International Journal of Accounting, Finance and Risk Management

2023; 8(3): 57-67

http://www.sciencepublishinggroup.com/j/ijafrm
doi: 10.11648/j.ijafrm.20230803.11
ISSN: 2578-9368 (Print); ISSN: 2578-9376 (Online)

Determinants of Private Investment Performance in

Ethiopia
Mikiyas Nigussie Jobir
Department of Accounting and Finance, Dire Dawa University, Drie-Dawa, Ethiopia

Email address:

To cite this article:

Mikiyas Nigussie Jobir. Determinants of Private Investment Performance in Ethiopia. International Journal of Accounting, Finance and Risk
Management. Vol. 8, No. 3, 2023, pp. 57-67. doi: 10.11648/j.ijafrm.20230803.11

Received: March 3, 2023; Accepted: July 7, 2023; Published: July 20, 2023

Abstract: This study was conducted with the main objective of investigating and analyzing factors that determine private
investment performance in Ethiopia. Study may give valuable information to the stakeholders in the Investment arena
including the government, investors and general public. The study may clearly show the prospects for the investment activity.
Moreover, the study explains determinants of private Investment performance in Ethiopia. 27- Years secondary data (i.e. from
1992 to 2018) was collected from various national and international institutions for example EIC NBE, MOFED, and WB.
Then, ARDL regressions model was applied after the data sets were transformed to natural log form and, to account for
inherent problems of time series data, different tests such as correlation, autocorrelation tests, Hetroscedasticity, multicolinarity
and stationarity test ware made for. The regression results show that Growth GDP, and access to Domestic credit have
significant positive effect on private investment, while Trade openness external debt, and real effective exchange have
significant negative effect on performance of private investment under the study period. Hence, to promote the performance of
private sector in the country, it is essential to take measures that can improve real income of people, and make trade
liberalization and institutions that are crucial to attract private investment. Besides, strengthen financial institutions to provide
sufficient financial resource to private investors.
Keywords: Determinants, Private Investment, Ethiopia, Performance

1. Introduction
1.1. Background of the Study [26] In today’s fast changing environment, financial
products have gained significant attention from individuals,
Investment is the commitment of resources made with and attracted individuals to make investment by way of
the hope of realizing benefits which are expected to occur different instruments in order to gain extra income and
over a reasonably long period of time. It is an economic earnings. In addition, investments have been used as an
activity where an individual, group or government buys instrument by individuals as part of their personal financial
assets with the hope of receiving adequate risk premium planning [4].
(returns) overtime and the key determinant to economic Ethiopia is one of the fastest growing economies in the
growth. Investment is the source of manufactured goods world. It has registered impressive GDP growth for several
that will be used to produce other goods. It is the major years and the World Bank and IMF forecast continuous
foundation of enhancement in the level of literacy, average growth of 7 to 7.5 per cent over the 2015-2018
improvement in technology and increase in the capital period. Ethiopia is one of the prime destinations for foreign
stock [11]. direct investment. The country is attracting investors with tax
Rapid economic growth has reliably increased the incentives, low-cost labour, strategic location for trade, and
income and purchasing power of individuals around the improved transport infrastructure. In recent years, the
world. Indeed, this growth has increased their desire and Government of Ethiopia has made considerable efforts to
need for a wide variety of financial products and services improve the country’s business and investment climate
58 Mikiyas Nigussie Jobir: Determinants of Private Investment Performance in Ethiopia

though the issuance of targeted legislative measures. The political insatiability.

