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Wazema Institute ProspectofFDI-LedIndustrializationinEthiopia(Critical analysis) April2017 1 WazemaInstitute 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 3 WazemaInstitute 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 5 WazemaInstitute 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. 7 WazemaInstitute 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. 9 WazemaInstitute Source:WDI2016 FDIInflowstoEthiopia Althoughithasshownasignificantsurgesince2013,FDIinflowstoEthiopiawassignificantly lowandshowednosteadytrendhistorically. ProspectofFDI-LedIndustrializationinEthiopia 10 Source:WDI2016 Inthepasttenyearscoveringfrom2006to2015,EthiopiawitnessedanaverageFDInetinflows ofUSD754millionannually.Toputthingsinperspective,FDIinflowstoEthiopiawaslessthan whatwasobservedinUgandawhoseeconomyandpopulationarelessthanhalfofthatof Ethiopia.ComparedtoBangladeshandTanzaniathefigureisaroundhalfwhileitisone-tenth andaquarteroftheFDIinflowstothehighestperformingcountriesVietnamandthe Philippines,respectively. 11 WazemaInstitute 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. 13 WazemaInstitute 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 15 WazemaInstitute 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 WazemaInstitute 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 WazemaInstitute 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 WazemaInstitute 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 WazemaInstitute 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 WazemaInstitute (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 WazemaInstitute 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 WazemaInstitute ENDS ProspectofFDI-LedIndustrializationinEthiopia 30