CHAPTER 2

2. Regulations and administration of investments in Ethiopia

Ethiopia offers a favorable business-operating environment.
The Ethiopian Investment Commission (EIC) and all other government agencies are at your disposal
to facilitate establishment and operation of your business.
Aftercare service: The good hands of the Ethiopian Investment Commission will follow you as
you lay the ground for your operation. EIC provides post establishment facilitation and follow-up
services including, but not limited to:
 Facilitating acquisition of land and utilities (water, electrical power and telecom services)
 Processing of loans and residence permit applications
 Approval of environmental impact assessment studies
Ethiopia follows a civil law legal system where major laws are codified under civil, commercial, penal
and other codes. The Constitution is the supreme law of the country. Under the Constitution are
proclamations that are passed by the Parliament, followed by regulations that are enacted by the
Council of Ministers, and implementing directives passed by ministries or agencies. All proclamations
and regulations are published in official gazettes. Below is the most relevant legislation as related to
investment.
Investment laws:
 Investment Proclamation No. 769/2012, Amendment Proclamation No. 849/2014
 Investment Regulation No. 270/2012, Amendment Regulation No. 312/2014
 Investment Directives - Directive on Duty-free Import of Motor Vehicles No. 4/2005 (E.C)
 Ethiopian Investment Board and the Ethiopian Investment Commission Establishment
Regulation No. 313/2014
Industrial park laws:
 Industrial Parks Proclamation No. 886/2015
 Industrial Parks Regulation, 2017
Commercial matters:
 Commercial Registration and Business Licensing Proclamation No. 980/2016.
 Trade Practices and Consumer Protection Proclamation No. 813/2013
 Commercial Code of Ethiopia, Proclamation No. 166/1960
 Civil Code of Ethiopia, Proclamation No. 165/1960
2.1 Definition and Nature of Investment Law
Law of investment, in general, is a branch of a law consisting of set of rules that regulate investment.
Investment law may be either international law on foreign investment or national law.
International law on foreign investment may be defined as a set of rules that govern international
investment. International law on foreign investment has been and is being shaped by on interplay of
various economic, political and historical factors. It is generated by the eventual resolution of
conflicting national interests. The interests of capital-exporting states have clashed with those of the
capital importing states. The international law on foreign investment is a resultant resolution to such
conflicts. It is a field by which economic theories, political science and related areas have helped to
shape the arguments in the field.
It cannot be explained in accordance with any existing theory of international law. It is a field of
international law which calls for a creation of alternative theory because now, the rules are not clear.
National investment law -Investment is a commercial or business activity. Business activities are
governed by Commercial Code/law. Commercial law cuts across both the law of obligations and the
law of property. That means commercial law includes some part of the law of obligations and the law
of property. For instance, the transactions of business in general and investment in particular require the
application of the law of contract since it involves contractual transactions. Properties are the subject of
contracts in investment. Let us consider another example. An investor may import or export products or

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other goods that are related to his/her investment. An investor should import machineries and
equipment for his/her investment. Those machineries and equipment should be transported to Ethiopia.

In such a case, a bill of lading may be used. A bill of lading is a receipt for the bailment of a specific
object and possesses the quality of being ‘negotiable’. Thus, it represents the goods in some way. It is
also a document that contains a contract for the carriage of the goods. For instance, the transactions of
business in general and investment in particular require the application of the law of contract since it
involves contractual transactions. Properties are the subject of contracts in investment. Further, we have
seen that investment activity is governed by commercial law. Commercial law developed through
practice by merchants and the state ‘received’ it into a legal system. In short, it both includes contract
and property. This shows that an investment involves the application of the law of contract and
property.