revised Investment Code of 1996, as well as the Investment “Hailu and Debele [15] conducted his research on
Proclamation, provide incentives for development-related determinants of private investment in Ethiopia for the period
investments and have gradually removed most of the from 1981 to 2010)” the study was conducted using OLS
sectorial restrictions on investment [6]. regression model. Augmented Dickey Fuller/ADF/
Technique were applied to check for stationary in the data
1.2. Statement of the Problem series. Based on the study private investment performance is
The private investment sector plays a vital role in the positively influenced by public investment, real GDP Growth,
growth process of developing countries and it determines the favorable investment climate, real interest rate on bank
rate at which physical capital is accumulated. Private deposits and private investment performance in Ethiopia is
investment has been a major economic heart for developing found to be influenced negatively due high and protracted
countries. Private investment has a stronger, more positive inflation rate, pressure of external debt, high lending rate.
effect on growth than government investment, because This study is unique in that, unlike the majority of the past
private investment is more efficient and less closely studies reviewed in literature that used static OLS estimation
associated with corruption. In Ethiopia, private investment technique to evaluate the relationship between economic
sectors also have an important contribution to make to variables and private investment, this study used ECM
economic development and poverty reduction [5]. estimation technique together with ARDL modelling
Rise in private investment leads to creation of more capital, technique. The benefit of using these two approaches is the
job opportunities and higher tax revenue for government, put fact that besides getting the effects of Growth GDP, access of
pressure on public sector to expand road networks and other domestic credit, external debt, trade openness, exchange rate
infrastructure that leads to enhanced investment and growth, and interest rate on private investment, the study was able to
help reduce poverty, promotes competition and discipline in go a step further and evaluate the nature of effect on private
the market place & consumers benefit by getting best investment. And The research used the most recent available
products at competitive prices. It promotes innovation and data.
research [18]. 1.3. Objectives of the Study
Ethiopia require fast growing private sector to ensure
structural transformation of the economy and its 1.3.1. General Objective
sustainability which require identification of determinants of The main objective of this study is to examine the major
private investment to address their respective roles and take determinants of private investment performance in Ethiopia.
policy tools and measures. The other rationale behind
undertaking this study currently is to evaluate the investment 1.3.2. Specific Objectives
endeavour of the government in different social and physical To accomplish general objective of the study, the
infrastructure components of public investment. [1] following specific objectives were developed and stated
Previously a number of studies had been conducted in the below:
topic of determinants of private Investment performance in 1. To investigate the effect of gross GDP on Private
different country including Ethiopia. Such Investment performance.
as,”Weldemariyam [27] studied the determinants of private 2. To evaluate the effect of stable exchange rate on Private
investment in Ethiopia” over the period ranging from 1996- Investment performance.
2016 motivated by modified flexible accelerator model by 3. To examine the effect of domestic credit on Private
applying OLS econometric technique. According to his study Investment performance.
the coefficients of real GDP, external debt servicing, national 4. To evaluate the effect of trade openness on Private
reserve, public investment and access to bank credit rate Investment performance.
found to be statistically significant positive effect. On private 5. To evaluate the effect of external debt stock on Private
investment in the study period, while foreign direct Investment performance.
investment, interest rate and inflation rate had negative effect 6. To examine the effect of Interest rate on Private
in private investment in the study period. Investment performance.
“Osmond, C [18] studied the determinants of private 1.4. Research Hypotheses
investment in Nigeria” for the period from 1970- 2012 by
estimating the Investment rate function derived from life Based on the empirical studies reviewed the following
cycle hypothesis while taking into account the structural research hypotheses have been developed.
distinctiveness of developing country. The study employed H1 gross GDP has statistically significant positive effect on
error correction model to avoid for the problem of spurious private Investment performance..
relations. The results of the study confirmed that investment H2 Unstable exchange rate has statistically significant
rate is positively influenced by the growth rate of disposable negative effect on private Investment performance.
income and the real interest rate on bank deposits. Investment H3 availability of domestic credit has statistically
rate in Nigeria is found to be influenced negatively due low significant positive effect on private Investment performance.
public infrastructure, high lending rate, low saving rate and H4 Trade openness has statistically significant positive
 International Journal of Accounting, Finance and Risk Management 2023; 8(3): 57-67 59

