvantageofJapan’sindustrialsuccess
duetotheirgeographicalproximitytoandculturalsimilaritywiththelater.Therearealso
dozensofsuccessfulnewlyemergingeconomiesincludingChina,India,Turkey,Thailandand
Malaysiathatpursuedtheirownpathsofindustrializationthatblendseveralpolicyoptions
dependingontheircontext.
Duringthelastdecade,theGovernmentofEthiopiaclaimedthatthecountry’seconomyhas
beengrowingatanaverageratearound10percent.However,leavingasidethevalidityofthis
staggeringfigure,theshareoftheindustrysectorisstillverylowandunchanged.Unlikewhat
hasbeenobservedinmostfastgrowingeconomies,manufacturinginEthiopiahasbeenlagging
andthereisnosignofstructuralchangethatshiftslaborfromlowtohighproductivitysectors.
In2014,theaverageshareofindustryinGDPofthecountrywasonly15percentwhilethatof
themanufacturingsubsectoris5percent.ThisshareofthemanufacturingsectorinGDPis
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significantlylessthanthedevelopingcountriesaverageaswellasthesub-SaharanAfrica
averagewhichwasabout10percentinthesameyear.
Inmyperviousshortarticle1,Iargued,bystatingseveralexternalandinternalfactors,thatthe
presentdayEthiopiacanemulateneithertheindustrializationmodelofJapannorthatofthe
othersuccessfulAsianeconomies.However,Iindicatedthatthedoortoindustrializationisnot
totallyclosedtoEthiopia.Ethiopiacancompeteforlightmanufacturingindustriesthatare
currentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaandgoingtocountrieslike
Vietnam,Bangladesh,CambodiaandPhilippinesinsearchofcheaperskilledlaborandproduct
markets.Givenitscomparativeadvantages–lowerwage,youngpopulation,andbigdomestic
market–EthiopiahasthepotentialtopursuetheForeignDirectInvestmentled
industrializationpolicyfollowingthefootstepsofthelatereconomies.However,the
competitiontoattractefficiency-ormarket-seekingFDIfirmsistough.Infact,takingadvantage
ofthisreality,manyothereconomies–whicharestillatthelowerstageofdevelopmentinthe
globalstructuraltransformationchain–arealsocurrentlypursuingFDI-ledindustrialization
thatintendstoattractsuchefficiency-ormarket-seekingFDIfirms.
Itshouldbenotedthatsuchefficiency-ormarket-seekingFDIfirmsaredifferentfromthe
traditionaltypeofresource-seekingFDIfirms.Efficiency-ormarket-seekingFDIfirms-in
additiontocheaplaborandproductmarket-requireanexcellentinvestmentclimate.In
contrast,resource-seekingFDIfirmsaregenerallymoretolerantofapoorinvestmentclimate
asthecostsofresource-basedinvestmentsarelessdependentonthebroadereconomicand
politicalconditions.
Moreover,asarecentassessmentsofFDIinflowsindicated,attractingFDIdoesnotguarantee
economicdevelopment.And,manyarearguingthatthebenefitsofFDIanditsproductivity
spilloversdependonthemacroeconomicandstructuralconditionsofthehosteconomy.2
Inthisarticle,Itrytoexploretheexistingopportunitiesandchallengesinpursuingsuccessful
FDI-ledindustrializationinEthiopia.
II.
Rationale,CaveatsandFundamentalsofFDI-Led
Industrialization
Worldleadinggrowtheconomists,suchasDaronAcemogluandPhilippeAghion,arguethatin
countriesthatareatearlierstagesofdevelopmentinvestment-basedstrategiesthatencourage
adoptionandimitation,ratherthaninventionandinnovation,arenotonlybetterbuttheonly
1
MadeinEthiopia-Arkebe'sVisionorIllusion.www.wazemaradio.com
UNCTAD.(2015).ForeigndirectinvestmentinflowstoAfricaremainedstablein2014,UNreportsays
[Pressrelease].Retrievedfrom:unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=250.
2
ProspectofFDI-LedIndustrializationinEthiopia 4
feasiblepolicystrategies.3Moreover,withglobalization,thereisalsoachangeinthemodeof
industrialproductionfromwholeproductionchaintosegmentedvaluechains.Asaresult
producershaveshiftedthefocusfromachievingcomparativeadvantagealongthewhole
productionchaininfavorofadvantagesinspecificniches.4Suchsegmentedvaluechainscreate
opportunitiesfordevelopingcountriestospecialize,withFDIproductivityspillovershelping
themmoveprogressivelyintohighervalue-addedtasks,overtime.
Inconnectiontothis,severalempiricalstudiesfoundFDIcouldplayasignificantrolein
economicdevelopmentinmultipledimensions5:byincreasinginvestmentandtrade;by
expandingaccesstoworldmarketsforcapital,technology,andgoods;bycontributingto
technologyadoptionbyandindustrialupgradingamongdomesticfirms;byhelpingthe
structuraltransformationofhosteconomies;and,ultimately,byspurringgrowthofoutput,
employment,andproductivity.
Intheirstudythatispublishedintheworld-leadingplatformforhighqualitypeer-reviewed
DevelopmentEconomicsJournals,“HandbookofDevelopmentEconomics”,Harrisonand
Rodríguez-Clare(2010)presentthattradevolumesarehighlyandpositivelycorrelatedwith
foreigninvestmentinflows.6
AnothergroupofprominenteconomistsprovidesomeempiricalevidencethatFDI-by
combininglongterminvestmentwithcontrol-canfacilitatethetransferofcapability
(technologyandmanagementknowhow),andprovideaccesstoregionalandglobalvalue
chains.7
AWorldBankstudybyChandraandKolavalli(2006)provideevidencethatattractingFDIhas
beenanimportantstrategyintechnologicaladaptation.8Similarly,inanotherWorldBank
study,FaroleandWinkler(2014)presentevidencehowproductivityincreasecanbeattained
throughthetransferoftechnologyandknowhowoftheforeigncompanytodomesticfirmsin
3
Acemoglu,D.,Aghion,P.,&Zilibotti,F.(2006).Distancetofrontier,selection,andeconomicgrowth.Journalof
theEuropeanEconomicassociation,4(1),37–74.
4
UNECA.(2013).HarmonizingPoliciestoTransformtheTradingEnvironmentUnitedNationsCommissionfor
Africa.Retrievedfrom:www.uneca.org/sites/default/files/PublicationFiles/aria_vi_english_full.pdf.
