Prospect of FDI-Led Industrialization in Ethiopia...

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Wazema Institute

ProspectofFDI-LedIndustrializationinEthiopia(Criticalanalysis)

April2017

ProspectofFDI-LedIndustrializationinEthiopia 2

WazemaInstitute:

WazemainstituteisWazemaRadioaffiliatedresearchgroupcomprisingexpertsworkingonpertainingissuesinEthiopiaandacrosstheEastAfricaregion.

www.wazemaradio.com

Contact-DereseK.Getachew(PhD)–derese@gmail.com

AbouttheAuthor:

SileshiTennaisanEconomistbytraining.HereceivedhisBachelorsinEconomicdegreefromAddisAbabaUniversityandMastersDegreeinPublicAdministrationandInternationalDevelopmentfromHarvardUniversity.HeiscurrentlyworkingforBankofAmerica.SileshiisalsoregularcontributortoWazemaRadio.

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I. Introduction

Historically,industrialdevelopment–particularlytheonethroughtheexpansionofthemanufacturingsubsector-wasthefirstmilestonethatcontemporarydevelopedcountriesattainedintheirjourneyofeconomicdevelopment.Thisisbecausethemanufacturingsubsector-withrelativelylittleefforttoimprovelaborskills-iscapableofabsorbinglargeamountoflaborforcethatisreleasedfromthetraditionalsectorlikeagriculture.Inthesecondhalfofthe20thcentury,mostofthecountriesthatcaughtupthedevelopedeconomiesmanagedtodosobyincreasingtheproductivityoftheirlaborforcethroughshiftingitfromthetraditionaleconomyintothemanufacturingsubsector.Inthisregard,itcouldbereasonabletodevelopingcountrieslikeEthiopiatofocusonthemanufacturingsubsectorintheirendeavortotransformtheirtraditionaleconomyintoamodernone.

However,thereisnosinglemodelforindustrializationthatalldevelopedeconomiesemployed.Tracingbackthehistoryofindustrializationrevealsindividualaswellasdifferentgroupsofcountriesmanagedtoindustrializetheireconomiesatdifferentpointsintimefollowingdifferentapproachesthatfittheirspecificcontexts.Thepioneersofindustrialization-namelyWestEuropeandNorthAmerica-followedprivatesector-ledindustrializationthatinvolvedinventionandexpansionofnewtechnologieswhileJapan-takingadvantageofbeingafollower-industrializeditseconomybyfollowingexport-orientedandstate-ledindustrializationbyimitatingandinnovatingthealreadyinventedtechnologiesbythepioneers.ThesocalledEastAsianTigereconomiesincludingHongKong,Singapore,SouthKoreaandTaiwanmoreorlessfollowedapaththatissimilartothatofJapan.However,inadditiontobenefitingfromthepoliticsoftheColdWarera,theTigerswereabletotakeadvantageofJapan’sindustrialsuccessduetotheirgeographicalproximitytoandculturalsimilaritywiththelater.TherearealsodozensofsuccessfulnewlyemergingeconomiesincludingChina,India,Turkey,ThailandandMalaysiathatpursuedtheirownpathsofindustrializationthatblendseveralpolicyoptionsdependingontheircontext.

Duringthelastdecade,theGovernmentofEthiopiaclaimedthatthecountry’seconomyhasbeengrowingatanaverageratearound10percent.However,leavingasidethevalidityofthisstaggeringfigure,theshareoftheindustrysectorisstillverylowandunchanged.Unlikewhathasbeenobservedinmostfastgrowingeconomies,manufacturinginEthiopiahasbeenlaggingandthereisnosignofstructuralchangethatshiftslaborfromlowtohighproductivitysectors.In2014,theaverageshareofindustryinGDPofthecountrywasonly15percentwhilethatofthemanufacturingsubsectoris5percent.ThisshareofthemanufacturingsectorinGDPis

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significantlylessthanthedevelopingcountriesaverageaswellasthesub-SaharanAfricaaveragewhichwasabout10percentinthesameyear.

Inmyperviousshortarticle1,Iargued,bystatingseveralexternalandinternalfactors,thatthepresentdayEthiopiacanemulateneithertheindustrializationmodelofJapannorthatoftheothersuccessfulAsianeconomies.However,IindicatedthatthedoortoindustrializationisnottotallyclosedtoEthiopia.EthiopiacancompeteforlightmanufacturingindustriesthatarecurrentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaandgoingtocountrieslikeVietnam,Bangladesh,CambodiaandPhilippinesinsearchofcheaperskilledlaborandproductmarkets.Givenitscomparativeadvantages–lowerwage,youngpopulation,andbigdomesticmarket–EthiopiahasthepotentialtopursuetheForeignDirectInvestmentledindustrializationpolicyfollowingthefootstepsofthelatereconomies.However,thecompetitiontoattractefficiency-ormarket-seekingFDIfirmsistough.Infact,takingadvantageofthisreality,manyothereconomies–whicharestillatthelowerstageofdevelopmentintheglobalstructuraltransformationchain–arealsocurrentlypursuingFDI-ledindustrializationthatintendstoattractsuchefficiency-ormarket-seekingFDIfirms.

Itshouldbenotedthatsuchefficiency-ormarket-seekingFDIfirmsaredifferentfromthetraditionaltypeofresource-seekingFDIfirms.Efficiency-ormarket-seekingFDIfirms-inadditiontocheaplaborandproductmarket-requireanexcellentinvestmentclimate.Incontrast,resource-seekingFDIfirmsaregenerallymoretolerantofapoorinvestmentclimateasthecostsofresource-basedinvestmentsarelessdependentonthebroadereconomicandpoliticalconditions.

Moreover,asarecentassessmentsofFDIinflowsindicated,attractingFDIdoesnotguaranteeeconomicdevelopment.And,manyarearguingthatthebenefitsofFDIanditsproductivityspilloversdependonthemacroeconomicandstructuralconditionsofthehosteconomy.2

Inthisarticle,ItrytoexploretheexistingopportunitiesandchallengesinpursuingsuccessfulFDI-ledindustrializationinEthiopia.

II. Rationale,CaveatsandFundamentalsofFDI-LedIndustrialization

Worldleadinggrowtheconomists,suchasDaronAcemogluandPhilippeAghion,arguethatincountriesthatareatearlierstagesofdevelopmentinvestment-basedstrategiesthatencourageadoptionandimitation,ratherthaninventionandinnovation,arenotonlybetterbuttheonly

1MadeinEthiopia-Arkebe'sVisionorIllusion.www.wazemaradio.com2UNCTAD.(2015).ForeigndirectinvestmentinflowstoAfricaremainedstablein2014,UNreportsays[Pressrelease].Retrievedfrom:unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=250.