effect on private Investment performance. use your income, investment can be defined as postponed
H5 External debt stock has statistically significant negative consumption. Individuals may postpone their current
effect on private Investment performance. consumption to accumulate for the sake of accumulating.
H6 Interest rate has statistically significant negative effect For any or all of these reasons individuals save part of
on private Investment performance. their income rather than spend all of their income. This
shows that investment has a strong relationship with saves
1.5. Significance of the Study income. But the extent of investment also depends on the
The student assumes that the study may give valuable level of consumption. As Theresa observes “there are no
information to the stakeholders in the Investment arena other road of economic development than a compulsory
including the government, investors and general public. The rise in the share of the nation’s income which is withheld
study may clearly show the prospects for the investment from consumption. In an economy where living standards
activity. Moreover, the study explains determinants of of the masses are too low, to curb consumption, it is
private Investment performance in Ethiopia. Upcoming difficult to mobilize and allocate resource in to investment
students may also refer the study and the study serves as activity [24].
spring board to address other non-researched area of In Ethiopia foreign direct investment has been steadily
investment. Finally the study may come up with a good growth the federal and regional government encourage
recommendation that could enhance both domestic and investment: they provide land incentive such as; tax holding,
foreign investment. an improved bureaucracy at the federal and regional
investment office. The Ethiopian government special focus
1.6. Scope of the Study on investment and private investors both Ethiopian and
non-Ethiopian national undertaken Investment activities in
The study set out to identify and examine the major the agriculture, construction and manufacturing sectors,
determinants of private investment performance in Ethiopia. flower farm, cement factory, steel melting and rolling mills
In order to make this research work extensive and are becomes more and more common in Ethiopia.
manageable, it covers a period of 27 years (1992 – 2018). Investment is the current commitment of dollar (birr) for
Within this period, GDP growth, Availability of domestic period of time in order to drive further payments that will
credit, external debt stock, trade openness, real effective compensate the investors: the time and funds are committed,
exchange rate and interest ratewere examined against the the expected rate of inflation and the uncertainty of the
corresponding investment using available published data. future payment.
The study did not included micro and small enterprises
(MSE), public investment, endowment fund investments, 2.1.1. Types of Investment
non-governmental organizations (NGO). Finally, as the study Investment may be categorized differently. From the
would be conducted based on sample that was draw from standpoint of an individual, two types of investment may be
Ethiopia and generalization of the study is valid for Ethiopia distinguished: investment in the means of production, and
only. purely financial investment. Both types may provide a
monetary return to the investor. However, from the
2. Literature Review standpoint of the entire economy, purely financial
investments appear only as title transfers, and do not
2.1. Theoretical Literature Review constitute an addition to productive capacity. Investment may
also be grouped into foreign (international) and local
The term ‘investment’ may mean different things in (domestic) investment. The classification of investment into
different disciplines and contexts. Thus, it may mean foreign and domestic depends on the identity of the investor
“expenditure to acquire property or assets to produce revenue. because the identity of the investor would attract several
Investment is definedas commitment of funds made in the legal consequences. The identity of the investor poses
expectation of some positive rate of return. The return will different policy considerations, and this in turn attracts
commensurate with the risk the investor assumes if the several legal manifestations. Foreign investment is an
investment is properly undertaken. [18] investment by a foreign investor while a domestic investment
According to “Mohamed, S. [17] investment is the flow of is an investment by a domestic investor.
capital which is used for productive purposes”. There is a A Foreign Investor is one who is a foreigner not
great emphasis on investment for being the primary permanently residing in Ethiopia and who invests capital
instrument of economic growth and development for a obtained from foreign sources or reinvests profits accruing to
country. Investment means an increase in capital spending her/him from investment already made in Ethiopia.
and it helps in creating a robust economy. In economics, (i) Foreign Direct Investment (FDI) is investment that is
investment can be defined as the purchase of plant, made to acquire a lasting interest the investor’s
equipment or inventory. In lay terms investment is the purpose being to have an effective choice in the
acquisition of an asset such as a stock or a bond”. management of the enterprise. To be more specific, a
Once an individual receives income, there are two foreign direct investment is ownership of assets by
alternatives to spend or to save it. Regardless of how you
60 Mikiyas Nigussie Jobir: Determinants of Private Investment Performance in Ethiopia

foreign residents for the purpose of controlling the use ranges of investment incentives given, domestic investment
of these assets. Foreign direct investments are made has shown gradual increase. However, the gradual increase is
largely by multinational corporations. Multinational not consistent and investor‘s enormous development
corporations are large business organizations so the potential is far under fetched.
sum of money invested is large. Further, those During 1996 Ethiopia introduced new investment
multinational corporations will implement a global proclamation and reform in the country. The objectives of the
strategy in making foreign investment. Consequently, proclamation were to expand the domestic market, increase
controlling is essential for the implementation of the employment opportunities, strengthen private-sector
global strategy. investment, and encourage the use of domestic raw materials
(ii) Domestic Investor- Proclamation No 280/2002 Art 2 and the absorption of foreign production know-how. The
(5) defines domestic investor as: An Ethiopian or a proclamation enabled the private sector to invest in most
foreign national permanently residing in Ethiopia sectors, except in those areas reserved for the government
having made an investment, and includes the such as defence industries, the production and supply of
Government, Public enterprises as well as a foreign electricity, telecommunication and postal services, large-
national, Ethiopian by birth, and desiring to be scale air and marine transport services and the import of
considered as domestic investors from this definition, petroleum and weaponry for the government [4].
an investor to be regarded as a domestic investor s/he As a result, overall economic performance has shown a
or it must either be 1) An Ethiopian national; or 2) A relative improvement in spite of fluctuations (due to recurrent
foreigner who is a permanent resident of Ethiopia; or 3) drought, population pressure, border war, and land
A person of Ethiopian origin who is no longer an degradation) over the period, and the country experienced
Ethiopian national even where s/he does not live in broad-based growth across sectors [27]. The rising
Ethiopia so long as s/he chooses to be treated as a importance of private investment during the study period,
domestic investor; Or 4) Public enterprises which which was brought about by the liberalization policies
according to Proclamation No. 25/1992, business pursued by the support of the WB and IMF stabilization polic.
entities owned by the Ethiopian Government or
regional governments or other state entities in Ethiopia. 2.2. Empirical Literature Review from Ethiopia
In short, they are publicly owned business entities “Woldemariam [27] Studied the determinants of private
(Federal Democratic Republic of Ethiopia, 2002). investment in Ethiopia” over the period ranging from 1996-
2.1.2. Investment Opportunities & Policies in Ethiopia 2016 motivated by modified flexible accelerator model by
Investment Opportunities: Agro Processing 74 million applying OLS econometric technique. According to his study
hectare of arable land (only 15 million hectare cultivated), the coefficients of real GDP, external debt servicing, national
largest producer of Wheat and third largest producer of reserve, public investment and access to bank credit rate
Maize in Africa, Has the largest Livestock in Africa, 55 found to be statistically significant positive effect On private
million cattle, 28 million goats, 27 million sheep Top investment in the study period, while foreign direct
producer of Coffee in Africa and 5th in the world. investment, interest rate and inflation rate had negative effect
Opportunities in: Cotton, Flower, Vegetables, Fruits, Herbs, in private investment in the study period.
Livestock and Poultry breeding (Investment Opportunities “Tesfaye, E [23] The study assessed the determinants of
Directory, 2006). investment activities in Nekemte town” he used both primary
Textile and Textile Garments: Ethiopian textile firms and secondary data and descriptive analysis was employed.
export to Europe & US, Potential to develop a competitive The result shows that output/national income, public
cotton or textiles industry due to favourable climatic and soil investment and exchange rate are the critical variables
conditions, Strong export performance: the Ethiopian affecting the performance of private investment. The higher
garment and apparel industry has grown an average of 51% real GDP per capita is assumed increase effective demands
over the last 6 years: US imports 40% of Ethiopian textile for goods and services and thereby inspire private investors..
and garment exports UK imports 10% of Ethiopia’s textile “Osmond, C [18] studied the determinants of private
and garment exports - other European countries import 50% investment in Nigeria” for the period from 1970- 2012 by
Ethiopia is endowed with abundant and untapped estimating the investment rate function derived from life
resources such as large number of trainable labour force, vast cycle hypothesis while taking into account the structural
arable land, varieties of plant and animal stocks, and precious distinctiveness of developing country. The study employed
minerals together with favourable weather conditions error correction model to avoid for the problem of spurious
According to “CSA [8], indicating one of the potentially relations. The results of the study confirmed that investment
large domestic markets in Africa. Since 1991” major rate is positively influenced by the growth rate of disposable
economic and structural reforms have been made and income and the real interest rate on bank deposits. Investment
different investment incentives have been given to create rate in Nigeria is found to be influenced negatively due low
investment friendly environment in the country. In spite of public infrastructure, high lending rate, low saving rate and
the macro-economic, political and structural reforms and political insatiability.
 International Journal of Accounting, Finance and Risk Management 2023; 8(3): 57-67 61