5
Dinh,H.,Plamade,V.,Chandra,V.,andCossar,F.(2012).LightManufacturinginAfrica:TargetedPoliciesto
EnhancePrivateInvestmentandCreateJobs.InternationalBankforReconstructionandDevelopment/
InternationalDevelopmentAssociationorTheWorldBank.WashingtonDC20433
6
Harrison,A.,&Rodríguez-Clare,A.(2010).“Trade,ForeignInvestment,andIndustrialPolicy”Handbookof
DevelopmentEconomics.Volume5,editedbyD.RodrikandM.Rosenzweig,2010.
7
Prasad,E.,Rogoff,K.,Wei,S.J.,&Kose,M.A.(2005).Effectsoffinancialglobalizationondevelopingcountries:
someempiricalevidence(pp.201–228).PalgraveMacmillanUK.
8
Chandra,V.,andShashiKolavalli,S.(2006).“Technology,Adaptation,andExports:HowSomeCountriesGotIt
Right.”InTechnology,AdaptationandExports,ed.,VandanaChandra.Washington,DC:WorldBank
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thesamesector(horizontalspillover)oralongthesupplychain(verticalspillovers)throughthe
movementofpeopleandgoods.9
BasedonasurveyconductedonthebiggestexportfirmsandindustrialcompaniesacrossSubSaharanAfrica,SuttonandZhang(2016)presentthreekeyfactsthatillustratethepotentially
transformativeroleofFDIinAfrica.Theseare:(i)Aroundhalfthebiggestexportcompanies
operatinginAfricancountriesthathavesuccessfullygonefromlowtohighindustrialization
beganasFDIventures;(ii)IntheAfricancountriesthatcurrentlyshowthegreatestprospects
forindustrialization,aroundone-fourthoftheirleadingindustrialcompaniesarecompaniesof
foreignorigin;and(iii)Insub-SaharanAfricaneconomiesasinEastAsia,FDIhasbroadenedthe
scaleofactivityacrossexistingindustriesandtherangeofindustrialactivities.10
AllthesesuggestthatattractingFDIisvitalforcountriesthatareatthelowerstageof
developmentintheglobalstructuraltransformationchainbutstrivingtoindustrializetheir
economy.However,attractingefficiency-ormarket-seekingFDIfirmsisnotaneasytaskasit
requiresanexcellentinvestmentclimatethatcomprisesthewholearraysofeconomic,social
andpoliticalfactors.Someofrequirementssuchasbasicinfrastructure(accesstoelectricity
andenergy,transport,telecommunicationandlogistics),vitalinstitutions(propertyrights,rule
oflaw,corruption,macroeconomicstability,economicmanagement,andbusinessregulations),
andpoliticalstability(peaceandsecurity)aredeemedtobeknock-outfactorwhilethereare
stillotherimportantfactorslikethesizeofthedomesticmarket,thequalityofhumancapital,
thedegreeofmonetizationoftheeconomy,andinvestmentandtradepolicyincentives(wage,
tariff,taxonexportandprofittax).
Suttonetal.(2016)arguethatefficiency-ormarket-seekingFDIfirmsaredifferentfrom
resource-seekingFDIfirmsthataregenerallymoretolerantofapoorinvestmentclimate
becausethecostsofenclaveinvestmentsarelessdependentonthebroadereconomicand
politicalconditionsandcustom-madearrangementscanbeagreedwithlocalelites.Incontrast,
asSuttonetal.(2016)furtherelaborates,politicaloreconomicinstabilitymaybean
insurmountableobstacleforefficiency-ormarket-seekingFDIfirmstoinvest.Thepresenceof
widespreadcorruptioningovernmentisincapacitatingandcaneffectivelystifleFDIinflows,
evenwhenotheraspectsoftheinvestmentclimatearefavorable.Theseconditionsareusually
deep-rootedinstitutionalfailures,politicallysensitiveanddifficulttoaddress,buttheyare
fundamentalinattractingFDI.11
Moreover,attractingFDIdoesnotguaranteeeconomicdevelopment.ThebenefitsofFDIand
itsproductivityspilloversdependonthemacroeconomicandstructuralconditionsofthehost
9
Farole,T.,&Winkler,D.(Eds.).(2014).MakingforeigndirectinvestmentworkforSub-SaharanAfrica:local
spilloversandcompetitivenessinglobalvaluechains.WorldBank,Washington,DC.
10
Sutton,J.,andZhang,Q.(Inprogress).Industrialdevelopmentinhistoricalperspective:theprospectsforSubSaharanAfrica.
11
Sutton,J.Jinhage,A.,Leape,J.,Newfarmer,R.&Page,J.(2016).HarnessingFDIforjobcreationand
industrialisationinAfrica.GrowthBrief|FIRMS|May2016.
ProspectofFDI-LedIndustrializationinEthiopia 6
economy.12AWorldBankstudybyLedermanetal.(2010)indicatesthatFDIcanbedirectly
harmfulwhenpoorlymanaged,forexample,asaresultofadeteriorationinthebalanceof
paymentsasprofitsarerepatriated.13Similarly,FaroleandWinkler(2014)14andChenetal.
(2015)15arguethatharnessingthevalueofFDIrequiresactivepro-competitionpoliciesthatnot
onlyattractFDI,butalsoencourageeconomiccontributionstotechnology,labormarketsand
verticalsupplychains.
BrookingsInstitutionresearcherswhohavebeenstudyingtheprospectofindustrializationin
AfricaforlongarguethatforincreasedFDItotranslateintoincreasedproductivity,and
ultimatelyeconomicgrowth,willdependuponexistinglinkagesbetweendomesticandforeign
firms.Theresearchersarguethatthemovementofworkersandadoptionoftechnologiesand
workpracticesarecrucialingeneratingproductivityspillovers.InAfrica,incontrasttoEastAsia,
theresearchersindicates,linkagesbetweenforeignanddomesticmanufacturingfirmsare
limited,asmultinationalenterprises(MNEs)oftenrelysolelyonimportsforintermediate
inputs.ManyAfricanMNEsproducewhollyforexportmarkets,thisreducesthescopefor
forwardlinkages.16
III.