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feasiblepolicystrategies.3Moreover,withglobalization,thereisalsoachangeinthemodeofindustrialproductionfromwholeproductionchaintosegmentedvaluechains.Asaresultproducershaveshiftedthefocusfromachievingcomparativeadvantagealongthewholeproductionchaininfavorofadvantagesinspecificniches.4Suchsegmentedvaluechainscreateopportunitiesfordevelopingcountriestospecialize,withFDIproductivityspillovershelpingthemmoveprogressivelyintohighervalue-addedtasks,overtime.

Inconnectiontothis,severalempiricalstudiesfoundFDIcouldplayasignificantroleineconomicdevelopmentinmultipledimensions5:byincreasinginvestmentandtrade;byexpandingaccesstoworldmarketsforcapital,technology,andgoods;bycontributingtotechnologyadoptionbyandindustrialupgradingamongdomesticfirms;byhelpingthestructuraltransformationofhosteconomies;and,ultimately,byspurringgrowthofoutput,employment,andproductivity.

Intheirstudythatispublishedintheworld-leadingplatformforhighqualitypeer-reviewedDevelopmentEconomicsJournals,“HandbookofDevelopmentEconomics”,HarrisonandRodríguez-Clare(2010)presentthattradevolumesarehighlyandpositivelycorrelatedwithforeigninvestmentinflows.6

AnothergroupofprominenteconomistsprovidesomeempiricalevidencethatFDI-bycombininglongterminvestmentwithcontrol-canfacilitatethetransferofcapability(technologyandmanagementknowhow),andprovideaccesstoregionalandglobalvaluechains.7

AWorldBankstudybyChandraandKolavalli(2006)provideevidencethatattractingFDIhasbeenanimportantstrategyintechnologicaladaptation.8Similarly,inanotherWorldBankstudy,FaroleandWinkler(2014)presentevidencehowproductivityincreasecanbeattainedthroughthetransferoftechnologyandknowhowoftheforeigncompanytodomesticfirmsin

3Acemoglu,D.,Aghion,P.,&Zilibotti,F.(2006).Distancetofrontier,selection,andeconomicgrowth.JournaloftheEuropeanEconomicassociation,4(1),37–74.4UNECA.(2013).HarmonizingPoliciestoTransformtheTradingEnvironmentUnitedNationsCommissionforAfrica.Retrievedfrom:www.uneca.org/sites/default/files/PublicationFiles/aria_vi_english_full.pdf.5Dinh,H.,Plamade,V.,Chandra,V.,andCossar,F.(2012).LightManufacturinginAfrica:TargetedPoliciestoEnhancePrivateInvestmentandCreateJobs.InternationalBankforReconstructionandDevelopment/InternationalDevelopmentAssociationorTheWorldBank.WashingtonDC204336Harrison,A.,&Rodríguez-Clare,A.(2010).“Trade,ForeignInvestment,andIndustrialPolicy”HandbookofDevelopmentEconomics.Volume5,editedbyD.RodrikandM.Rosenzweig,2010.7Prasad,E.,Rogoff,K.,Wei,S.J.,&Kose,M.A.(2005).Effectsoffinancialglobalizationondevelopingcountries:someempiricalevidence(pp.201–228).PalgraveMacmillanUK.8Chandra,V.,andShashiKolavalli,S.(2006).“Technology,Adaptation,andExports:HowSomeCountriesGotItRight.”InTechnology,AdaptationandExports,ed.,VandanaChandra.Washington,DC:WorldBank

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thesamesector(horizontalspillover)oralongthesupplychain(verticalspillovers)throughthemovementofpeopleandgoods.9

BasedonasurveyconductedonthebiggestexportfirmsandindustrialcompaniesacrossSub-SaharanAfrica,SuttonandZhang(2016)presentthreekeyfactsthatillustratethepotentiallytransformativeroleofFDIinAfrica.Theseare:(i)AroundhalfthebiggestexportcompaniesoperatinginAfricancountriesthathavesuccessfullygonefromlowtohighindustrializationbeganasFDIventures;(ii)IntheAfricancountriesthatcurrentlyshowthegreatestprospectsforindustrialization,aroundone-fourthoftheirleadingindustrialcompaniesarecompaniesofforeignorigin;and(iii)Insub-SaharanAfricaneconomiesasinEastAsia,FDIhasbroadenedthescaleofactivityacrossexistingindustriesandtherangeofindustrialactivities.10

AllthesesuggestthatattractingFDIisvitalforcountriesthatareatthelowerstageofdevelopmentintheglobalstructuraltransformationchainbutstrivingtoindustrializetheireconomy.However,attractingefficiency-ormarket-seekingFDIfirmsisnotaneasytaskasitrequiresanexcellentinvestmentclimatethatcomprisesthewholearraysofeconomic,socialandpoliticalfactors.Someofrequirementssuchasbasicinfrastructure(accesstoelectricityandenergy,transport,telecommunicationandlogistics),vitalinstitutions(propertyrights,ruleoflaw,corruption,macroeconomicstability,economicmanagement,andbusinessregulations),andpoliticalstability(peaceandsecurity)aredeemedtobeknock-outfactorwhiletherearestillotherimportantfactorslikethesizeofthedomesticmarket,thequalityofhumancapital,thedegreeofmonetizationoftheeconomy,andinvestmentandtradepolicyincentives(wage,tariff,taxonexportandprofittax).

Suttonetal.(2016)arguethatefficiency-ormarket-seekingFDIfirmsaredifferentfromresource-seekingFDIfirmsthataregenerallymoretolerantofapoorinvestmentclimatebecausethecostsofenclaveinvestmentsarelessdependentonthebroadereconomicandpoliticalconditionsandcustom-madearrangementscanbeagreedwithlocalelites.Incontrast,asSuttonetal.(2016)furtherelaborates,politicaloreconomicinstabilitymaybeaninsurmountableobstacleforefficiency-ormarket-seekingFDIfirmstoinvest.ThepresenceofwidespreadcorruptioningovernmentisincapacitatingandcaneffectivelystifleFDIinflows,evenwhenotheraspectsoftheinvestmentclimatearefavorable.Theseconditionsareusuallydeep-rootedinstitutionalfailures,politicallysensitiveanddifficulttoaddress,buttheyarefundamentalinattractingFDI.11

Moreover,attractingFDIdoesnotguaranteeeconomicdevelopment.ThebenefitsofFDIanditsproductivityspilloversdependonthemacroeconomicandstructuralconditionsofthehost

9Farole,T.,&Winkler,D.(Eds.).(2014).MakingforeigndirectinvestmentworkforSub-SaharanAfrica:localspilloversandcompetitivenessinglobalvaluechains.WorldBank,Washington,DC.10Sutton,J.,andZhang,Q.(Inprogress).Industrialdevelopmentinhistoricalperspective:theprospectsforSub-SaharanAfrica.11Sutton,J.Jinhage,A.,Leape,J.,Newfarmer,R.&Page,J.(2016).HarnessingFDIforjobcreationandindustrialisationinAfrica.GrowthBrief|FIRMS|May2016.

