CHAPTER 2

REGULATING AND ADMINISTRATION

OF INVESTMENT IN ETHIOPIA
INTRODUCTION
• Investors are traders, who may be
individuals or those organized in the
form of a business organization.
• Thus, as traders, relevant laws
regulating trade are applicable to them.
• In this chapter, among others, we will
discuss the nature and definition of
regulation of investment in particular.
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• Regulation of investment must be
based on the principles of good
regulation and these principles will be
covered in this Chapter.
• Why we need to regulate investment?
This is an important inquiry which will
be addressed under this chapter.
• Further, we will cover regulation of
investment in Ethiopia.
• Besides we will discuss the areas that
are reserved for domestic investors,
Ethiopian nationals, and to the
2 government. 02/14/2025
DEFINITION AND NATURE OF
REGULATION
• What do we mean by regulation?

 Regulation is a normative standard

that should be obeyed, and a violator
must be forced to comply where there
is non-compliance.

 Investment regulation in short may

be defined as control of the
government on investment.
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• In general, there are three
stages/types/areas of regulation:
market regulation; industry regulation;
and government regulation.
• A market regulation is aimed at
guaranteeing efficiency, flexibility, and
low costs.
• However, market regulation provides
uncertainty and instability for
participants, notwithstanding that they
are producers, employees, or
consumers.
•4 Thus, market regulation has
02/14/2025 a
• Industry regulation may be
cooperative or imposed by dominant
enterprises.
• Industrial regulation has the advantage
to reduce the instability for both the
business organizations and employees.
• However, this could be achieved at the
cost higher than necessary profits and
inefficient allocations of a product.
• On top of that, Industry level regulation
gives no guarantee that the products’
quality will be kept high.
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• Governmental regulation aims at
fairness, non-discrimination, consumer
protection and quality maintenance.
• The problem with government
regulation is that it may be inflexible in
guaranteeing efficient allocation.
• There should be governmental
machineries that are necessary to
provide regulation and to monitor
compliance with appropriate budgetary
allocation to run them.
• Thus, it is necessary to have qualified
6 personnel in sufficient number to02/14/2025
make
• These personnel must be salaried; they
need on the job trainings and so on.
• The industry being regulated also
needs to set up personnel and
procedures to guarantee compliance
with government regulation, which
involves additional costs.
• Therefore, government regulation can
be said as costly.
• Nowadays there is a need to regulate
business due to failure of various
organizations as a result of
7 incompetent management, or fraud 02/14/2025or
PRINCIPLES OF GOOD REGULATION

• In general, a regulation that fosters

investment and free market
competition is said to be a good
regulation.

• In regulating investment, it is
imperative to focus on how to
constructively harness the innovative
power and motivating business
enterprises so that they could meet the
8 needs of society without weakening the
02/14/2025
In General, the following are recognized
as principles of good regulation.
A.Using resources most efficiently
and economically;
B. Being proportionate-
• This means the role and actions of the
regulator must be proportional to the
significance of the issues and risks
under consideration.
• By the principle of proportionality,
minor issues should be given less
attention while major issues should
9 attract significant attention; 02/14/2025
C) Responsibility of firms’ own
management-
• The company management should take
responsibility for running the business
in a proper manner and maintain
adequate financial resources.
• Here, it is emphasized that it is not the
role of the regulator to run companies;
it is the responsibility of the company
management to take responsibility for
complying with the rules and guidance
that are established by the regulator in
10 the most appropriate manner. 02/14/2025
E) Facilitating innovation-
• The regulations and standards should
facilitate innovation of investors in their
activities.

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Why do we need to regulate
investment?

• Governments and regulators need to

ensure stable and competitive markets
for services and goods, and conducive
atmosphere for companies to be
successful and reputable in the
business.

• Failure of companies, particularly, as a

result of fraud or mismanagement
12 would damage the trust of the market
02/14/2025
• Therefore, there has been a growing
need to regulate business by
governments and regulators to
establish formal standards and rules for
traders to abide by and thus to protect
consumers.
• Investment, as a business, cannot be
an exception to such regulation and
supervision.
• Concerning this the Commercial Code
of Ethiopia in its preface provides that
“…We have directed that in the
13 expansion and consolidation of our
02/14/2025
• According to Proclamation No.
1180/2020, the investment
administration system has to be
transparent, predictable, and efficient
to increase investment attraction,
retention, and expansion.
• Therefore, the main purpose of
regulating investment is to ensure
transparency and efficiency in the
investment administration.
• In general, the need for governments to
control, regulate or participate in
14 investment springs in part from political
02/14/2025
• The code of conduct on transnational
corporations states a similar
proposition in the following terms:

States have the right to regulate

the entry and establishment of
transnational corporations
including determining the role
such corporations may play in
economic and social development
and prohibiting or limiting the
extent of their presence in specific
15 sectors. 02/14/2025
• In short, states have the power to
control foreign investment in their
jurisdictions.

• This is a universally recognized rule.

• The conflict between the liberal idea of

free flow of investment with the notion
of sovereign rights to control the entry
of investment is evident, however.

• Powerful states which see benefits in

16 maintaining the stance of economic
02/14/2025
What is the purpose of domestic
laws in regulating investment?
• The objective of the domestic laws
regulating both the entry as well as the
operation of foreign investment in the
host country is to enlarge the scope for
domestic control.
• As a result, the role, if any, which
international law plays in the process of
foreign investment is restricted.
• It is worth noting that the techniques
and the degree of control adopted in
17 such legislation may differ. 02/14/2025
• In some legislation, the vehicle through
which foreign investment could make
entry is identified.

