Determinants of Domestic Private Investment in Ethiopia: - an Auto-Regressive Distributed Lag (ARDL) approach

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.