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economy.12AWorldBankstudybyLedermanetal.(2010)indicatesthatFDIcanbedirectlyharmfulwhenpoorlymanaged,forexample,asaresultofadeteriorationinthebalanceofpaymentsasprofitsarerepatriated.13Similarly,FaroleandWinkler(2014)14andChenetal.(2015)15arguethatharnessingthevalueofFDIrequiresactivepro-competitionpoliciesthatnotonlyattractFDI,butalsoencourageeconomiccontributionstotechnology,labormarketsandverticalsupplychains.

BrookingsInstitutionresearcherswhohavebeenstudyingtheprospectofindustrializationinAfricaforlongarguethatforincreasedFDItotranslateintoincreasedproductivity,andultimatelyeconomicgrowth,willdependuponexistinglinkagesbetweendomesticandforeignfirms.Theresearchersarguethatthemovementofworkersandadoptionoftechnologiesandworkpracticesarecrucialingeneratingproductivityspillovers.InAfrica,incontrasttoEastAsia,theresearchersindicates,linkagesbetweenforeignanddomesticmanufacturingfirmsarelimited,asmultinationalenterprises(MNEs)oftenrelysolelyonimportsforintermediateinputs.ManyAfricanMNEsproducewhollyforexportmarkets,thisreducesthescopeforforwardlinkages.16

III. ProspectofFDI-LedIndustrializationinEthiopia:AcomparativeanalysisofEthiopia’srelativepositionintermsofitspotentialtoattractefficiency-ormarket-seekingFDIfirms

Background

Inthispart,whatItrytoachieveistoshowwhereEthiopiaisfoundvis-a-visothercountriesintermsofitspotentialtoattractefficiency-ormarket-seekingFDIfirms?

Toundertakeasensiblecomparativeanalysis,thispaper-bygoingthroughexistingliteratureandavailablelateststatistics-identified15AfricanandAsianeconomiestobepartoftheanalysis.Thesecountriesareselectedsincetheyarestillatthelowerstageofdevelopmentintheglobalstructuraltransformationchainbutstrivingtoattractefficiency-ormarket-seekingFDIfirms-thatarecurrentlyleavingdevelopedandemergingeconomiesinsearchofmarketandcheaplabor-bypursuingFDI-ledindustrializationpolicy.Theseinclude:relatively‘big’

12UNCTAD.(2015).ForeigndirectinvestmentinflowstoAfricaremainedstablein2014,UNreportsays[Pressrelease].Retrievedfrom:unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=250.13Lederman,D.,Mengistae,T.andXu,L.(2010).MicroeconomicConsequencesandMacroeconomicCausesofForeignDirectInvestmentinSouthernAfricanEconomies.WorldBank,Washington,DC.14Farole,T.,&Winkler,D.(Eds.).(2014).MakingforeigndirectinvestmentworkforSub-SaharanAfrica:localspilloversandcompetitivenessinglobalvaluechains.WorldBank,Washington,DC.15Chen,G.,Geiger,M.,&Fu,M.(2015).ManufacturingFDIinSub-SaharanAfrica.16Newman,C.,Page,J.,Rand,J.,Shimeles,A.,Söderbom,M.,andTarp,F.(2016).MadeinAfrica:learningtocompeteinindustry.BrookingsInstitutionPress,Washington,DC.

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economieslikeIndonesia,Nigeria,EgyptandPhilippines;‘mid-size’economieslikeBangladeshandVietnam;smalleconomieslikeMyanmar,Kenya,Ethiopia,Tanzania,GhanaandUganda;andevenverysmalleconomieslikeRwanda,LaoPRDandCambodiaareincludedduetotheirstrongefforttoattractefficiency-seekingandmarket-seekingFDIfirms.

Althoughalloftheselectedeconomiesarestillatthelowerstageofdevelopmentintheglobalstructuraltransformationchain,itshouldbenotedthattherearesignificantdifferenceamongthem.Someoftheseeconomies–suchasIndonesia,Vietnam,EgyptandPhilippines–canbesaidtheyareintheprocessoftransformingtheireconomyandsomewhatmanagedtoattractreasonableamountofefficiency-ormarket-seekingFDIfirmsinthepastdecade,therearesomethatmanagedtoattractnoticeableamountofFDIthoughtheyhavenotyetabletoshowstrongsignofeconomictransformation,andthereareothersthatcanbesimplyconsideredasstrongaspirantsofFDI-ledindustrialization.17

BeforewediveintoexploringEthiopia’srelativepositionintermsofthekeyfactorsthatarebelievedtodeterminetheinflowsofefficiency-ormarket-seekingFDIfirms,itisgoodtoseethefollowingtwothingsthatpertainwiththeobjectiveofattractingFDI.

(i)TherelativesizeandstructureoftheEthiopianEconomyvis-à-visothercountries–countriesthatarecurrentlypursuingFDI-ledindustrializationpolicyandstrivingtoattractefficiency-ormarket-seekingFDIfirms;and

(ii)WhereEthiopiastandscurrentlyvis-à-visothercountries–countriesthatarecurrentlypursuingFDI-ledindustrializationpolicyandstrivingtoattractefficiency-ormarket-seekingFDIfirms–intermsofinflowsofFDI

RelativeSizeofEthiopianEconomy

AscanbeseeninFigure____,thesizeofEthiopia’seconomyissignificantlylessthansomeleadingFDI-seekingeconomieslikeIndonesia,Vietnam,BangladeshandPhilippinesinAsia,andEgyptandNigeriainAfrica.However,thankstoitsbigpopulation,Ethiopia’seconomyissomewhatbiggerthanmanyotherFDI-seekingsmalleconomieslikeRwanda,Uganda,GhanaandTanzaniainAfricaandlikeCambodiaandLaoPRDinAsia.