Further, we have seen that investment activity is governed by commercial law. Commercial law
developed through practice by merchants and the state ‘received’ it into a legal system. Recently, state
regulations grow to regulate the industry and with the creation of public utilities owned by the State
have led to the intrusion of public law into the realm of commerce. Public law is a body of law dealing
with the relations between individuals and the government. This shows that commercial law is also a
public law.
 Do you remember what public law means?
This shows that commercial law is also a public law. One of the purposes of our Commercial Cod is,
as indicated under the preface as follows: Investors are individuals and the government regulates
investment. Therefore, law of investment is a public law.
 Investment law regulates investment in general and among others addresses the following issues
among:
A. It defines important terms like investment and investor. International investment agreements
are international investment law that defines these terms. National laws also devote certain
provisions to define investment and investor. In so doing, the investment law regulates
investment. For example, many international agreements define investment as something
established according to the laws of the host country. The main purpose of such definition is to
ensure that investment has been properly registered and licensed in accordance with the laws of
the host country. As was have discussed earlier, investment law classifies investment in to
varies categories, such as:
 Foreign direct investment,(FDI)
 Portfolio investment,
 Domestic investment etc.
B. Admission and Establishment of Investment: Investment law regulates the entry of foreign
investment in a host country. Each state may wish to restrict investment in certain sectors of the
economy to the state or to domestic inventors. Investment law puts requirements to establish
enterprises to undertake investment activities, and the forms of enterprises. It also includes
ownership restrictions and related issues.
C. National Treatment: A host country is required by international investment law to treat
foreign investors in the same manner as national/domestic investors. However, the host country
may not treat foreign investors equally with domestic investors. It is worth noting that a
customary international law does not necessarily require states to extend national treatment to
foreign investors. Such national treatment is provided by bilateral investment treaties or/and
national laws.
D. Guarantees- Investment law provides guarantees to investors. International investment law is
aimed at guaranteeing foreign investors. History has shown nationalization and expropriation of
foreign direct investment. Thus, customary international investment law guarantees investors
against those and other forms of expropriation of investment.

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 E. Environmental Issues: - are also addressed by investment law. Today, it is realized that
economic activities are closely linked to the protection of the environment. Thus, investment
treaties have begun to include provisions addressing environmental protection.
F. Labour Issues –The inclusion of labour provisions in investment treaties is growing although
they are always included. The International Labour organization’s Tripartite Declaration of
Principles Concerning Multinational Enterprises and social policy (1977) and the DECD’S
Guidelines on Investment and Multinational Enterprises (1976) are the two international
agreements that address labour issue. Promotion of employment of host country’s nationals is
one of the labour issues treated by the investment law. For example, the Ethiopian Investment
Law requires, in some cases, that foreigners be replaced within a specified period of time by
Ethiopians who have been trained by the investors (employer). We will treat these points under
this subject. Investment treaties may provide for minimum standards as to wages and working
labour conditions. It may also address the right of workers to organize labour union.
ELEMENTS OF INVESTMENT
There are three factors that are considered as elements of investment.
 Reward (return);
 Risk and return; and
 Time.
A. Reward
We have seen above that investment is made with the intention to gain profit. Thus, investors,
generally, may expand their fund to earn a return on it. The return is known as reward from the
investment, and it includes both current income and capital gains or losses which arise by the increase
or decrease of an investment.
Let’s say, Ayal has started producing bread in a modern way at Arat Kilo and distributes it to the
customers in Addis Ababa. The capital for the investment is Birr 10,000. She invested on the sector
with the expectation of profit. Moreover, let us assume that she has got Birr Two thousand within six
months of her investment. This is a reward from the investment.
B. Risk and Return
The second element of investment is risk and return. Risk may be defined as the chance that the
expected or prospective gains, or profit or return may not materialize. It also includes the fact that the
actual outcome of investment may be less than the expected outcome. It is important to not that the
greater the variability or dispersion in the possible outcome, the greater the risk will be. In addition, risk
means estimation about the degree of happening of the loss. Risk and return are inseparable. Return
is an expected income from the investment. It represents the benefits derived by an investor from
his/her investments. The rate of return required by the investor largely depends on the risk involved in
the investments. Thus, the investment process must be considered in terms of both aspects of risks and
return. Risk can be quantified by using precise statistical techniques. Therefore, risk is measurable
element.