ProspectofFDI-LedIndustrializationinEthiopia:A
comparativeanalysisofEthiopia’srelativepositionintermsof
itspotentialtoattractefficiency-ormarket-seekingFDIfirms
Background
Inthispart,whatItrytoachieveistoshowwhereEthiopiaisfoundvis-a-visothercountriesin
termsofitspotentialtoattractefficiency-ormarket-seekingFDIfirms?
Toundertakeasensiblecomparativeanalysis,thispaper-bygoingthroughexistingliterature
andavailablelateststatistics-identified15AfricanandAsianeconomiestobepartofthe
analysis.Thesecountriesareselectedsincetheyarestillatthelowerstageofdevelopmentin
theglobalstructuraltransformationchainbutstrivingtoattractefficiency-ormarket-seeking
FDIfirms-thatarecurrentlyleavingdevelopedandemergingeconomiesinsearchofmarket
andcheaplabor-bypursuingFDI-ledindustrializationpolicy.Theseinclude:relatively‘big’
12
UNCTAD.(2015).ForeigndirectinvestmentinflowstoAfricaremainedstablein2014,UNreportsays
[Pressrelease].Retrievedfrom:unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=250.
13
Lederman,D.,Mengistae,T.andXu,L.(2010).MicroeconomicConsequencesandMacroeconomicCausesof
ForeignDirectInvestmentinSouthernAfricanEconomies.WorldBank,Washington,DC.
14
Farole,T.,&Winkler,D.(Eds.).(2014).MakingforeigndirectinvestmentworkforSub-SaharanAfrica:local
spilloversandcompetitivenessinglobalvaluechains.WorldBank,Washington,DC.
15
Chen,G.,Geiger,M.,&Fu,M.(2015).ManufacturingFDIinSub-SaharanAfrica.
16
Newman,C.,Page,J.,Rand,J.,Shimeles,A.,Söderbom,M.,andTarp,F.(2016).MadeinAfrica:learningto
competeinindustry.BrookingsInstitutionPress,Washington,DC.
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economieslikeIndonesia,Nigeria,EgyptandPhilippines;‘mid-size’economieslikeBangladesh
andVietnam;smalleconomieslikeMyanmar,Kenya,Ethiopia,Tanzania,GhanaandUganda;
andevenverysmalleconomieslikeRwanda,LaoPRDandCambodiaareincludedduetotheir
strongefforttoattractefficiency-seekingandmarket-seekingFDIfirms.
Althoughalloftheselectedeconomiesarestillatthelowerstageofdevelopmentintheglobal
structuraltransformationchain,itshouldbenotedthattherearesignificantdifferenceamong
them.Someoftheseeconomies–suchasIndonesia,Vietnam,EgyptandPhilippines–canbe
saidtheyareintheprocessoftransformingtheireconomyandsomewhatmanagedtoattract
reasonableamountofefficiency-ormarket-seekingFDIfirmsinthepastdecade,thereare
somethatmanagedtoattractnoticeableamountofFDIthoughtheyhavenotyetabletoshow
strongsignofeconomictransformation,andthereareothersthatcanbesimplyconsideredas
strongaspirantsofFDI-ledindustrialization.17
BeforewediveintoexploringEthiopia’srelativepositionintermsofthekeyfactorsthatare
believedtodeterminetheinflowsofefficiency-ormarket-seekingFDIfirms,itisgoodtosee
thefollowingtwothingsthatpertainwiththeobjectiveofattractingFDI.
(i)TherelativesizeandstructureoftheEthiopianEconomyvis-à-visothercountries–
countriesthatarecurrentlypursuingFDI-ledindustrializationpolicyandstrivingto
attractefficiency-ormarket-seekingFDIfirms;and
(ii)WhereEthiopiastandscurrentlyvis-à-visothercountries–countriesthatare
currentlypursuingFDI-ledindustrializationpolicyandstrivingtoattractefficiency-or
market-seekingFDIfirms–intermsofinflowsofFDI
RelativeSizeofEthiopianEconomy
AscanbeseeninFigure____,thesizeofEthiopia’seconomyissignificantlylessthansome
leadingFDI-seekingeconomieslikeIndonesia,Vietnam,BangladeshandPhilippinesinAsia,and
EgyptandNigeriainAfrica.However,thankstoitsbigpopulation,Ethiopia’seconomyis
somewhatbiggerthanmanyotherFDI-seekingsmalleconomieslikeRwanda,Uganda,Ghana
andTanzaniainAfricaandlikeCambodiaandLaoPRDinAsia.
17
Inordertomoreinformationabouttheeconomicstructureoftheselectedcountrieslookat
https://www.cia.gov/library/publications/the-world-factbook/
ProspectofFDI-LedIndustrializationinEthiopia 8
Source:WDI2016
StructureofEthiopianEconomy
WhenwelookatthestructureofEthiopianeconomy,theeconomyisdominatedbyagriculture
with42percentofitsGDPcomesfromthesector-thisshareismorethantheshareobservedin
anyotherAsianandAfricaneconomyincludedincomparisongroup.
TheshareoftheindustrysectorintheEthiopianeconomyisonly16percentwhilethatofthe
manufacturingsub-sector–whichisoneoftheindicatorsofthesuitabilityoftheFDI-seeking
economiesforFDI-ledindustrialization–accountsforonly4percentoftheGDP.Inmanyof
FDI-seekingeconomiesinAsia,theshareoftheindustrysectorintheeconomyisalreadymore
than30percentwhilethecomparablefigureforFDI-seekingeconomiesinAfricaismorethan
20percent.Similarly,theshareofthemanufacturingsub-sectorinGDPismuchgreaterinmany
ofFDI-seekingeconomiesofAsiaandAfricathanitisinEthiopia.
ThecurrentstructureoftheEthiopianeconomyindicatesthat,asacountrythathasnotyet
starteditsjourneytoindustrializeitseconomy,Ethiopiaawaitsafiercecompetitionwiththe
otherFDI-seekingeconomiesthathavealreadystartedtheirjourneytoindustrializationand
aggressivelyworkingtoachievemoreviaFDI-ledindustrializationpolicy.
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Source:WDI2016
FDIInflowstoEthiopia
Althoughithasshownasignificantsurgesince2013,FDIinflowstoEthiopiawassignificantly
lowandshowednosteadytrendhistorically.