17Inordertomoreinformationabouttheeconomicstructureoftheselectedcountrieslookathttps://www.cia.gov/library/publications/the-world-factbook/

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Source:WDI2016

StructureofEthiopianEconomy

WhenwelookatthestructureofEthiopianeconomy,theeconomyisdominatedbyagriculturewith42percentofitsGDPcomesfromthesector-thisshareismorethantheshareobservedinanyotherAsianandAfricaneconomyincludedincomparisongroup.

TheshareoftheindustrysectorintheEthiopianeconomyisonly16percentwhilethatofthemanufacturingsub-sector–whichisoneoftheindicatorsofthesuitabilityoftheFDI-seekingeconomiesforFDI-ledindustrialization–accountsforonly4percentoftheGDP.InmanyofFDI-seekingeconomiesinAsia,theshareoftheindustrysectorintheeconomyisalreadymorethan30percentwhilethecomparablefigureforFDI-seekingeconomiesinAfricaismorethan20percent.Similarly,theshareofthemanufacturingsub-sectorinGDPismuchgreaterinmanyofFDI-seekingeconomiesofAsiaandAfricathanitisinEthiopia.

ThecurrentstructureoftheEthiopianeconomyindicatesthat,asacountrythathasnotyetstarteditsjourneytoindustrializeitseconomy,EthiopiaawaitsafiercecompetitionwiththeotherFDI-seekingeconomiesthathavealreadystartedtheirjourneytoindustrializationandaggressivelyworkingtoachievemoreviaFDI-ledindustrializationpolicy.

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Source:WDI2016

FDIInflowstoEthiopia

Althoughithasshownasignificantsurgesince2013,FDIinflowstoEthiopiawassignificantlylowandshowednosteadytrendhistorically.

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Source:WDI2016

Inthepasttenyearscoveringfrom2006to2015,EthiopiawitnessedanaverageFDInetinflowsofUSD754millionannually.Toputthingsinperspective,FDIinflowstoEthiopiawaslessthanwhatwasobservedinUgandawhoseeconomyandpopulationarelessthanhalfofthatofEthiopia.ComparedtoBangladeshandTanzaniathefigureisaroundhalfwhileitisone-tenthandaquarteroftheFDIinflowstothehighestperformingcountriesVietnamandthePhilippines,respectively.

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Source:WDI2016

PillarsofFDI-LedIndustrialization

Attractingefficiency-ormarket-seekingFDIfirmsisnotaneasytaskasitrequiresanexcellentinvestmentclimatethatcomprisesthewholearraysofeconomic,socialandpoliticalconditions.Someofrequirementssuchasthepresenceofbasicinfrastructure(accesstoelectricityanduseofenergy,transport,telecommunicationandlogistics),vitalinstitutions(propertyrights,ruleoflaw,corruption,macroeconomicstability,economicmanagementandbusinessregulations),andpoliticalstability(peaceandsecurity)aredeemedtobeknockoutfactorsinattractingefficiency-ormarket-seekingFDIfirmsinthesensethatwithoutthemitisunthinkabletoseesuchfirmsinvesting.Inthissub-section,weexploreEthiopia’spositionvis-a-visothercountriesintermsofthesefactors.

a. Infrastructure

Basicinfrastructuresuchaselectricity,transportation,telephone,mobileandinternetservices,andwaterarenecessarytoattractefficiency-ormarket-seekingFDIfirms.ThepresenceofsuchbasicinfrastructureisamongthethreemostimportantfactorsthatFDIfirmsconsiderbeforetheyinvestinthehostcountry.Specially,forefficiency-ormarket-seekingFDIfirms,thepresenceofsuchbasicinfrastructureisaknockoutfactor.ThisisbecausewithoutefficientinfrastructureFDIfirmscan’tattainthecompetitivenessandproductivitythatarerequiredfortheirsurvival.

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AccesstoElectricityandUseofEnergy

Lowaccess,poorreliabilityandhighcostofelectricityisrepeatedlyidentifiedasamajorchallengeforcountriesthatstrivetoattractFDI.ArecentWorldBankEnterpriseSurveyconductedin2011/2013indicatesthatmorethantwo-thirdofFDIfirmsidentifiedelectricityasamajorconstraintfordoingbusinessinAfrica(Chenetal.,2015).18

OfthetotalpopulationofEthiopia,only27percentgotaccesstoelectricityby2012.AccesstoelectricityinEthiopiaissignificantlylessthantheaccessinmanyoftheFDIseekingAsianandAfricaneconomies.ThisfigureisevenlessthantheaveragefigureforSub-SaharanAfrica(excludinghighincome).

Whenwefurtherlookattheelectricpowerconsumption(KWHpercapita),wefoundthisstatistichorrifyinglylow.Asof2013,electricpowerconsumptioninEthiopiaisonly65KWHpercapitawhichislessthan5percentofwhatisconsumedincountrieslikeVietnamandEgypt,lessthanone-tenthofwhatisconsumedincountrieslikeIndonesiaandPhilippines,lessthanone-fifthofwhatisconsumedincountrieslikeBangladeshandGhana,andlessthanone-thirdofwhatisconsumedincountrieslikeMyanmarandKenya.

Source:WDI2016

Generally,likemostsmalleconomies,energyuseinEthiopiaislow.InEthiopia,percapitaenergyuse-beingmeasuredbykilogramofoilequivalent-ismoreorlesssimilartowhatisobservedinKenyaandTanzaniawhileitissignificantlygreaterthanwhatisusedinBangladesh,

18Chen,G.,Geiger,M.,&Fu,M.(2015).ManufacturingFDIinSub-SaharanAfrica.

CountryName Accesstoelectricity(%ofpopulation),2012

Electricpowerconsumption(kWhpercapita),2013

Energyuse(kgofoilequivalentpercapita),2013

Energyuse(kgofoilequivalent)per$1,000GDP(constant2011PPP)

Egypt,ArabRep. 100 1697 885 88Vietnam 99 1306 668 130Indonesia 96 788 850 88Philippines 88 692 457 72LaoPDR 70 na na naGhana 64 382 344 90Bangladesh 60 293 216 76Nigeria 56 142 773 142Myanmar 52 164 313 NACambodia 31 221 396 134Ethiopia 27 65 507 381Kenya 23 168 492 179Uganda 18 NA NA NARwanda 18 NA NA NATanzania 15 89 470 207

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MyanmarandGhana.Intermsofefficiencyofenergyuse,however,Ethiopiaistheleastefficient.Onaverage,381kgofoilequivalentisusedtoproduce$1,000worthofoutput(GDP)inEthiopiawhilethecomparablefigureinmostAsianeconomiesislessthan100kgofoilequivalent.EventhebadperformerAfricaneconomieslikeKenyaandTanzaniaused179kgand207kgofoilequivalentper$1,000GDP,respectively.