Example: Hailu has invested on flower on the road to Jimma. He must assess the risks involved in the
investment. For instance he should consider the possible pests that may cause damage to the flower, the
risk of the market failure, the risks involved in transporting the flower to Bole, and then the air
transport to export it to foreign countries and so on. On the other hand, Hailu should estimate the
expected return, i.e. profit from the investment. We have seen that risk and return are inseparable. Thus,
Hailu should consider both the risks and return of his investment together.
C. Time
Time is the third element of investment. It offers several different courses of action. Conditions change
as time moves on and investors should re-e valuate expected return for each investment.
An investment could not be materialized within a very short period of time. In other words, investment
is of long-term in nature. For example, if one needs to invest on a cement factory, s/he should conduct
market research to ensure the viability of the investment. Conducting research needs a certain period of
time. After the research is done, machineries should be imported and installed. This also is to be done

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through time. Then, the factory should produce sample cement, distribute the product, and collect the
feedback from the customers. Then, the factory would start production and distribute cement to
customers. All the above-mentioned activities need to be done through time. Further, investment
requires a continuous flow of decisions. Moreover, investors should from time to time reappraise and
revaluate their various investment commitments in the light of new information, changed expectations
and ends. Investment decisions are based on data which represent the observable environment and the
general and specifics of a given investment. It takes the ability to analyze the data and specifications
properly to make an appropriate decision. Thus, investment is the result of a series of decisions.
Principles of Good regulation in investment
ECONOMIC PRINCIPLES OF INVESTMENT
We have seen that investment is both an art and a science. As a science, there are fundamental
principles applicable to investment. Under this part of the material, we shall discuss the essential ones.
A. Safety of Investment
An investment needs safety since the investor invests his/her fund and time. Thus, adequate protection
should exist against the risk of loss of capital. Investing in the form of shares is said to be relatively
safe because the risk is spread due to diversification among different scripts of companies. For instance,
if Abebe invests his fund alone, the risk of loss is higher compared with the investment made together
with others in the form of Share Company. In general, what is required is maximizing the
chance of getting profit in any manner.
B. Liquidity
Liquidity is the second principle of investment. Any investment is said to be liquid, if it can be
converted into cash or sold as and when required. A liquid investment would enable the investor to
encash his/her investment whenever the need arises. It would also permit the investor to sell off an
unremunerative investment, thereby minimizing the losses, and switch over to a more promising
investment. Thus, the liquidity of an investment offers flexibility in the face of changing economic and
political environment.
For instance, Dendir was investing on food processing in Eritrea before the prevailing regime came to
power. Investment on this sector is safe since the return is very high in that particular area. However,
Dendir has sold it easily and came to Ethiopia as the political conditions changed dramatically. Thus,
the investment Dendir has made is liquid since it was possible to encash it whence it was required.
C. Profit
We have seen that profit is an element of investment. The main reason of investment is to accrue profit.
Profit can be realized in either or both of the capital appreciation yields. Capital appreciation occurs
when an investment is disposed of at a higher value compared to the price for which it was purchased.
Where the difference between the net selling price and the purchase price is positive, it is said to be
capital appreciation.
Yield, on the other hand, is derived in the form of interest or dividend. The rate of dividend may
fluctuate from year to year, depending on the profitability of the area in which money has been invested
where as the rate of interest is usually fixed. If for example Kedir invests on purchasing shares, such
shares are expected to yield a dividend at the end of the year. This is an investment for Kedir i.e a
capital appreciation or yield.
D. Tax Implications
The investor may be required to pay tax on his/her income. Income is defined as “Every sort of
economic benefit including nonrecurring gains in cash or in kind, from whatever source derived and in
whatever form paid credited or received. We have seen that investment is made to gain profit. An
activity recognized by the Commercial Code of Ethiopia as trade and is made to gain profit is known as
business activity.
E. Inflation
Inflation erodes the value of money invested. To earn a rate of return, the money should be properly
invested. We have seen that investment is a business activity. Business is undertaken for profit, and the
investment must at least compensate for the rate of inflation. What do we mean by inflation? The term
generally means, “Increase in prices coinciding with a fall in the real value of money”. The increase of