2.3. Conceptual Frame Works 3.2. Research Approach

There are three types of research approach these are

quantitative, qualitative and mixed research approach. This
research would be used quantitative research approach
because of the nature of data. That means data was collected
from secondary data sources in order to tests the main
economic variables that determine private investment
performance in Ethiopia. The quantitative approach was
employed in order to conduct quantifiable and empirical data
with respect to the study area [14].

3.3. Types and Source of Data

The study conducted basically using secondary data. An

attempt made to gather a 27-years data on some important
variables. The study covered the period 1992 up to 2018;
allowing for full annual data on all the variables. The data
gathered from various sources such as NBE, EIC, CSA,
MoFED and WB. Data thus are purely secondary all used
secondary data from national and international statistical
organizations, such as WB.

3.4. The Model Specification

When using the ARDL approach, the order of integration

Figure 1. Conceptual frame works. of the series does not matter. It can accommodate both I (1)
and I (0) series or series that are mutually integrated. The
Source: own construction (by taking the theoretical and empirical review,
2020
lag order of the ARDL is determined using a recursive
method called ''from general to specific''. To test long-run
relationship between private investment and its
3. Research Methodology determinants in Ethiopia using bounds testing, a joint
3.1. Research Design significance test for H0: β1 = β2 = β3 = β4 = β5 = β6 = β7
= 0 against the alternative hypothesis of H1:
A research design is a plan to guide the researcher in β1≠β2≠β3≠β4≠ β5≠ β6≠β7≠0 is performed. The test is
collecting, analyzing and interpreting observed fact. [7] based on Wald-test (F-statistics); the asymptotic critical
there are different research designs, namely exploratory, values for the test were supplied [22]. To confirm that
descriptive and explanatory designs. Explanatory studies cointegration exists, the F-statistics from joint test of
are used when exploring relationships between different significance should be greater than asymptotic critical
factors and variables and how they affect each other [21]. values from Pesaran for upper bounds and lower bounds,
This study employed both descriptive and explanatory types otherwise there is no cointegration. The bounds test
of research design. The descriptive analyses was employed approach enables examination of both short-run and long
to explain the overall Secondary data was collected from run dynamics following ARDL model estimated in equation
different secondary source such as NBE, CSA, EIC, 1.
MOFED, and WB and explanatory research design used to Following the co-integration test using the bounds testing
explain the relationship between dependent and approach the last step is to estimate the long-run and short-
Independent variable. run error correction models. The models are specified as
follows:
∆ PIt= α0+∑ β1 PI t-1+∑ β2GDPG t-1∑ β3INABCt-1+∑ β4INEXDt-1+∑ β5INTO t-1+∑ β6INREER t-1+∑ β7IRt-1+θW+µ (1)
∆ PIt= α0+∑ β1 PI t-1+∑ β2GDPG t-1 +∑ β3INABCt-1+∑ β4INEXDt-1+∑ β5INTO t-1+∑ β6INREER t-1+∑ β7IRt-1+ ΩECTt−i+θW+ µ (2)