ProspectofFDI-LedIndustrializationinEthiopia 10
Source:WDI2016
Inthepasttenyearscoveringfrom2006to2015,EthiopiawitnessedanaverageFDInetinflows
ofUSD754millionannually.Toputthingsinperspective,FDIinflowstoEthiopiawaslessthan
whatwasobservedinUgandawhoseeconomyandpopulationarelessthanhalfofthatof
Ethiopia.ComparedtoBangladeshandTanzaniathefigureisaroundhalfwhileitisone-tenth
andaquarteroftheFDIinflowstothehighestperformingcountriesVietnamandthe
Philippines,respectively.
11
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Source:WDI2016
PillarsofFDI-LedIndustrialization
Attractingefficiency-ormarket-seekingFDIfirmsisnotaneasytaskasitrequiresanexcellent
investmentclimatethatcomprisesthewholearraysofeconomic,socialandpoliticalconditions.
Someofrequirementssuchasthepresenceofbasicinfrastructure(accesstoelectricityanduse
ofenergy,transport,telecommunicationandlogistics),vitalinstitutions(propertyrights,ruleof
law,corruption,macroeconomicstability,economicmanagementandbusinessregulations),
andpoliticalstability(peaceandsecurity)aredeemedtobeknockoutfactorsinattracting
efficiency-ormarket-seekingFDIfirmsinthesensethatwithoutthemitisunthinkabletosee
suchfirmsinvesting.Inthissub-section,weexploreEthiopia’spositionvis-a-visothercountries
intermsofthesefactors.
a. Infrastructure
Basicinfrastructuresuchaselectricity,transportation,telephone,mobileandinternetservices,
andwaterarenecessarytoattractefficiency-ormarket-seekingFDIfirms.Thepresenceofsuch
basicinfrastructureisamongthethreemostimportantfactorsthatFDIfirmsconsiderbefore
theyinvestinthehostcountry.Specially,forefficiency-ormarket-seekingFDIfirms,the
presenceofsuchbasicinfrastructureisaknockoutfactor.Thisisbecausewithoutefficient
infrastructureFDIfirmscan’tattainthecompetitivenessandproductivitythatarerequiredfor
theirsurvival.
ProspectofFDI-LedIndustrializationinEthiopia 12
AccesstoElectricityandUseofEnergy
Lowaccess,poorreliabilityandhighcostofelectricityisrepeatedlyidentifiedasamajor
challengeforcountriesthatstrivetoattractFDI.ArecentWorldBankEnterpriseSurvey
conductedin2011/2013indicatesthatmorethantwo-thirdofFDIfirmsidentifiedelectricityas
amajorconstraintfordoingbusinessinAfrica(Chenetal.,2015).18
OfthetotalpopulationofEthiopia,only27percentgotaccesstoelectricityby2012.Accessto
electricityinEthiopiaissignificantlylessthantheaccessinmanyoftheFDIseekingAsianand
Africaneconomies.ThisfigureisevenlessthantheaveragefigureforSub-SaharanAfrica
(excludinghighincome).
Whenwefurtherlookattheelectricpowerconsumption(KWHpercapita),wefoundthis
statistichorrifyinglylow.Asof2013,electricpowerconsumptioninEthiopiaisonly65KWHper
capitawhichislessthan5percentofwhatisconsumedincountrieslikeVietnamandEgypt,
lessthanone-tenthofwhatisconsumedincountrieslikeIndonesiaandPhilippines,lessthan
one-fifthofwhatisconsumedincountrieslikeBangladeshandGhana,andlessthanone-third
ofwhatisconsumedincountrieslikeMyanmarandKenya.
CountryName
Accesstoelectricity Electricpower
Energyuse(kgofoilequivalent Energyuse(kgofoil
(%ofpopulation),
consumption(kWhper percapita),2013
equivalent)per$1,000GDP
2012
capita),2013
(constant2011PPP)
Egypt,ArabRep.
100
1697
885
88
Vietnam
99
1306
668
130
Indonesia
96
788
850
88
Philippines
88
692
457
72
LaoPDR
70
na
na
na
Ghana
64
382
344
90
Bangladesh
60
293
216
76
Nigeria
56
142
773
142
Myanmar
52
164
313
NA
Cambodia
31
221
396
134
Ethiopia
27
65
507
381
Kenya
23
168
492
179
Uganda
18
NA
NA
NA
Rwanda
18
NA
NA
NA
Tanzania
15
89
470
207 Source:WDI2016
Generally,likemostsmalleconomies,energyuseinEthiopiaislow.InEthiopia,percapita
energyuse-beingmeasuredbykilogramofoilequivalent-ismoreorlesssimilartowhatis
observedinKenyaandTanzaniawhileitissignificantlygreaterthanwhatisusedinBangladesh,
18
Chen,G.,Geiger,M.,&Fu,M.(2015).ManufacturingFDIinSub-SaharanAfrica.
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MyanmarandGhana.Intermsofefficiencyofenergyuse,however,Ethiopiaistheleast
efficient.Onaverage,381kgofoilequivalentisusedtoproduce$1,000worthofoutput(GDP)
inEthiopiawhilethecomparablefigureinmostAsianeconomiesislessthan100kgofoil
equivalent.EventhebadperformerAfricaneconomieslikeKenyaandTanzaniaused179kgand
207kgofoilequivalentper$1,000GDP,respectively.
Asidefromaccessanduseofelectricity,delaysinobtainingelectricconnectionandpower
outagesarealsotheothercrucialfactorsthatFDIfirmsconsiderseriously.Intermsofdelaysin
obtainingelectricpowerconnection,Ethiopiaistheworstofall.InEthiopia,afirm,aftermaking
arequestforanelectricconnection,needstowait194daysoralittlelessthansevenmonths
onaverage.Inthisregard,thereisnoanyothercountryontheplanetthatstandsin
comparisontoEthiopia.Forinstance,inCambodiaandNigeria,arequestforelectricpower
connectionisansweredinlessthan10dayswhileittakesaroundthreeweeksinUgandaand
LaoPDR.Withregardtotheextentofpoweroutageinfirms,however,unlikewhatiswitnessed
bytheconsumersandserviceproviders,Ethiopiaisnottheworstifnotthebest.Thetotal
numberofinstancesofpoweroutagesinfirmsinatypicalmonthisaround8whichis
significantlylessthanwhatisobservedinBangladesh(65days),Nigeria(33days),Egypt(16
days)andMyanmar(13days).