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price and the decrease of the real value of money definitely will have a negative impact upon the
investment. For instance, the capital of the investor is Birr 220,000. If inflation occurs, the real value
will decrease and the capital will not have the power that it was at the time of investment. Therefore,
the investor might be forced to increase the capital.
F. Government Control
Government controls certain economic sectors and that may affect investment. Thus, Government
control affects investment and it must be considered.
G. Legality
The investor is required to invest on areas that are allowed by law. S/he should also fulfil other
requirements like license etc. For instance, grinding mills, retail and brokerage, among others, are areas
exclusively reserved for domestic investors. To have an investment, the income during one period of
time should produce earning in future periods. In order to obtain a greater return in the future,
consumption in the current period is foregone. In general, for an economy as a whole to invest, total
production must exceed total consumption. Therefore, no foreign investor is allowed to invest on areas
that are reserved only for domestic investors.
In the up-phase of the economic cycle, price-based measures of asset values rise, price-based measures
of risk fall and competition to grow bank profits increases.
Market discipline encourages financial institutions to respond to these three related developments by
some combination of:
 Expanding their balance sheets to take advantage of the fixed costs of banking franchises and
regulation
 Trying to lower the cost of funding by using short-term funding from the money markets and
 Increasing leverage.
When the boom ends, and asset prices fall and short-term funding to institutions with impaired and
uncertain assets or high leverage dries up, leading to forced sales of assets which drives up their
measured risk, the boom turns to bust.
 We distinguish between micro and macro-prudential regulation.
 Micro prudential regulation concerns itself with factors that affect the stability of individual
institutions.
 Macro-prudential regulation concerns itself with factors that affect the stability of the financial
system as a whole.
As we will attempt to show, the nature of the regulation applied to an individual financial institution
depends crucially on how ‘systemic’ its activities are. Regulators should increase the existing
capital adequacy requirements (based on an assessment of inherent risks) by two multiples. The first
is related to above average growth of credit expansion and leverage. Regulators should agree on the
degree of bank asset growth and leverage that is consistent with the long run target for nominal
GDP, so that the multiple on capital charges raises the more credit expansion exceeds this target.
Portfolio Investment- “is a movement of money for the purpose of buying shares in a company
formed or functioning in another country. The World Bank defines portfolio flows as consisting of
“bonds, equity (comprising direct stock market purchases, American Depository Receipts (ADRs),
and country funds), and money market instruments (such as certificates of deposits (CDs) and
commercial paper”. in portfolio investment, the investor purchases shares from the host country
business organization. The nature of portfolio investment does not offer the opportunity to control
the business organization.
Economic Policy of Ethiopia
THE CLASSICAL THEORY ON FOREIGN INVESTMENT
According to the classical economic theory, foreign investment is wholly beneficial to the host
economy. In other words, pursuant to the classical economic theory, it is the economy where the
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investment is made that benefited wholly from the investment. What are the reasons up on which
classical economic theory is based?
1) Capital inflow – The first reason for the classical theory is that foreign investment makes
available capital in the host state that flows from capital sending country. Do you believe that
foreign investment is wholly beneficial to the host state? Those who reject the theory argue that
the existence of capital in a host country soaks local capital. Thus, the inflow of capital to the
host state is like a big fish that swallows a small one. Hence, the local capital that would be used
to invest could not be invested. What is more, foreign investors will export the high profits
obtained from the investment to their home state. The proponents of classical economic theory
argue that foreign investment is beneficial to developing countries by making available capital.
Therefore, the capital will benefit the shareholders who are foreigners.
2) Transfer of technology: - is the second reason on which the classical economic theory bases its
justification. However, foreign investors may transfer technology that is outdated. Foreign
investors may need to use a technology that is already not up to date. They may not have the
chance to use the outdated technology in their country because it may be dangerous to the
environment, or it may not be efficient. In addition, the technology used by foreign investors
may be capital intensive; using such a technology may be expensive.
3) Creation of employment:- It is argued that foreign investment creates new employment
opportunities. Accordingly, the unemployment problem that exists in a host state will be solved.
However, the fact that it creates a new job opportunity should not be taken as a benefit only to the
host state. The foreign investor is highly beneficial from the creation of employment because labour
is usually not expensive. Rather, the workers will not be fully paid, or the rate of wages is very low
that is not commensurate with the service rendered by the workers.
4) Transfer of managerial skills: Foreign investment transfers managerial skills to the host state,
particularly skills in management of large projects. The foreign investor may recruit local
experts in higher managerial positions. For example, the local employees could be assistants to
foreigners in structure in the business organization, marketing the product of the business
organization, administration of employees etc. Therefore, they conclude that foreign investment
is beneficial to host states. Transfer of managerial skills to local personnel is illusory because
the foreign investor does not allow higher managerial positions such as departmental head for
local professionals. Therefore, local personnel who are employed cannot acquire new skills.
5) Building infrastructure- It is also argued that foreign investment makes sure the building of
infrastructure in a host country. Fundamentally, the state builds necessary infrastructures in
areas where foreign investment is made. For example, health, and education facilities are
delivered by the state. The investor may also built infrastructure facilities in host countries. The
infrastructure that is build is based on the standard of foreigners. It is only those who can pay
for the facilities who could benefit from the building of the infrastructure. For example, a school
fee may be high and only elites that can afford may benefit from it.
6) Upgrades infrastructure- It is also argued that foreign investment upgrades facilities such as
transport, health, and education that will benefit the society as a whole.
7) Brings economic development- Foreign investment brings about economic development for
the less developed countries. However, it is revealed that foreign investors engage themselves
directly or indirectly in suppression of human rights to ensure the continued maintenance of
regimes favorable to foreign investors. The classical economic theory does not explain other
reasons for state interference in foreign investment.
THE DEPENDENCY THEORY
The dependency theory is a criticism to classical theory. It does focus on an entirely different meaning
of economic development. It redefines development as requiring not wealth transfer to the host state,
but the development of the people of a state as a whole. It is popular among Latin American
economists. The proponents of the dependency theory analyze that the multinational corporations have
their head quarters in developed countries and the branches they establish in developing countries work
in the interest of their parent companies and their shareholders. Hence, development becomes