In equation 1 and 2 all the variables are as previously The ECT coefficient should be statistically significant with a
defined, µ is the error term and Ω is the coefficient of the negative sign.
error correction term (ECTt−i). The ECT captures the speed The study has used Eviews 10, statistical software package
of adjustment to restore equilibrium in the dynamic model. for the entire analysis of the study.
62 Mikiyas Nigussie Jobir: Determinants of Private Investment Performance in Ethiopia

4. Result and Discussion

4.1. Descriptive Analysis

Table 1. Descriptive Analysis (PI and GDPG are presented in millions of Birr, ABC% GDP, EXD and TO be% of GNP).

PI GDPG ABC EXD TO REER IR

Mean 6560.538 8.184519 2.772447 61.79479 311.8583 119.7707 12.11519
Maximum 25876.30 13.57260 7.730642 147.1813 604.8284 183.8800 15.50000
Minimum 323.8410 -3.458139 0.608630 10.50851 19.91732 88.85000 6.800000
Std. Dev. 5470.582 4.475559 1.788160 42.94018 183.8718 25.61579 1.792389
Observations 27 27 27 27 27 27 27

Source: Own computation, 2020

As depicted in the table 1 above, the annual average of of GDP respectively. While External debt had a mean of
Private investment performance during the period of 1992 to 61.79% of GNP and a standard deviation 42.94 with a
2018 was Birr 6560.54 million. During the study period, minimum 10.51% of GNP that was observed in 2008 and
highest Private Investment was Birr 25876.30 million that maximum value of 147.18% of GNP that was observed in
was observed in 2018 the lowest private investment 1994.
performance was indicated by value of Birr 323.84 million in Trade openness had a mean of 311.86% of GNP and a
1992. During the period of 1992 to 2018 and standard standard deviation of 183.87 with a minimum and maximum
deviation of private investment performance during the study value of 19.92% of GNP and 604.83% of GNP respectively.
period was birr 5470.58 million. While Gross domestic Real effective exchange rate had a mean of 119.77 and a
product had a mean of Birr 8.18 million and a standard standard deviation of 25.62 with a minimum and maximum
deviation of 4.48 with a minimum value of Birr -3.46 million value of 88.85 and 183.88 respectively. Interest rate had a
that was observed in 1997 and a maximum value of Birr mean of 12.12 and a standard deviation of 1.79 with a
13.57 million that was observed in 2003 for the period under minimum value of 6.80 that was observed in 1992 and a
study. Credit to the private sector on the other hand had a maximum value of 15.50 that was observed in 1996 for the
mean of 2.77% of GDP and a standard deviation of 1.79 with period under study.
a minimum and maximum value of 0.61% of GDP and 7.73%
4.2. Trend of Private Investment in Ethiopia

Source: Own computation, 2020

Figure 2. Trend of Private Investment in Ethiopia from 1992-2018.

As the figure depicted that private investment as percentage figure 2 private Investment performance has declined in the
of GDP pass through different cyclical movements, related year 2010 this might be due to unstable political atmosphere
with macroeconomic environment. After the year 2016 that of disfavor economic activities. And again starts to rises
onwards it shows an increasing rate, this increment results from 2016 to 2018. As a result, overall economic performance
from the government of Ethiopia creates favorable has shown a relative improvement in spite of fluctuations (due
environment to the private sector development and continued to recurrent drought, population pressure, border war, and land
to perform sound economic growth. And as shown from the degradation) over the period, and the country experienced
 International Journal of Accounting, Finance and Risk Management 2023; 8(3): 57-67 63

broad -based growth across sectors. therefore, invalid conclusion will be prevailed Brook (2008).
The simplest multi-colinearity test is conducted by testing the
4.3. Correlation correlation coefficient between the independent variables. As
Correlation is The second Test of assumption of a rule (rule of thumb), if the correlation coefficient is above
Multicolinearity An implicit assumption that if there is no 0.75, we should suspect of multi-colinearity problems among
relationship between the explanatory variables, they would independent variables Gujarati, (2004). In this study the
be said to be orthogonal to one another otherwise we are in Correlation values for all the repressors, as reported in Table
the state of multi-colinearity problem where the regression 2 are lower than 0.75 these results suggest that
model will end up with an incorrect or erroneous result and multicollinearity is not a problem in the estimated model.

Table 2. Correlations.