Source:WDI2016
Transport
EaseoftransportationofgoodsandpeopleistheotherthekeyrequirementsofFDIfirms.Poor
transportinfrastructureraisesthecostofinputstomanufacturingandotheractivities.The
ProspectofFDI-LedIndustrializationinEthiopia 14
WorldBankEnterpriseSurveyconductedin2011/2013indicatesthatpoortransport
infrastructurestandssecondintermsofconstraintstoFDI,especiallyfortheonethirdof
Africancountriesthatarelandlocked.19
Inthisregard,land-lockedEthiopiawithitslessthan1000KMrailhasaformidablechallenge
thoughthereisasignificantimprovementinthepastdecade.Afterspendingbillionsofdollars
inimprovingandexpandingitsroadnetwork,asof2014,Ethiopiascoredonly2.2outof5for
thequalityoftradeandtransport-relatedinfrastructureithadwhilein2015itscored3.3outof
7forthequalityofportinfrastructureitused.
TheEthiopia’spoorperformancewithtransportandportrelatedinfrastructureisnotwithout
cost.Consistenttothispoorperformance,costofexportandimportisveryhighinEthiopia.As
of2014,onaverage,afirmneededtopayUSD2,380percontainertoexportandUSD2,960to
import.Theseamountsaresignificantlyhigherthanwhatafirmneededtopayinmostother
countries,andthisnegativelyaffectsEthiopia’sattractivenesstoefficiency-seekingFDIfirms.
Forinstance,afirminIndonesia,VietnamandMyanmarneededtopayaroundUSD600per
containereithertoexportorimportgoods.
19
ibid
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Source:WDI2016
Logistic
InordertoattractFDIfirms,countryneedtohaveagoodperformanceintheirlogistics.
Withoutefficientlogistics,delaysatthelandports,seaportsandairportsaswellasatborder
andintransitwouldbeinevitable.Delayscanhaveadramaticeffectonincreasingcosts–and
thereforedecreasingcompetitiveness(Arvis,etal.,2014)20.Moreover,inadditiontoincreasing
costanddecreasingcompetitiveness,delaysalsoreducethevolumeoftrade(Freundand
Rocha,2010)21.
Ethiopiascored2.6outof5foritsoveralllogisticperformancewhichreflectsperceptionsofa
country'slogisticsbasedonefficiencyofcustomsclearanceprocess,qualityoftrade-and
transport-relatedinfrastructure,easeofarrangingcompetitivelypricedshipments,qualityof
logisticsservices,abilitytotrackandtraceconsignments,andfrequencywithwhichshipments
reachtheconsigneewithinthescheduledtime.Ethiopia’slogisticsperformanceratingsareless
thantheaveragerateofthecomparisongroupforthe4logisticsperformanceindicatorsofthe
6logisticsperformanceindicatorsthispaperconsidered.
20
Arvis,J.F.,Saslavsky,D.,Ojala,L.,Shepherd,B.,Busch,C.,&Raj,A.(2014).ConnectingtoCompete2014:Trade
LogisticsintheGlobalEconomy–TheLogisticsPerformanceIndexandItsIndicators.
21
Freund,C.L.,&Rocha,N.(2010).WhatconstrainsAfrica’sexports?WorldBankPolicyResearchWorkingPaper
Series,5184.WorldBank,Washington,DC.
ProspectofFDI-LedIndustrializationinEthiopia 16
Source:WDI2016
Whenwelookatthespecifics,Ethiopia’sperformanceintermsofthequalityoftradeand
transport-relatedinfrastructureandeaseofarrangingcompetitivelypricedshipmentsverylow.
Theotherkeyindicatorsthatthispaperusedtomeasuretherelativelogisticsperformanceof
Ethiopiaarethemedianleadtimetoexport(whichisthemediantime-thevaluefor50percent
ofshipments-fromshipmentpointtoportofloading)andthemedianleadtimetoimport
(whichisthemediantime-thevaluefor50percentofshipments-fromportofdischargeto
arrivalattheconsignee).Inbothparameters,Ethiopia’sperformanceistheworstofall
countriesinthecomparisongroup.In2014,themedianleadtimetoexportfromEthiopiawas
14dayswhiletheaveragemedianleadtimetoexportconsideringallothercountriesinthe
comparisongroupwasonly2.7days.Similarly,themedianleadtimetoimporttoEthiopiawas
13dayswhiletheaveragemedianleadtimetoimportconsideringallothercountriesinthe
comparisongroupwasonly3.5days.
17
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Source:WDI2016
InformationCommunicationTechnology(ICT)
Theriseinglobalvaluechainshasincreasednotonlytheopportunitycostofmaintaining
inefficientlogisticproceduresandothernon-tariffbarriers,butithasincreasedtheopportunity
costofrestrictionsontheflowofinformation–whichhasgottodowithInformation
CommunicationTechnology.
Likeelectricityandtransport,Ethiopia’sICTinfrastructureaswellastheICTmanagementare
inferiorasitisreflectedinthecoverageandqualityofdifferentICTservices.Mobilecellular
subscriptionper100peopleis32whichistheleastofallthecountriesconsideredfor
comparisonpurpose.Similarly,thenumberofsecureinternetserversperamillionpopulationis
lessthan1whichisalsotheleastinthegroup.
ProspectofFDI-LedIndustrializationinEthiopia 18
Source:WDI2016
b. Institutions
RuleofLaw,PropertyRightsandBusinessRegulations
Thepresenceofvitalinstitutions(propertyrights,ruleoflaw,lowlevelofcorruption,
macroeconomicstability,goodeconomicmanagement,andbusinessfriendlyregulations)is
amongthethreemostimportantfactorsthatFDIfirmsconsiderbeforetheyinvestinthehost
country.Specially,forefficiency-ormarket-seekingFDIfirms,thepresenceofsuchinstitutions,
likebasicinfrastructure,isaknockoutfactor.
Generally,theregulationenvironmentinEthiopiaisamongthebadifnottheworst.Ethiopia
scored146foreaseofdoingbusinessindexwhere1isascorethatisgiventomostbusinessfriendlyregulations.Ofcourse,someofthecountries–includingBangladesh,Nigeria,and
Myanmar–wepickedforthepurposeofcomparisonareworsethanEthiopiawhileseveralof
themarenotthatmuchbetterthanEthiopia.However,givenEthiopianeagernesstoattractFDI
andthelegionsofchronicweaknesswelistedabove,puttingbusiness-friendlyregulations
shouldhavebeensomethingEthiopiacouldtakeadvantagefrom.
