Economic growth of countries is one of the fundamental questions in economics. Most African countries are opening their economies for welcoming of foreign investors. Ethiopia, like many African countries, has been taking measures to attract and improve Foreign Direct Investment (FDI).
FDI is particularly important for developing countries since it provides access to resources that would otherwise be unavailable to these countries. Its contribution to economic development and therefore poverty reduction comes through its role of transferring advanced technology and organizational forms to the host country. It also helps to fulfill technological gap and other spillover to domestically owned enterprises through assisting human capital formation, contributing to international trade integration and sustaining high level of development and establishment of basic infrastructure.
In recent years, Ethiopia has started encouraging the inflow of FDI by improving the investment climate and by providing different incentive packages, stated systematic review of Habtamu Legese, Head, Department of Economics, Raya University.
The results of his review has shown that variables like real growth domestic product, liberalization, exchange rate devaluation, and trade openness are significant and have a positive correlation with the inflow of FDI in Ethiopia.
Foreign Direct Investment remains a significant source of capital and income generating opportunities for the least developed countries. This is especially true for Ethiopia that does not have enough domestic funds to finance huge investment projects. It is also important for Ethiopia in transferring technological advancement for domestic enterprises, competitiveness and organizational forms, assist human capital formation, international trade integration and to create a more competitive business environment from abroad. Hence, FDI works as a means of incorporating underdeveloped countries into the global market and improving capital available for investment.
Understanding the merit and demerit of FDI is imperative to formulate a sound economic policy. Even if, in recent times, the policy that favors FDI dominates, there are two opposing views as to the role of FDI in developing economies. On the one hand, some argued that FDI benefits the host country, for instance, by creating job opportunities and bringing new technologies, which serves as technology and knowledge transfer. In contrast, the other group argues that the adverse effects of FDI outweigh its benefits.
In the view of pro-FDI, compared to the developed nation, gross domestic savings are too low in the least developed countries (LDCs). As a result, foreign direct investment is the next best alternative source to fill the gap between domestic savings and the required investment for economic growth as well as economic development. Besides, foreign firms bring not only financial capital but also managerial techniques as well as, entrepreneurial and technological skills that lack in LDCs and these skills can transfer to domestic firms through different channels.
On the other hand, some scholars strongly disagree with the Pro-FDI views. If individuals do not save enough, it will be difficult to fill the gap between savings and investments. Besides, foreign direct investors may also fail to reinvest the profit they generate in the host country, they may hinder the growth of domestic enterprises and domestic investment by importing the input and intermediate product from their subsidiaries in other countries and this will have a significant impact to sustain the growth.
FDI is an important source of investment in an economy. Performance of a host country in terms of GDP is important for investors in an economy; however, the country must do more to improve its GDP. Currently, most developing countries are trying to attract foreign direct investment and Ethiopia as a nation with low domestic saving and with high budget deficit needs to be part of this competition.
Providing tip of advice, Habtamu stated that in order to sustain and improve the inflows of foreign direct investment (FDI) the Ethiopian government and another concerned bodies first should focus on factors that hinder domestic investments. The reason for this is that foreign investors will be encouraged to invest in a country if the domestic investors are doing successfully.
The Ethiopian Herald October 22, 2019
BY BACHA ZEWDIE