Gdpg lnABC lnEXD lnTO lnREER IRL

Gdpg 1.0000
lnABC 0.2647 1.0000
lnEXD -0.4631 -0.5103 1.0000
lnTO 0.2349 0.6837 -0.6588 1.0000
lnREER 0.2189 0.4092 -0.1057 -0.1122 1.0000
IRL -0.4775 0.2838 0.3067 0.0380 0.0640 1.0000

(Source: Own computation, 2020)

effect of Growth GDP, access of domestic credit, External

4.4. Stability Test debt stock, Trade openness, real effective exchange rate and
The Model stability is confirmed when Ramsey RESET interest rate on Private Investment performance in Ethiopia.
Test F-statistic and Log likelihood ratios are greater than 5%. The study intends to examine both short-run and long-run
The researcher would test the model stability with the help of association between these variables. After ensuring that the
Ramsey RESET Test as stable. The test for stability checks study variables are stationary at first difference, the ARDL
the Probability-value of F- statistic and T- statistic both (Autoregressive Distributive Lag Model) method was
greater than 5%. employed to investigate the existence of co-integration both
in long and short run.
Table 3. Ramsey RESET Test stability test.
4.5.1. Long Run Estimation
Value Df Probability The other objective this study is to examine the long run
t-statistic 0.030003 16 0.9764
relationship between private investment performance and
F-statistic 0.000900 (1, 16) 0.9764
growth GDP, access of domestic credit, External debt stock,
(Source: Eview 10 Own computation, 2020) Trade openness, real effective exchange rate and interest rate
in Ethiopia during the period of 1992 to 2018. The result of
4.5. Long Run and Short Run Dynamics Behaviors long run estimation is presented in table below.
This study was conducted with an objective of identifying

Table 4. Long Run Dynamics.

ARDL Long Run Form of regression

Variable Coefficient Std. Error t-Statistic Prob.
GDPG 0.045628 0.018629 2.449298 0.0254
LNABC 0.682319 0.197806 3.449437 0.0031
LNEXD -0.324893 0.125448 -2.589862 0.0191
LNREER -2.690165 0.650893 -4.133038 0.0007
LNTO -0.729542 0.189257 -3.854776 0.0013
IR 0.124132 0.084397 1.470811 0.1596
C 10.94493 2.893646 3.782402 0.0015
EC = LNPI - (0.0456*GDPG + 0.6823*LNABC -0.3249*LNEXD -2.6902
*LNREER -0.7295*LNTO + 0.1241*IRL + 10.9449)

Source: Own Eview 10 computation, 2020

that 1 percent increase in growth GDP result on 4.56 percent

(i). Impact of Growth GDP on Private Investment increase in private Investment during the period of 1992 to
Performance 2018. This association is statistically significant at
As presented in table 4 above, long run association significance level of 5% that indicates very strong association
between Private Investment and growth GDP that the between Private Investment and growth GDP in long run.
coefficient is positive, the coefficient of 0.045628 suggests Therefore, this study can accept the null hypothesis that
64 Mikiyas Nigussie Jobir: Determinants of Private Investment Performance in Ethiopia