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impossible in developing countries since their economy is subservient/dependent to the developed
countries. Thus, they propose that indigenization measures and efforts be made to control foreign
investment. Because Attempts to permit foreign investments through joint ventures are seen as failure
and the foreign investor defeated it through his/her alliance with the elite in the host state. According to
the dependency theory foreign investment is a way for developed countries to gain power in developing
countries. It influenced many nationalizations of foreign direct investment.
THE MIDDLE PATH
When communism proved to be unsuccessful, free market economy was accepted as a means to
marshal economic development. Then, private economy was considered essential for the development
of an economy. As a result, privatization of state companies took place in developed and developing
countries. Multinational Corporation is a threat to the sovereignty of developing states has changed.
Developing states have built up confidence in dealing with these multinational corporations.
Multinational corporations, on their part, usually ceased to be instruments of the foreign policy of their
home states. The study also identified the negative effect of multinational corporations. This enabled
the host states to take regulatory measures to curb harmful practices. The gist of the codes of conduct is
that multinational corporations shall avoid things that are identified as harmful to the economic
development of developing states.
1. Defeating the Tax law of the host states was the first harmful conduct of multinational
corporations. The multinational corporations find an artificial high price for an item permitted to
be imported. These transfers pricing which is harmful to the host economy.
2. Hazardous and disused technology: The study showed that the technology that was exported
was often hazardous and disused. It was identified that the hazardous and disused technology
was causing potential harm to both life and the environment For example; the Bhopal disaster
which was caused by a gas leakage in a plant set up by multi-national corporation caused
damage to life and property. This shows that multinational corporations export hazardous and
outdated technology that was prohibited in their home countries. Lack of profits: Multinational
corporations adopt restrictive business practice on a global scale that prevents the host state
from maximum export scope potential for goods that are produced within its territory. The
theory has disproved that foreign investment was not fully beneficial to the host state because it
accepted the drawbacks of foreign investment.
THE LIBERAL CONSENSUS/agreement/
Liberal economic theory is based on the premise that free market yields maximum productivity. In the
eighteenth century, Adam Smith and David Ricardo came up with the liberal economic theory and
challenged mercantilism. Mercantilism argues that extensive state regulation of the economic activity is
necessary to promote the interest of a nation. In the period between the 16th to 18th centuries,
mercantilism was a dominant political economic theory in Europe. According to mercantilists, a
national wealth may be equated with the quantity of gold held hold by the state. Hence, they sought to
restrict imports and increase exports to increase the gold supply. On the contrary, according to
liberalists, the wealth of national economy could not be equated with the amount of gold in the
treasury; rather national wealth is best measured by the productivity of the people. They further argued
that productivity of people is best achieved by an unregulated market.