Asidefromaccessanduseofelectricity,delaysinobtainingelectricconnectionandpoweroutagesarealsotheothercrucialfactorsthatFDIfirmsconsiderseriously.Intermsofdelaysinobtainingelectricpowerconnection,Ethiopiaistheworstofall.InEthiopia,afirm,aftermakingarequestforanelectricconnection,needstowait194daysoralittlelessthansevenmonthsonaverage.Inthisregard,thereisnoanyothercountryontheplanetthatstandsincomparisontoEthiopia.Forinstance,inCambodiaandNigeria,arequestforelectricpowerconnectionisansweredinlessthan10dayswhileittakesaroundthreeweeksinUgandaandLaoPDR.Withregardtotheextentofpoweroutageinfirms,however,unlikewhatiswitnessedbytheconsumersandserviceproviders,Ethiopiaisnottheworstifnotthebest.Thetotalnumberofinstancesofpoweroutagesinfirmsinatypicalmonthisaround8whichissignificantlylessthanwhatisobservedinBangladesh(65days),Nigeria(33days),Egypt(16days)andMyanmar(13days).

Source:WDI2016

Transport

EaseoftransportationofgoodsandpeopleistheotherthekeyrequirementsofFDIfirms.Poortransportinfrastructureraisesthecostofinputstomanufacturingandotheractivities.The

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WorldBankEnterpriseSurveyconductedin2011/2013indicatesthatpoortransportinfrastructurestandssecondintermsofconstraintstoFDI,especiallyfortheonethirdofAfricancountriesthatarelandlocked.19

Inthisregard,land-lockedEthiopiawithitslessthan1000KMrailhasaformidablechallengethoughthereisasignificantimprovementinthepastdecade.Afterspendingbillionsofdollarsinimprovingandexpandingitsroadnetwork,asof2014,Ethiopiascoredonly2.2outof5forthequalityoftradeandtransport-relatedinfrastructureithadwhilein2015itscored3.3outof7forthequalityofportinfrastructureitused.

TheEthiopia’spoorperformancewithtransportandportrelatedinfrastructureisnotwithoutcost.Consistenttothispoorperformance,costofexportandimportisveryhighinEthiopia.Asof2014,onaverage,afirmneededtopayUSD2,380percontainertoexportandUSD2,960toimport.Theseamountsaresignificantlyhigherthanwhatafirmneededtopayinmostothercountries,andthisnegativelyaffectsEthiopia’sattractivenesstoefficiency-seekingFDIfirms.Forinstance,afirminIndonesia,VietnamandMyanmarneededtopayaroundUSD600percontainereithertoexportorimportgoods.19ibid

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Source:WDI2016

Logistic

InordertoattractFDIfirms,countryneedtohaveagoodperformanceintheirlogistics.Withoutefficientlogistics,delaysatthelandports,seaportsandairportsaswellasatborderandintransitwouldbeinevitable.Delayscanhaveadramaticeffectonincreasingcosts–andthereforedecreasingcompetitiveness(Arvis,etal.,2014)20.Moreover,inadditiontoincreasingcostanddecreasingcompetitiveness,delaysalsoreducethevolumeoftrade(FreundandRocha,2010)21.

Ethiopiascored2.6outof5foritsoveralllogisticperformancewhichreflectsperceptionsofacountry'slogisticsbasedonefficiencyofcustomsclearanceprocess,qualityoftrade-andtransport-relatedinfrastructure,easeofarrangingcompetitivelypricedshipments,qualityoflogisticsservices,abilitytotrackandtraceconsignments,andfrequencywithwhichshipmentsreachtheconsigneewithinthescheduledtime.Ethiopia’slogisticsperformanceratingsarelessthantheaveragerateofthecomparisongroupforthe4logisticsperformanceindicatorsofthe6logisticsperformanceindicatorsthispaperconsidered.

20Arvis,J.F.,Saslavsky,D.,Ojala,L.,Shepherd,B.,Busch,C.,&Raj,A.(2014).ConnectingtoCompete2014:TradeLogisticsintheGlobalEconomy–TheLogisticsPerformanceIndexandItsIndicators.21Freund,C.L.,&Rocha,N.(2010).WhatconstrainsAfrica’sexports?WorldBankPolicyResearchWorkingPaperSeries,5184.WorldBank,Washington,DC.

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Source:WDI2016

Whenwelookatthespecifics,Ethiopia’sperformanceintermsofthequalityoftradeandtransport-relatedinfrastructureandeaseofarrangingcompetitivelypricedshipmentsverylow.

TheotherkeyindicatorsthatthispaperusedtomeasuretherelativelogisticsperformanceofEthiopiaarethemedianleadtimetoexport(whichisthemediantime-thevaluefor50percentofshipments-fromshipmentpointtoportofloading)andthemedianleadtimetoimport(whichisthemediantime-thevaluefor50percentofshipments-fromportofdischargetoarrivalattheconsignee).Inbothparameters,Ethiopia’sperformanceistheworstofallcountriesinthecomparisongroup.In2014,themedianleadtimetoexportfromEthiopiawas14dayswhiletheaveragemedianleadtimetoexportconsideringallothercountriesinthecomparisongroupwasonly2.7days.Similarly,themedianleadtimetoimporttoEthiopiawas13dayswhiletheaveragemedianleadtimetoimportconsideringallothercountriesinthecomparisongroupwasonly3.5days.

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Source:WDI2016

InformationCommunicationTechnology(ICT)

Theriseinglobalvaluechainshasincreasednotonlytheopportunitycostofmaintaininginefficientlogisticproceduresandothernon-tariffbarriers,butithasincreasedtheopportunitycostofrestrictionsontheflowofinformation–whichhasgottodowithInformationCommunicationTechnology.

Likeelectricityandtransport,Ethiopia’sICTinfrastructureaswellastheICTmanagementareinferiorasitisreflectedinthecoverageandqualityofdifferentICTservices.Mobilecellularsubscriptionper100peopleis32whichistheleastofallthecountriesconsideredforcomparisonpurpose.Similarly,thenumberofsecureinternetserversperamillionpopulationislessthan1whichisalsotheleastinthegroup.

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Source:WDI2016

b. InstitutionsRuleofLaw,PropertyRightsandBusinessRegulations

Thepresenceofvitalinstitutions(propertyrights,ruleoflaw,lowlevelofcorruption,macroeconomicstability,goodeconomicmanagement,andbusinessfriendlyregulations)isamongthethreemostimportantfactorsthatFDIfirmsconsiderbeforetheyinvestinthehostcountry.Specially,forefficiency-ormarket-seekingFDIfirms,thepresenceofsuchinstitutions,likebasicinfrastructure,isaknockoutfactor.