growth GDP and private investment have statistically competitiveness; and affects the rate of domestic private
significant and positive relationship during the period of investments negatively.
1992 to 2018 in long run and reject the alternative hypothesis.
The result can be supported by fixed accelerator model and (iv). Impact of Trade Openness on Private Investment
neoclassical model. This assumes that investment as a linear Performance
proportion of changes in output. GDP growth can serve as Terms of trade: fluctuation of terms of trade exhibits a
source of increase in aggregate and effective demand thus negative impact with a 5% level of statistical significance in
motivate firms to invest more due to higher sales volume and influencing private investment rates in Ethiopia in the long
profitability. This result also supported by the finding [29, 20, run. Therefore, this study can reject the null hypothesis that
10, 25, 6, 17]. About the positive and significant impact of Trade openness and private investment have statistically
gross domestic product in the growth private investment. significant and positive relationship during the period of
Whereas this study contradicts the finding [24], their finding 1992 to 2018 in long run and accept the alternative
were private investment is negatively affected bay GDP hypothesis. It might as trade of one country that have less
growth. developed economy becomes more open the infent domestic
investment can be negatively affected. Besides this It might
(ii). Impact of Domestic Credit Availability on Private have linked with export capacity of the country depends on
Investment Performance the primary commodities. Less of export earnings in relative
From table 4 above, long run association between Private to cost imports of goods and services have negative impact
Investment and Domestic credit is statistically significant and on the level of private investments through deteriorating the
positive. The coefficient of 0.682319 suggests that 1% current account deficit. This result is consistent with
increase in Domestic credit result on 0.682319% increases in Esubalew [10], Pesaran, M. H., Shin, Y., & Smith, R. J. [20]
private Investment during the period this association is but contradict with Bello and Lawanson [6]., Frinmpong and
statistically significant at significance level of 5% that Marbuah [12].
indicates very strong association between Private Investment
and Domestic credit in long run. Therefore, this study can (v). Impact of External Debt on Private Investment
accept the null hypothesis that Access of Domestic credit and Performance
private investment have statistically significant and positive As presents in table 4 above, long run association between
relationship during the period of 1992 to 2018 in long run Private Investment and External debt that the coefficient is
and reject the alternative hypothesis. The result can be negative, the coefficient of -0.324893 suggests that 1 percent
supported by the flexible accelerator model and Keynesian increase in External debt stock result on 0.324893 percent
model which assumes Access to domestic credit is one of the decreases in private Investment during the period of 1992 to
explanatory variables which are expected to have a positive 2018. This association is statistically significant at
influence in the growth of private investment. Since bank significance level of 5% that indicates very strong association
credit is relevant to avail access to working capital for between Private Investment and External debt stock in long
investors where there is capital shortage, the prevalence of run. Therefore, this study can accept the null hypothesis that
good and efficient credit facilities has a positive role to External debt stock and private investment have statistically
promote private investment. This finding is supported by the significant and negative relationship during the period of
study [27, 15, 10, 2, 9] among the others and contradict the 1992 to 2018 in long run and reject the alternative hypothesis.
findings [19]. This result supported by many empirical papers Bello and
Lawanson [6], Asante. [2] but the result is contradict with
(iii). Impact of Effective Exchange Rate on Private Adugna [1] Frinmpong and Marbuah [14] Thus, this external
Investment Performance debt creates uncertainty in the macroeconomic environment
From regression result real effective exchange rate has a and ‘crowding-out’ credits allocated for private investment
negative sign and significant relationship with Private where large debt service payment has involved and may face
investment growth in the long run. The Coefficient of Real liquidity constraints in global capital markets because of
effective exchange rate is -2.690165 which is negative. The large sum of unpaid debt service obligations. As `debt
respective sign is as per the researcher expectation; this show overhang' explains large amount of debt eliminates the
that real effective exchange rate has statistical significant this incentive for investors because returns from investors used
means holding other explanatory variables constant, one for reimburse the existing debt an [9] puts pressure on current
percent increase in real effective exchange rate causes 2.69 and future tax burden on private investors.
percent decreases in private investment in the study period.
This result is consistent with the findings [9, 2, 19]. In (vi). Impact of Interest Rate on Private Investment
developing countries import a large amount of good for Performance
investment; depreciation of the nation’s currency leads to A high interest rate level raises the real cost of capital and
raise the cost of these imported goods and consequently therefore dampens the private investment level. On the other
lowers the domestic private investment activity in the country. side, poorly developed financial markets in less developed
Likewise, real exchange rate appreciation in the time of countries and inadequate access to foreign financing for most
higher export capacity causes to lose external private projects, both imply that private investment is
 International Journal of Accounting, Finance and Risk Management 2023; 8(3): 57-67 65

constrained largely by domestic savings. These, in theory, are explained. The result is Contradict finding [13].
expected to respond positively to higher real interest rates.
For this reason, private investment could, on balance, be 4.5.2. Short Run Dynamics and ECM Regression
positively related to interest rates in developing countries Short run behavior of economic variables is captured
Greene and Villanueva, (1990). From regression result the through dynamic modeling. If there is long run relationship
relationship between Private Investment and interest rate is among the variables, an error correction model can be
positive and insignificant in the long run. Since interest rate formulated that portray both the dynamic and long run
has no statistical significant in this model, it is not further interaction between the variables.

Table 5. Short Run Dynamics and ECM Regression.

ECM Regression
Variable Coefficient Std. Error t-Statistic Prob.
C 10.74888 3.868361 2.778665 0.0129
LNPI(-1) -0.982087 0.189158 -5.191893 0.0001
GDPG 0.044811 0.018118 2.473300 0.0242
LNABC 0.670097 0.223059 3.004126 0.0080
LNEXD -0.319073 0.139733 -2.283455 0.0355
LNREER(-1) -2.641977 0.968972 -2.726578 0.0144
LNTO -0.716473 0.184709 -3.878934 0.0012
IR 0.121909 0.092606 1.316426 0.2055
D(LNREER) -3.912143 0.523057 -7.479376 0.0000
CointEq(-1) -0.982087 0.12 544 -7.885451 0.0000
R-squared 0.771573 Mean dependent var 0.068541
Adjusted R-squared 0.762056 S.D. dependent var 0.528477
S.E. of regression 0.257789 Akaike info criterion 0.200449
Sum squared resid 1.594918 Schwarz criterion 0.297226
Log likelihood -0.605840 Hannan-Quinn criter. 0.228317
Durbin-Watson stat 1.305522