Similarly,RuleofLawinEthiopiaisweak.Ethiopia’sscoreinTheGlobalEconomyRuleofLaw
index(-2.5weak;2.5strong)is-0.42whichislessthanthescoresgiventomostcountries
(Rwanda,Ghana,Uganda,Tanzania,Indonesia,PhilippinesandVietnam)includedinthe
comparisongroup.Ethiopiascored3.5outof6inCPIA’sbusinessregulatoryenvironment
ratingwhichassessestheextenttowhichthelegal,regulatory,andpolicyenvironmentshelpor
hinderprivatebusinessesininvesting,creatingjobs,andbecomingmoreproductive.Similarly,
19
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Ethiopiascored3outof6inCPIA’spropertyrightsandrule-basedgovernanceratingwhich
assesstheextenttowhichprivateeconomicactivityisfacilitatedbyaneffectivelegalsystem
andrule-basedgovernancestructureinwhichpropertyandcontractrightsarereliably
respectedandenforced.Moreover,Ethiopiascored3outof12initsstrengthoflegalright
indexthatmeasuresthedegreetowhichcollateralandbankruptcylawsprotecttherightsof
borrowersandlendersandthusfacilitatelending.Allofthesespecificmeasurementsofthe
healthofinstitutionalenvironmentcategorizeEthiopiawithpoorperformers.
Suchindexesarecreatedbyconsolidatingseveralfactsontheground.Forinstance,the
numberofproceduresneededtoregisterastart-upbusinessandtoregisterapropertyin
Ethiopiaare11and7,respectively.Andthesefiguresarehigherthanthenumberofprocedures
requiredtodothesameinmostcountriesinthecomparisongroupifnotinall.Inadditionto
delayingtheprocessofstartingbusinesses,theseprocedureshaveseriousimplicationoncost
ofstart-upabusiness.Thecostofbusinessstart-upproceduresbeingmeasuredaspercentage
ofgrossnationalincomepercapitais76percentinEthiopiawhichissignificantlyhigherthan
whatisobservedinallcountriesconsideredexceptone.
MacroeconomicStabilityandEconomicManagement
AspertheWorldBankCountryPolicyandInstitutionalAssessmentrating,Ethiopiascored
between3and4outof6inthewholerangeofissuespertainingtoMacroeconomicStability
andEconomicManagement.Ethiopia’sCPIAratingsarelessthantheaveragerateofthe
comparisongroupforthe5CPIAindicatorsofthe9CPIAindicatorsthispaperconsidered.The
areasEthiopiaperformedpoorlyvis-à-visothercountriesincludemacroeconomicmanagement
(referstothemonetary,exchangerate,andaggregatedemandpolicyframework),fiscalpolicy
(referstothesustainabilityofthepublicdebt),trade,economicmanagementclusteraverage,
andstructuralpoliciesclusteraverage.Thesehaveeitheradirectoranindirectrelevancein
termsofattractingFDIfirms.Particularly,CPIA’straderating–forwhichEthiopiascored3out
of6byscoring1unitlessthanthecomparisongroup’saveragerating(4outof6)–isavery
goodindicatorofthehealthofthetradeenvironmentandtellsthathowthepolicyframework
fosterstradeingoods-whichiscrucialforFDIfirms.
ProspectofFDI-LedIndustrializationinEthiopia 20
Source:WDI2016
Theothercrucialindicatorforthehealthofaneconomyisinflation.Highandunpredictable
inflationisregardedasharmfulfortheeconomybymakingitdifficultforcompaniestobudget
orplanlongterm.Uncertaintyaboutthefuturepurchasingpowerofthemoneydiscourages
firmsnottoinvest.HereagainEthiopia’srecordisverybad.Lookingbackforthepastdecade,
wefoundinflationinEthiopiastaggeringlyhighrangingfrom7.4percentandgoingupto44
percentwhiletwo-digitinflationrateswererecordedin7yearsoutofthe11yearsunder
consideration.
21
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Source:WDI2016
Corruption
Theotherfactorthatcanserverasindicatoroftheheathofinstitutioninacountryisthelevel
ofcorruption.Inthisregard,comparedtoothercountriesinthecomparisongroup,Ethiopia’s
performanceisnotbad.Ethiopia’sscoreinTheGlobalEconomyControlofCorruptionindex(2.5weak;2.5strong)is-0.43whichisstillnotgoodbutbetterthanthescoresgiventomost
countries(Nigeria,Uganda,Kenya,Tanzania,Cambodia,Bangladesh,LaoPDR,Indonesia,
VietnamandPhilippines)includedinthecomparisongroup.
Thepercentageoffirmsthatexperiencedatleastonebriberequestinthepastwas27percent.
Firmswhichexpectedtogivegiftsinmeetingswithtaxofficialsare17percentwhilefirms
whichmadeinformalpaymentstopublicofficialswere8percent.Thesefiguresaresignificantly
lessthanwhatwereobservedincountrieslikeCambodia,BangladeshandMyanmar.However,
incountrieslikeRwanda,EgyptandGhanafirmshadsignificantlylessexperienceofcorruption
thaninEthiopia.
ProspectofFDI-LedIndustrializationinEthiopia 22
Source:WDI2016
c. PoliticalStability
PoliticalstabilityisamongthethreemostimportantfactorsthatFDIfirmsconsiderbeforethey
investinthehostcountry.Specially,forefficiency-ormarket-seekingFDIfirms,political
stability,likethepresenceofbasicinfrastructureandvitalinstitutions,isaknockoutfactor.A
studybyLemiandAsefa(2003)22looksathowuncertaintyaffectsFDIandfindthatUS
manufacturingcompanieslookingtoinvestinAfricaconsidernotonlygovernments’policy
commitmentsbutpoliticalstabilityasparticularlyimportant.
Probably,politicalstabilityisthemajorchallengeofallthechallengesEthiopiafacesintermsof
attractingefficiency-ormarket-seekingFDIfirms.FortheofTheGlobalEconomycomposite
PoliticalStabilityindexwhichreflectsthelikelihoodofadisorderlytransferofgovernment
power,armedconflict,violentdemonstrations,socialunrest,internationaltension,terrorism,
aswellasethnic,religiousorregionalconflict,thelatestdatawehaveisfor2014.Sincewe
don’thavelatestdatathattakesintoaccountthelatestwavesofnation-widestrongpolitical
proteststhatcontinuedforthepasttwoyearsandforcedthegovernmenttodeclareasix
monthlongstateofemergencyinNovember2016,thescoregiventoEthiopiainTheGlobal
EconomyPoliticalStabilityindexdoesn’treflecttheactualcurrentpoliticalsituation.23Asa
resultoftheseprotests,severalofthefewFDIfirmsthatthecountrymanagedtoattractinthe
lastdecadehavebeenattackedandsufferedalot.24
22
Lemi,A.andAsefa,S.(2003).Foreigndirectinvestmentanduncertainty:empiricalevidencefromAfrica.Africa
FinanceJournal5,36–67.