Generally,theregulationenvironmentinEthiopiaisamongthebadifnottheworst.Ethiopiascored146foreaseofdoingbusinessindexwhere1isascorethatisgiventomostbusiness-friendlyregulations.Ofcourse,someofthecountries–includingBangladesh,Nigeria,andMyanmar–wepickedforthepurposeofcomparisonareworsethanEthiopiawhileseveralofthemarenotthatmuchbetterthanEthiopia.However,givenEthiopianeagernesstoattractFDIandthelegionsofchronicweaknesswelistedabove,puttingbusiness-friendlyregulationsshouldhavebeensomethingEthiopiacouldtakeadvantagefrom.

Similarly,RuleofLawinEthiopiaisweak.Ethiopia’sscoreinTheGlobalEconomyRuleofLawindex(-2.5weak;2.5strong)is-0.42whichislessthanthescoresgiventomostcountries(Rwanda,Ghana,Uganda,Tanzania,Indonesia,PhilippinesandVietnam)includedinthecomparisongroup.Ethiopiascored3.5outof6inCPIA’sbusinessregulatoryenvironmentratingwhichassessestheextenttowhichthelegal,regulatory,andpolicyenvironmentshelporhinderprivatebusinessesininvesting,creatingjobs,andbecomingmoreproductive.Similarly,

ProspectofFDI-LedIndustrializationinEthiopia 20

Ethiopiascored3outof6inCPIA’spropertyrightsandrule-basedgovernanceratingwhichassesstheextenttowhichprivateeconomicactivityisfacilitatedbyaneffectivelegalsystemandrule-basedgovernancestructureinwhichpropertyandcontractrightsarereliablyrespectedandenforced.Moreover,Ethiopiascored3outof12initsstrengthoflegalrightindexthatmeasuresthedegreetowhichcollateralandbankruptcylawsprotecttherightsofborrowersandlendersandthusfacilitatelending.AllofthesespecificmeasurementsofthehealthofinstitutionalenvironmentcategorizeEthiopiawithpoorperformers.

Suchindexesarecreatedbyconsolidatingseveralfactsontheground.Forinstance,thenumberofproceduresneededtoregisterastart-upbusinessandtoregisterapropertyinEthiopiaare11and7,respectively.Andthesefiguresarehigherthanthenumberofproceduresrequiredtodothesameinmostcountriesinthecomparisongroupifnotinall.Inadditiontodelayingtheprocessofstartingbusinesses,theseprocedureshaveseriousimplicationoncostofstart-upabusiness.Thecostofbusinessstart-upproceduresbeingmeasuredaspercentageofgrossnationalincomepercapitais76percentinEthiopiawhichissignificantlyhigherthanwhatisobservedinallcountriesconsideredexceptone.

MacroeconomicStabilityandEconomicManagement

AspertheWorldBankCountryPolicyandInstitutionalAssessmentrating,Ethiopiascoredbetween3and4outof6inthewholerangeofissuespertainingtoMacroeconomicStabilityandEconomicManagement.Ethiopia’sCPIAratingsarelessthantheaveragerateofthecomparisongroupforthe5CPIAindicatorsofthe9CPIAindicatorsthispaperconsidered.TheareasEthiopiaperformedpoorlyvis-à-visothercountriesincludemacroeconomicmanagement(referstothemonetary,exchangerate,andaggregatedemandpolicyframework),fiscalpolicy(referstothesustainabilityofthepublicdebt),trade,economicmanagementclusteraverage,andstructuralpoliciesclusteraverage.ThesehaveeitheradirectoranindirectrelevanceintermsofattractingFDIfirms.Particularly,CPIA’straderating–forwhichEthiopiascored3outof6byscoring1unitlessthanthecomparisongroup’saveragerating(4outof6)–isaverygoodindicatorofthehealthofthetradeenvironmentandtellsthathowthepolicyframeworkfosterstradeingoods-whichiscrucialforFDIfirms.

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21

Source:WDI2016

Theothercrucialindicatorforthehealthofaneconomyisinflation.Highandunpredictableinflationisregardedasharmfulfortheeconomybymakingitdifficultforcompaniestobudgetorplanlongterm.Uncertaintyaboutthefuturepurchasingpowerofthemoneydiscouragesfirmsnottoinvest.HereagainEthiopia’srecordisverybad.Lookingbackforthepastdecade,wefoundinflationinEthiopiastaggeringlyhighrangingfrom7.4percentandgoingupto44percentwhiletwo-digitinflationrateswererecordedin7yearsoutofthe11yearsunderconsideration.

ProspectofFDI-LedIndustrializationinEthiopia 22

Source:WDI2016Corruption

Theotherfactorthatcanserverasindicatoroftheheathofinstitutioninacountryisthelevelofcorruption.Inthisregard,comparedtoothercountriesinthecomparisongroup,Ethiopia’sperformanceisnotbad.Ethiopia’sscoreinTheGlobalEconomyControlofCorruptionindex(-2.5weak;2.5strong)is-0.43whichisstillnotgoodbutbetterthanthescoresgiventomostcountries(Nigeria,Uganda,Kenya,Tanzania,Cambodia,Bangladesh,LaoPDR,Indonesia,VietnamandPhilippines)includedinthecomparisongroup.

Thepercentageoffirmsthatexperiencedatleastonebriberequestinthepastwas27percent.Firmswhichexpectedtogivegiftsinmeetingswithtaxofficialsare17percentwhilefirmswhichmadeinformalpaymentstopublicofficialswere8percent.ThesefiguresaresignificantlylessthanwhatwereobservedincountrieslikeCambodia,BangladeshandMyanmar.However,incountrieslikeRwanda,EgyptandGhanafirmshadsignificantlylessexperienceofcorruptionthaninEthiopia.

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23

Source:WDI2016

c. PoliticalStability

PoliticalstabilityisamongthethreemostimportantfactorsthatFDIfirmsconsiderbeforetheyinvestinthehostcountry.Specially,forefficiency-ormarket-seekingFDIfirms,politicalstability,likethepresenceofbasicinfrastructureandvitalinstitutions,isaknockoutfactor.AstudybyLemiandAsefa(2003)22looksathowuncertaintyaffectsFDIandfindthatUSmanufacturingcompanieslookingtoinvestinAfricaconsidernotonlygovernments’policycommitmentsbutpoliticalstabilityasparticularlyimportant.