Source: Own Eview 10 computation, 2020

Similar to the results under the estimated long-run model, The result is Contradict finding [12, 22].
the coefficient of growth GDP in the short-run has a positive Trade openness fluctuation of trade openness exhibits a
sign and statistically significant at 5% levels confirming negative impact with a 5% level of statistical significance in
economic theory that economic growth positively affects influencing private investment rates in the Ethiopia. It might
private investment. in The short run private Investment and have linked with export capacity of the countries depends on
access of domestic credit is positive and significant at 5% the primary commodities. Less of export earnings in relative
This suggests that access of domestic credit has positive to cost imports of goods and services have negative impact
effect on private investment in short-run, on the level of private investments through deteriorating the
From regression result under the estimated long-run model, current account deficit. From regression result Unstable
the coefficient of External debt stock in the short-run has a exchange rate movement affects private investment rates
negative sign and statistically significant at 5% levels negatively in the short run. Real devaluation of exchange rate
confirming economic theory that external debt negatively affects private investment negatively through raising the real
affects private investment in the short run. The relationship cost of imported goods.
between Private Investment and interest rate is positive and To capture the speed of adjustment, the following dynamic
insignificant in the short run. Since interest rate has no error correction model is estimated as depicted by the
statistical significant in this model, it is not further explained. equation bellow:
∆ PIt= α0+∑ β1 PI t-1+∑ β2GDPG t-1 +∑ β3LNEXD t-1 +∑ β4INABCt-1+∑ β5INTO t-1+∑ β6INREER t-1+∑ β7IRt-1+ ΩECTt−i+θW+ µ

µ is the error term and Ω is the coefficient of the error long-run relationship in the current periods to clear this
correction term (ECTt−i). The ECT captures the speed of discrepancy. As it can be seen from the above table, the value
adjustment to restore equilibrium in the dynamic model. The of ECM is -0.982087 which is within the acceptable range in
ECT coefficient should be statistically significant with a magnitude and appropriate in sign, the coefficient of ECM
negative sign. shows that short run deviation of private investment is
The error-correction term (ECT) coefficient term is corrected/adjusted to long run equilibrium very fast at a rate
estimated of back adjustment speed to the long-run of 98.2% each year. The negative sign shows that the short
equilibrium relationship. The (ECT) should have a negative run private investment dynamics is below the long run
sign and significantly different from zero. The negative sign equilibrium level.
of (ECT) means that the deviation event between actual and
long-run equilibrium level would be adjusted back to the
66 Mikiyas Nigussie Jobir: Determinants of Private Investment Performance in Ethiopia

5. Coefficient, (R2) and Adjusted R2 in the short run and long run.
Determination 6.3. Recommendation

The constant has a positive significant coefficient of 1. From the analysis of the determinants of private
10.9449 with a P- value of 0.0129 hence in our case significant investment performance in Ethiopia, the study
at 5% confidence level. Holding all independent variables recommends that; since gross domestic product is an
constant, or there is no other activities, Private investment will important variable that determine private investment in
be increases by 10.94493% in Ethiopia. The estimated results the Ethiopia economy, it is necessary for policy makers
show that R2 and adjusted R2 of 0.771573 and 0.762056 to first seek to understand these factors that the study
respectively. This signifies that 76.21 percent of the variations have found are important in the country.
in private investment are explained by the independent 2. For sufficient gross of private investment and
variables. High value of adjusted R2 indicated that the sustainability of Ethiopian‘s economy, the government
independent variables (growth GDP, domestic credit, Interest needs to promote access to domestic credit for private
rate, Trade openness, External debt and real effective exchange investor is which is found to have positive and
rate) succeed to explain the private investment performance. significant impact for private investment to grow, thus
address the need to extend the operation of financial
institutions such as commercial banks even in remote
6. Summary, Conclusion and areas the government should strive to expand and
Recommendation distribute financial institutions such as banks and micro
finance institution towards rural and remote areas to
6.1. Summary of Findings promote saving mobilization and credit availability to
Primary objectives of the study were; investigation of the growth of private investor.
determinants of private sector investment performance and 3. ARDL results show that economic openness negatively
the effect of the determinant factors using a time series data affect private investment growth in Ethiopia during
from 1992-2018. The study used secondary data, sourced review period. Since economic openness had a negative
from EIC MOFED, NBE, and World Bank data basis. impact on the private investment growth, and this is
The coefficients of growth GDP, access to domestic credit, related to fact that as trade of one country becomes
trade openness, real effective exchange rate, external debt more open the infent domestic investment can be
found to be statistically significant in the long run, and the negatively affected. Besides this our imports are more
variables explain changes in private investment in the study significant than exports, it hence recommended that
period. Further, the study found that coefficient of interest there is need for the government to sustain the current
rate is insignificant in short run and long run therefore; the efforts of diversifying of the economy to achieve
variables could not explain changes in private investment in export-led type of economic growth. For example, the
short run and in the long run in the study period in Ethiopia. agricultural sectors and manufacturing industries should
be given priority to produce more in such a way that the
6.2. Conclusion country can produce a surplus for exports and not only
to produce consumption goods and trade liberalization
The major objective of this paper was to identify the of the country make optimal.
determinants of private investment performance in Ethiopia. To
fulfill this objective, the researcher have reviewed theoretical
explanations and empirical literature regarding to the main
determinants of private investment the context of developing
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