23
https://www.hrw.org/world-report/2016/country-chapters/ethiopia
https://www.hrw.org/africa/ethiopia
24
https://www.bloomberg.com/news/articles/2016-10-10/ethiopia-losing-appeal-for-foreign-investors-as-attacks-
spread
23
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Evenwiththedataof2014,however,Ethiopia’sscoreofTheGlobalEconomyPoliticalStability
Indexis-1.24whichisfarlessthanthescoregiventomostcountries(Rwanda,Ghana,
Tanzania,Uganda,Vietnam,Cambodia,LaoPRD,Indonesia,Philippines,Bangladesh,and
Myanmar)includedinthecomparisongroup.25
Wealsohaveothernarrowlydefinedmeasurementsofpoliticalrisk-short-termpoliticaland
long-termpoliticalrisk–whicharerelatedtoexporttransactionsandforwhichwehavethe
lateststatistics.Forashort-termpoliticalriskthatisrelatedtoshort-termexporttransactions
andcoversrisksofforeignexchangeshortages,wars,revolution,naturaldisastersandarbitrary
governmentactions,Ethiopiascored5outof7(where1reflectslowand7reflectshighrisk)
beingranked165outof200countriesconsidered.Foralong-termpoliticalriskthatisrelated
toexporttransactionswithacreditperiodofmorethantwoyearsandcoversrisksofforeign
exchangeshortages,wars,revolution,naturaldisastersandarbitrarygovernmentactions,
Ethiopiascored7outof7(where1reflectslowand7reflectshighrisk)beingranked185outof
200countriesconsidered.26
OtherImportantFactors
DomesticMarket
Intheprecedingsection,wesaidthatoneofthereasonthatlightmanufacturingindustriesare
currentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaistolookfornewmarkets.
Inthisregard,otherfactorsbeingthesame,Ethiopiawithmorethan90millionpopulation
looksattractivedestinationforsuchindustries.
http://globalriskinsights.com/2016/10/radar-foreign-investors-attack-ethiopia/
25
http://theglobaleconomy.com/
26
ibid
ProspectofFDI-LedIndustrializationinEthiopia 24
CountryName
Indonesia
Nigeria
Bangladesh
Philippines
Ethiopia
Vietnam
Egypt,ArabRep.
Myanmar
Tanzania
Kenya
Uganda
Ghana
Cambodia
Rwanda
LaoPDR
TotalPopulation,2015
257,563,815
182,201,962
160,995,642
100,699,395
99,390,750
91,703,800
91,508,084
53,897,154
53,470,420
46,050,302
39,032,383
27,409,893
15,577,899
11,609,666
6,802,023
GDPpercapita(currentUS$),2015
3,346
2,640
1,212
2,899
619
2,111
3,615
1,204
865
1,377
676
1,381
1,159
697
1,812 Source:WDI2016
However,itshouldbenotedthattherearealsootherbigFDI-seekingcountrieslikeIndonesia,
Bangladesh,PhilippinesandVietnaminAsiaandNigeriaandEgyptinAfricathatEthiopianeeds
tocompetewith.
Moreover,beingamemberofregionalcommunitiesplayanimportantroleindeterminingthe
actualmarketsizeofcountries.Regionaltradeagreementsthatdrivedowntradecostswhile
expandingmarketscanhaveapowerfuleffectinattractingFDI.ExperienceinChinaand
elsewhereinAsiashowsthatspecialeconomiczones(SEZs)canbehighlyeffectiveinattracting
FDI,byensuringthattheinfrastructure,institutionsandincentivesallworktosupport
manufacturingandfacilitatetrade.27
Whenwelookatcountriesweselectedforthiscomparativeanalysis,NigeriaandGhanaare
membersoftheEconomicCommunityofWestAfricanStates(ECOWAS)whichis15-member
statesstrongregionalgroupwithatotalpopulationof335million.ECOWAShasaCustoms
Unionprogramthatworkstoexpandthemarketsofmemberstates’industriesbyimproving
thecirculationofgoodsandservicesamongmemberstates.Thisimplies-givenotherfactors
arethesame-market-seekingFDIfirmswouldprefertoinvestincountriesthatarememberof
strongerregionalcommunitiesthaninvestingincountriesthatarememberofweakerregional
communities.Forinstance,relativelysmallercountrieslikeTanzania,KenyaandUgandacould
bemorepreferableintermsofaccesstomarketthanEthiopiaduetotheiradvantagesthatare
drawnfromtheCustomUnionandCommonMarketagreementsoftheEastAfricanCommunity
27
Sutton,J.Jinhage,A.,Leape,J.,Newfarmer,R.&Page,J.(2016).HarnessingFDIforjobcreationand
industrialisationinAfrica.GrowthBrief|FIRMS|May2016.
25
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(EAC)thatcomprisesfiveneighboringcountriesincludingTanzania,Kenya,UgandaRwandaand
Burundiwithamarketsizeofmorethan150millionpeople.
Moreover,lookingatthesizeofthepopulationalonedoesnottellustheactualsizeofthe
domesticmarket.Inordertomeasuretheactualmarketsize,weneedtolookatthestandard
oflivingofthepopulationwhichcancrudelybemeasuredbyGDPpercapitaofacountry.In
thisregard,givenotherthingsthesameandevenleavingasidethevalidityofEthiopian
staggeringgrowthstatistics,Ethiopia–withGDPpercapitaofUSD600–isstillamongthe
poorestcountriesintheworldandwouldbeamongtheleastpreferredformarket-seekingFDI
firmsduetotheloweststandardoflivingofitspopulation.Ethiopia’sGDPpercapitaisfarless
thantheGDPpercapitaofmostAsianandAfricaneconomiesthatEthiopianeedtocompete
withinordertoattractFDI.Toputthingsinperspective,Ethiopia’sGDPpercapitaisroughly
one-sixthofthatofEgyptandIndonesia,one-fifthofthatofPhilippinesandNigeria,one-third
ofthatofVietnamandLaoPDR,andhalfofthatofGhana,Kenya,Bangladesh,Myanmarand
Cambodia.