• The host state seeks to increase its

leverage over the foreign investment
by limiting entry through devices over
which control could be more easily
exercised.

• Thus, the foreign investment laws could

indicate that entry could be made only
18 through a joint venture with a02/14/2025
local
• In many instances, the joint venture
could be made only with a state entity,
thus ensuring that the government
policy in a particular industry is given
expression at every stage of the
venture in which the foreigner
participates.

• The recent trend to formulate more

open investment policies has been
particularly evident in the removal or
relaxation of regulatory barriers to the
19 entry of Foreign Direct Investment
02/14/2025
• Screening procedures involving prior
authorization have been eliminated or
reduced in scope.

• Closely related is the liberalization of

sectoral restrictions on the entry of
foreign investment and of limitations
regarding foreign shareholding in local
companies.

• There has also been a shift away from

the imposition of performance
20 requirements and a liberalization
02/14/2025of
• In addition, there has been increasing
acceptance of standards of non-
discriminatory treatment of foreign
investors and of international standards
on matters such as compensation in
case of expropriation.

• Finally, international arbitration

mechanisms for the settlement of
disputes between foreign investors and
host states have gained widespread
acceptance.
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• In Ethiopia, foreign investment is
regulated by legislation.
• This legislation has been amended now
and then to incorporate changes at the
international arena and to tune the
laws in line with the concept of liberal
economy.
• Today, Proclamation No 1180/2020,
Investment Proclamation, as amended,
is intended to regulate investment in
general, which include foreign
investment.
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• To apply this parent legislation, Council
of Ministers Regulations No. 474/2020,
Regulations on Investment incentives
and Investment Areas Reserved for
Domestic Investors, is enacted.

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REGULATION OF INVESTMENT IN
ETHIOPIA

• We have seen that regulating

investment is essential in general.

• Ethiopia also regulates investment

activities under the Constitution, the
economic policy and other laws.

• In this section of the material, we will

discuss how investment is regulated in
24 Ethiopia. 02/14/2025
1. Constitutional Framework of
Investment in Ethiopia
• In Ethiopia, the Federal Government is
duty bound to ensure that all
Ethiopians are given equal opportunity
to improve their economic conditions
and to promote equitable distribution of
wealth among them.
• The Government is granted the right to
own land and other natural resources,
on behalf of the people, and to deploy
them for their common development
25 and benefit. 02/14/2025
• States are to administer land and other
natural resources in accordance with
Federal Laws.
• Without regulation, these natural
resources could not be used effectively
and efficiently to bring the
development of the people.
• The Federal Government is also duty
bound to formulate policies which
ensure that all Ethiopians can benefit
from the legacy of intellectual and
material resources of Ethiopia.
•26 This indicates the power of02/14/2025
the
• The FDRE Constitution grants the
House of Peoples’ Representatives the
power to legislate law on the utilization
of land and other natural resources.

• We know that land and other natural

resources are essential for investment.

• Granting the power to enact law on

how to use natural resources, at least
by implication, means granting power
to regulate investment.
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• The Constitution further grants power
to the Federal Government to enact law
on inter-state commerce and foreign
trade under Article 55(2)(b).

• It would be safe to conclude that the

Federal Government has the power to
regulate inter-state commerce in
general and investment in particular.

• The Constitution also grants the power

to regulate foreign trade.
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• Please note that Commercial Code
(law) is a law that governs investment
and, therefore, the federal government
is given the power to enact investment
law.

• In other words, the federal government

is granted the power to regulate
investment: interregional and foreign
investment.

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2. Areas Of Investment Reserved for
Domestic Investors (Art 4 of
474/2020)

• We have seen that investors could be

categorized into domestic or foreign
investors.
• This classification has consequences,
among which, is that there are areas of
investment reserved for domestic
investors only.
• can you guess what activities are
30 reserved for domestic investors? 02/14/2025
• Just to mention some: it includes wholesale
trade and distribution (except fuel and the
domestic sale for locally produced goods
from foreign direct investment); importing
(excluding material inputs for export
production); exporting raw coffee, oil seeds,
‘chat’, pulses, hides and skins, live sheep,
goats, and cattle (not fattened); construction
companies (except grade 1); tanning of hides
and skins up to crust level; hotels (except
star designed ones), motels, pensions,
bakery and pastries; car here, taxi, road and
inland water transport services; grinding
mills, saw milling, timber making; customs
31
clearance services; museums, theatres and
02/14/2025
• It is only Ethiopian nationals who can
invest in the financial sector (banking,
insurance and microfinance) forwarding
and shopping services, broadcasting
services and air transport service with
the capacity of up to 20 passengers.
• What are the reasons for excluding
foreigners from investing in the
abovementioned areas?
• In general, the motives behind
restrictions vary.
• Nationalism and the desire to exclude
32 foreign interests from controlling and
02/14/2025
• Under the Ethiopian law, the exclusion
of foreigners from the economic sectors
may be justified in that vital public
services should not fall under foreign
control.

• It is essential to note that areas of

investment we considered above are
exclusively reserved for domestic
investors.

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➢ The following shall be a reading
assignment.

3. Investment areas reserved for Joint

investment with the government (Art 3 of
regulation No. 474/2020

4. Investment areas reserved for Joint

investment with domestic and foreign
investors (Art 5 of regulation No.
474/2020
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Investment Permits, acquisition of
existing enterprise and Transfer of
investment Project under
implementation

➢ Please refer to Art 7 through 12 of the

investment regulations

Economic policy of Ethiopia

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 END of CHAPTER TWO

Thank You!

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