Abstract:
In the growth literature, investment has been regarded as one of the primary engines of
growth. Growth theories stress the importance of investment in determining the level of
income (neoclassical) and the pace of economic growth (endogenous growth model).
However, the Ethiopian private investment performance has been weak for long time. Yet, the
reasons behind the weak performance has not been well studied. Hence, this study have been
done with the objective of investigating the determinants of private domestic investment in
Ethiopia by taking annual data set of 32 years spanning from 1986-2018. Variables identified for
the study includes private investment, foreign direct investment, inflation rate, access to credit,
GDP per capita, lending interest rate, human capital, exchange rate, public investment, taxation
and political stability. The analysis have been made using ARDL model after the data sets were
transformed to log form except political stability. And, to account for inherent problems of time
series data, different tests such as pre-estimation test of stationary test, post estimation
diagnostic test and bound test of co-integration have been applied. The regression results show
that GDP per-capital, political stability and public investment have significant positive long run
effect on private investment, while lending interest rare, exchange rate, and access to bank credit
have negative long run effect. Public investment and political stability have positive significant
effect while lending interest rate, access to bank credits and exchange rate have negative
significant effect in the short run and in the long run. Finally expansion of infrastructure,
increasing income generation mechanism for citizens, appreciation of domestic currency and
creating fertile investment climate are some of the recommendation forwarded.