MonetizationoftheEconomy
Generallyspeaking,financialpenetrationinEthiopiaislow.AspertheWorldBankCountry
PolicyandInstitutionalAssessmentrating,Ethiopiascored3outof6infinancialsectorrating
andthisfigureislessthanwhatisscoredbyseveralofthecountriesinthecomparisongroup.
Lookingatsomespecificindicatorsoffinancialpenetrationwouldmakeclearwhatthisrating
means.Forinstance,lessthan22percentoftheeligiblepopulationhasanaccountatafinancial
institutioninEthiopiawhichissignificantlylessthantheaveragefigure(30percent)obtained
byconsideringallthecountriesinthecomparisongroup.Similarly,therearelessthan3
commercialbankbranchesper100thousandadultswhiletheaveragefigureobtainedby
consideringallthecountriesinthecomparisongroupis5commercialbankbranchesper100
thousandadults.
InEthiopia,only12.9percentofthefirmsusedbankstofinanceinvestmentwhile16.4percent
offirmsusedbankstofinanceworkingcapital.Thecomparablefiguresfromcountrieslike
Kenya,Rwanda,GhanaandLaoPDRandBangladesharesignificantlyhigherthanthatof
Ethiopia.
ProspectofFDI-LedIndustrializationinEthiopia 26
Source:WDI2016
HumanCapital
Intheprecedingsection,wesaidthatoneofthereasonthatlightmanufacturingindustriesare
currentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaistolookforcheap,skilled
labor.Thisimpliescountriesthatstrivetoattractefficiency-ormarketseekingFDIfirmsneedto
haveenoughworkerswhohaveskillsthatmatchtothedesireoftheFDIfirms.
Asacorollarytoitsbigpopulation,Ethiopiahasahugelaborforcethatwasestimatedtoreach
around47millionbythemid-year2014.Ofcourse,tohaveahugelaborforceisanadvantage
toattractefficiency-seekingFDIfirms.However,thequalityofthelaborforcealsomatters.As
pertheWorldBankCountryPolicyandInstitutionalAssessmentrating,Ethiopiascored4.5out
of6inbuildinghumanresourcesratingwhichassessesthenationalpoliciesandpublicand
privatesectorservicedeliverythataffecttheaccesstoandqualityofhealthandeducation
services,includingpreventionandtreatmentofHIV/AIDS,tuberculosis,andmalaria.Inthis
regard,Ethiopia’sperformanceisbetterthantheperformanceofothercountriesinthe
comparisongroup.
WithrespecttoattractingFDIfirmshoweverweneedtogobeyondthisgeneralindicatorof
qualityoflaborforce.Moreimportantly,weneedtolookattheeducationalattainmentofthe
laborforceasmostefficiency-seekingFDIfirmsrequiressecondaryandtertiaryeducationlevel
ofattainment.InEthiopia,themajorityofthelaborforceisliterate.However,59percentofthe
totallaborforceattainedorcompletedonlyprimaryeducationasthehighestlevelofeducation
whileonly21percentofthetotallaborforceattainedorcompletedsecondaryortertiary
educationasthehighestlevelofeducation.Incontrast,incountrieslikeEgyptandthe
Philippinesthemajorityofthelaborforceattainedorcompletedsecondaryortertiary
educationasthehighestlevelofeducation.
27
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WageandLaborMarket
WageorcompensationofemployeesinEthiopiaisverylow.Asof2015,annualminimumwage
paidinEthiopiawasaroundUSD252whichislessthanwhatwaspaidinmostcountriesinthe
worldincludingintheFDI-seekingeconomiesselectedforcomparisonpurposes.Givenother
factorsarethesame,thisfactcouldmakeEthiopiamorepreferableFDIdestinationthanmost
countriesintheworld.
However,notonlylackofskilledandmatchinglaborforcebutalsorigidlabormarketsthatare
characterizedbyrestrictivelaborlawsandregulationscandeterFDI.Toattainthedesired
efficiencyinproductionFDIfirmsneedmoreflexibleemploymentrules.Inthisregard,we
don’thaveanindicatortomeasureEthiopia’srelativeposition.
Source:WDI2016
Incentive
ProspectofFDI-LedIndustrializationinEthiopia 28
Itisarguedthathighimporttariffs,hugetaxonexportsandtraderestrictionsaredisincentives
toFDIandforeigntradebyreducingthecompetitivenessofmanufacturingsector(LooiKeeet
al.,2009).28Inthisregard,wedon’thaveanindicatortomeasureEthiopia’srelativeposition.
Source:WDI2016
IV.
ConclusionandPolicyImplication
ThiscomparativeanalysissuggestsEthiopiaiscurrentlyfarlesscompetentthanothercountries
intermsofitsrelativepositiontoattractefficiency-ormarket-seekingFDIfirms-thatare
currentlyleavingthedevelopedandemergingeconomiesinsearchofcheaplaborandmarket.
AlthoughtheGovernmentofEthiopiarecentlyclaimstopursueFDI-ledindustrializationpolicy,
thecountry'sperformanceinallofthethreeknockoutfactors(i.e.basicinfrastructure,vital
Institutionsandpoliticalstability)forattractingefficiency-ormarket-seekingFDIfirmsis
inferior.Similarly,thecountry'srelativepositioninsomeoftheotherimportantfactors
(includingmonetizationoftheeconomyandinvestmentincentives)islower.
Withthispoorperformance,Ethiopiafacesaformidablechallengetocompetewiththese
countriesandbepartoftheglobalstructuraltransformationchain.
ForsuccessfulattractionofFDI,politicalstability,improvementinvitalinstitutionsandfurther
expansionofbasicphysicalinfrastructurearenecessaryconditions.Similarly,attractionof
FDIrequiresformulationandimplementationofpoliciesandstrategiesthatcapitalizeon
country’scomparativeadvantages-lowerwage,youngpopulation,andbigdomesticmarket.
28
LooiKee,H.,Nicita,A.,&Olarreaga,M.(2009).Estimatingtraderestrictivenessindices,TheEconomicJournal,
2009,vol.119,p172–199.
29
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ENDS
ProspectofFDI-LedIndustrializationinEthiopia 30