Probably,politicalstabilityisthemajorchallengeofallthechallengesEthiopiafacesintermsofattractingefficiency-ormarket-seekingFDIfirms.FortheofTheGlobalEconomycompositePoliticalStabilityindexwhichreflectsthelikelihoodofadisorderlytransferofgovernmentpower,armedconflict,violentdemonstrations,socialunrest,internationaltension,terrorism,aswellasethnic,religiousorregionalconflict,thelatestdatawehaveisfor2014.Sincewedon’thavelatestdatathattakesintoaccountthelatestwavesofnation-widestrongpoliticalproteststhatcontinuedforthepasttwoyearsandforcedthegovernmenttodeclareasixmonthlongstateofemergencyinNovember2016,thescoregiventoEthiopiainTheGlobalEconomyPoliticalStabilityindexdoesn’treflecttheactualcurrentpoliticalsituation.23Asaresultoftheseprotests,severalofthefewFDIfirmsthatthecountrymanagedtoattractinthelastdecadehavebeenattackedandsufferedalot.24

22Lemi,A.andAsefa,S.(2003).Foreigndirectinvestmentanduncertainty:empiricalevidencefromAfrica.AfricaFinanceJournal5,36–67.23https://www.hrw.org/world-report/2016/country-chapters/ethiopiahttps://www.hrw.org/africa/ethiopia24https://www.bloomberg.com/news/articles/2016-10-10/ethiopia-losing-appeal-for-foreign-investors-as-attacks-spread

ProspectofFDI-LedIndustrializationinEthiopia 24

Evenwiththedataof2014,however,Ethiopia’sscoreofTheGlobalEconomyPoliticalStabilityIndexis-1.24whichisfarlessthanthescoregiventomostcountries(Rwanda,Ghana,Tanzania,Uganda,Vietnam,Cambodia,LaoPRD,Indonesia,Philippines,Bangladesh,andMyanmar)includedinthecomparisongroup.25

Wealsohaveothernarrowlydefinedmeasurementsofpoliticalrisk-short-termpoliticalandlong-termpoliticalrisk–whicharerelatedtoexporttransactionsandforwhichwehavethelateststatistics.Forashort-termpoliticalriskthatisrelatedtoshort-termexporttransactionsandcoversrisksofforeignexchangeshortages,wars,revolution,naturaldisastersandarbitrarygovernmentactions,Ethiopiascored5outof7(where1reflectslowand7reflectshighrisk)beingranked165outof200countriesconsidered.Foralong-termpoliticalriskthatisrelatedtoexporttransactionswithacreditperiodofmorethantwoyearsandcoversrisksofforeignexchangeshortages,wars,revolution,naturaldisastersandarbitrarygovernmentactions,Ethiopiascored7outof7(where1reflectslowand7reflectshighrisk)beingranked185outof200countriesconsidered.26

OtherImportantFactors

DomesticMarket

Intheprecedingsection,wesaidthatoneofthereasonthatlightmanufacturingindustriesarecurrentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaistolookfornewmarkets.Inthisregard,otherfactorsbeingthesame,Ethiopiawithmorethan90millionpopulationlooksattractivedestinationforsuchindustries.

http://globalriskinsights.com/2016/10/radar-foreign-investors-attack-ethiopia/25http://theglobaleconomy.com/26ibid

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25

Source:WDI2016

However,itshouldbenotedthattherearealsootherbigFDI-seekingcountrieslikeIndonesia,Bangladesh,PhilippinesandVietnaminAsiaandNigeriaandEgyptinAfricathatEthiopianeedstocompetewith.

Moreover,beingamemberofregionalcommunitiesplayanimportantroleindeterminingtheactualmarketsizeofcountries.RegionaltradeagreementsthatdrivedowntradecostswhileexpandingmarketscanhaveapowerfuleffectinattractingFDI.ExperienceinChinaandelsewhereinAsiashowsthatspecialeconomiczones(SEZs)canbehighlyeffectiveinattractingFDI,byensuringthattheinfrastructure,institutionsandincentivesallworktosupportmanufacturingandfacilitatetrade.27

Whenwelookatcountriesweselectedforthiscomparativeanalysis,NigeriaandGhanaaremembersoftheEconomicCommunityofWestAfricanStates(ECOWAS)whichis15-memberstatesstrongregionalgroupwithatotalpopulationof335million.ECOWAShasaCustomsUnionprogramthatworkstoexpandthemarketsofmemberstates’industriesbyimprovingthecirculationofgoodsandservicesamongmemberstates.Thisimplies-givenotherfactorsarethesame-market-seekingFDIfirmswouldprefertoinvestincountriesthatarememberofstrongerregionalcommunitiesthaninvestingincountriesthatarememberofweakerregionalcommunities.Forinstance,relativelysmallercountrieslikeTanzania,KenyaandUgandacouldbemorepreferableintermsofaccesstomarketthanEthiopiaduetotheiradvantagesthataredrawnfromtheCustomUnionandCommonMarketagreementsoftheEastAfricanCommunity

27Sutton,J.Jinhage,A.,Leape,J.,Newfarmer,R.&Page,J.(2016).HarnessingFDIforjobcreationandindustrialisationinAfrica.GrowthBrief|FIRMS|May2016.

CountryName TotalPopulation,2015 GDPpercapita(currentUS$),2015Indonesia 257,563,815 3,346Nigeria 182,201,962 2,640Bangladesh 160,995,642 1,212Philippines 100,699,395 2,899Ethiopia 99,390,750 619Vietnam 91,703,800 2,111Egypt,ArabRep. 91,508,084 3,615Myanmar 53,897,154 1,204Tanzania 53,470,420 865Kenya 46,050,302 1,377Uganda 39,032,383 676Ghana 27,409,893 1,381Cambodia 15,577,899 1,159Rwanda 11,609,666 697LaoPDR 6,802,023 1,812

ProspectofFDI-LedIndustrializationinEthiopia 26

(EAC)thatcomprisesfiveneighboringcountriesincludingTanzania,Kenya,UgandaRwandaandBurundiwithamarketsizeofmorethan150millionpeople.

Moreover,lookingatthesizeofthepopulationalonedoesnottellustheactualsizeofthedomesticmarket.Inordertomeasuretheactualmarketsize,weneedtolookatthestandardoflivingofthepopulationwhichcancrudelybemeasuredbyGDPpercapitaofacountry.Inthisregard,givenotherthingsthesameandevenleavingasidethevalidityofEthiopianstaggeringgrowthstatistics,Ethiopia–withGDPpercapitaofUSD600–isstillamongthepoorestcountriesintheworldandwouldbeamongtheleastpreferredformarket-seekingFDIfirmsduetotheloweststandardoflivingofitspopulation.Ethiopia’sGDPpercapitaisfarlessthantheGDPpercapitaofmostAsianandAfricaneconomiesthatEthiopianeedtocompetewithinordertoattractFDI.Toputthingsinperspective,Ethiopia’sGDPpercapitaisroughlyone-sixthofthatofEgyptandIndonesia,one-fifthofthatofPhilippinesandNigeria,one-thirdofthatofVietnamandLaoPDR,andhalfofthatofGhana,Kenya,Bangladesh,MyanmarandCambodia.

