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Abstract
In the growth literature, investment has been regarded as one of the primary engines of
growth. Growth theories emphasise 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. It had
been stagnantly low until the end of the socialist regime. In spite of little improvement in the
post‐socialist era, the share of private investment in GDP has never been above 6 percent
even until 2003. Yet, the reasons behind the weak performance have not been well studied.
Hence, investigating the performance trend and maim constraints of private investment in
Ethiopia becomes the core theme of this study. Targeting at addressing a question of what
measures should be taken to promote investment in the country, the research proceeds to
test empirically whether demand augmenting and trade liberalization policies, improved
infrastructural facilities, macroeconomic and political stabilities improve the private
investment performance of Ethiopia. Motivated by the modified version of the Flexible
Accelerator Model of investment behaviour, the empirical investigation employs a
multivariate single equation ECM estimation methodology on integrated of order one, I(1),
variables using annual time‐series data sets for 1950‐2003 and two sub‐periods. According to
the estimation results, private investment in Ethiopia is influenced positively by domestic
market, return to capital, trade openness and liberalization measures, infrastructural
facilities and FDI; but, negatively by government activities, macroeconomic uncertainty and
political instability. Hence, enhancing demand augmenting and trade liberalization policies,
improving infrastructural facilities and maintaining macroeconomic and political stabilities
should be among the main ingredients of a policy package designed to promote private
investment in Ethiopia. Furthermore, the operations of the public sector and other
institutions will need new thinking.