MonetizationoftheEconomy

Generallyspeaking,financialpenetrationinEthiopiaislow.AspertheWorldBankCountryPolicyandInstitutionalAssessmentrating,Ethiopiascored3outof6infinancialsectorratingandthisfigureislessthanwhatisscoredbyseveralofthecountriesinthecomparisongroup.

Lookingatsomespecificindicatorsoffinancialpenetrationwouldmakeclearwhatthisratingmeans.Forinstance,lessthan22percentoftheeligiblepopulationhasanaccountatafinancialinstitutioninEthiopiawhichissignificantlylessthantheaveragefigure(30percent)obtainedbyconsideringallthecountriesinthecomparisongroup.Similarly,therearelessthan3commercialbankbranchesper100thousandadultswhiletheaveragefigureobtainedbyconsideringallthecountriesinthecomparisongroupis5commercialbankbranchesper100thousandadults.

InEthiopia,only12.9percentofthefirmsusedbankstofinanceinvestmentwhile16.4percentoffirmsusedbankstofinanceworkingcapital.ThecomparablefiguresfromcountrieslikeKenya,Rwanda,GhanaandLaoPDRandBangladesharesignificantlyhigherthanthatofEthiopia.

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Source:WDI2016

HumanCapital

Intheprecedingsection,wesaidthatoneofthereasonthatlightmanufacturingindustriesarecurrentlyleavingcountrieslikeChina,Turkey,ThailandandMalaysiaistolookforcheap,skilledlabor.Thisimpliescountriesthatstrivetoattractefficiency-ormarketseekingFDIfirmsneedtohaveenoughworkerswhohaveskillsthatmatchtothedesireoftheFDIfirms.

Asacorollarytoitsbigpopulation,Ethiopiahasahugelaborforcethatwasestimatedtoreacharound47millionbythemid-year2014.Ofcourse,tohaveahugelaborforceisanadvantagetoattractefficiency-seekingFDIfirms.However,thequalityofthelaborforcealsomatters.AspertheWorldBankCountryPolicyandInstitutionalAssessmentrating,Ethiopiascored4.5outof6inbuildinghumanresourcesratingwhichassessesthenationalpoliciesandpublicandprivatesectorservicedeliverythataffecttheaccesstoandqualityofhealthandeducationservices,includingpreventionandtreatmentofHIV/AIDS,tuberculosis,andmalaria.Inthisregard,Ethiopia’sperformanceisbetterthantheperformanceofothercountriesinthecomparisongroup.

WithrespecttoattractingFDIfirmshoweverweneedtogobeyondthisgeneralindicatorofqualityoflaborforce.Moreimportantly,weneedtolookattheeducationalattainmentofthelaborforceasmostefficiency-seekingFDIfirmsrequiressecondaryandtertiaryeducationlevelofattainment.InEthiopia,themajorityofthelaborforceisliterate.However,59percentofthetotallaborforceattainedorcompletedonlyprimaryeducationasthehighestlevelofeducationwhileonly21percentofthetotallaborforceattainedorcompletedsecondaryortertiaryeducationasthehighestlevelofeducation.Incontrast,incountrieslikeEgyptandthePhilippinesthemajorityofthelaborforceattainedorcompletedsecondaryortertiaryeducationasthehighestlevelofeducation.

ProspectofFDI-LedIndustrializationinEthiopia 28

WageandLaborMarket

WageorcompensationofemployeesinEthiopiaisverylow.Asof2015,annualminimumwagepaidinEthiopiawasaroundUSD252whichislessthanwhatwaspaidinmostcountriesintheworldincludingintheFDI-seekingeconomiesselectedforcomparisonpurposes.Givenotherfactorsarethesame,thisfactcouldmakeEthiopiamorepreferableFDIdestinationthanmostcountriesintheworld.

However,notonlylackofskilledandmatchinglaborforcebutalsorigidlabormarketsthatarecharacterizedbyrestrictivelaborlawsandregulationscandeterFDI.ToattainthedesiredefficiencyinproductionFDIfirmsneedmoreflexibleemploymentrules.Inthisregard,wedon’thaveanindicatortomeasureEthiopia’srelativeposition.

Source:WDI2016Incentive

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Itisarguedthathighimporttariffs,hugetaxonexportsandtraderestrictionsaredisincentivestoFDIandforeigntradebyreducingthecompetitivenessofmanufacturingsector(LooiKeeetal.,2009).28Inthisregard,wedon’thaveanindicatortomeasureEthiopia’srelativeposition.

Source:WDI2016

IV. ConclusionandPolicyImplicationThiscomparativeanalysissuggestsEthiopiaiscurrentlyfarlesscompetentthanothercountriesintermsofitsrelativepositiontoattractefficiency-ormarket-seekingFDIfirms-thatarecurrentlyleavingthedevelopedandemergingeconomiesinsearchofcheaplaborandmarket.

AlthoughtheGovernmentofEthiopiarecentlyclaimstopursueFDI-ledindustrializationpolicy,thecountry'sperformanceinallofthethreeknockoutfactors(i.e.basicinfrastructure,vitalInstitutionsandpoliticalstability)forattractingefficiency-ormarket-seekingFDIfirmsisinferior.Similarly,thecountry'srelativepositioninsomeoftheotherimportantfactors(includingmonetizationoftheeconomyandinvestmentincentives)islower.

Withthispoorperformance,Ethiopiafacesaformidablechallengetocompetewiththesecountriesandbepartoftheglobalstructuraltransformationchain.

ForsuccessfulattractionofFDI,politicalstability,improvementinvitalinstitutionsandfurtherexpansionofbasicphysicalinfrastructurearenecessaryconditions.Similarly,attractionofFDIrequiresformulationandimplementationofpoliciesandstrategiesthatcapitalizeoncountry’scomparativeadvantages-lowerwage,youngpopulation,andbigdomesticmarket.

28LooiKee,H.,Nicita,A.,&Olarreaga,M.(2009).Estimatingtraderestrictivenessindices,TheEconomicJournal,2009,vol.119,p172–199.

ProspectofFDI-LedIndustrializationinEthiopia 30

ENDS