Liberals opposed restrictions on national trade. Liberalism propagates for free market economy. In
general, liberal economic theory is based on the premise that free markets will yield maximum
productivity. This could work only where markets are functioning well. However, markets fail in
developing countries. In such a case, a state is required to intervene to correct serious market failure.
MAJOR INVESTMENT AREAS IN ETHIOPIA

 Very good climate

 A wide range of cereals, pulses, oil seeds, cash crops, fruits and vegetables can grow
 Very good climate for flower farms
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 High Livestock potential: One of the first ranking countries in Africa and is among the top ten
countries in the world
 Favorable Investment Policies
 Major manufacturing opportunities, as the country’s manufacturing potential remains untapped
 With population estimated to be around 80 millions, there can be a huge potential for marketing the
goods in the country itself
 Investment Opportunities in Ethiopia
Agriculture and Agro-industrial Processing
It is clear that agriculture is the backbone of the Ethiopian economy. Ethiopia grows all types of
cereals, fibber crops, oil seeds, coffee, tea, flowers, fruits, and vegetables since it is endowed or brilliant
a with wide ranging agro-ecological zones and diversified resources. Therefore, Ethiopia offers
opportunities to invest on food crops, beverage crops and cotton. Among the various agricultural and
agro-industrial sectors, the following are the main ones:
 Coffee and Tea
 Fruits and vegetables
 Flowers
 Livestock and poultry
 Pulses
 Oil Seeds
Areas of Investment Reserved for Domestic Investors
One of the achievements of investment Proclamation No 116/1998 was that it fully opened the
hydro-electric power generation for private sectors. However, the distribution of the electricity was still
made to continue as the exclusive monopoly of the government. Thus, private investors were allowed
to generate electric power and to sell it to a state owned electric distribution agency. To allowed private
investors to invest in the telecommunication sector jointly with the government. Defence industries
may be important to produce civilian goods and services in addition to weapons.
Manufacturing
Vision: To become the leading manufacturing hub or core in Africa. Ethiopia offers a remarkable
amazing or notable /extraordinary/ competitive advantage for manufacturing industries due to:
Government facilitation of efficiency-enhancing investment solutions including industrial parks that is
ready for ‘plug and play
 Large pool of trainable work force available at competitive wages
 Cheapest energy rate on a global standard
 Geographic proximity and preferential access to key markets; and abundance of high-quality
industrial raw materials; Ethiopia is Africa’s largest raw material supplier for the leather
industry.

 Leather and leather products

 Textiles and textile products and garments
 Building materials (steel, cement, etc)
 Food and beverage industries, including breweries, starch and glucose compel, baby food unit, etc
 Automotive industry, including production of components and spare parts (Lifan Motors, Peugeot,
and Hyundai can be good examples.)
Industrial Parks Development
The government places significant importance to industrial parks development and
expansion
Investors (domestic and foreign) can engage in industrial parks development
Two operational and seven upcoming government industrial parks
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One operational and seven upcoming privately developed industrial parks:
Agriculture
Ethiopia is a conducive investment destination for commercial farming.
It is endowed with large land size (8th largest country in Africa and 27th in the world) and huge
proportion of arable land, diverse topography and agro-climatic zones, a long growing season, fertile
soils and water availability for irrigation.
Services
Known as ‘Land of Origins’, Ethiopia is among the world’s best destination for tourism with strong
service industry to support the sector. Ethiopia is home to several cultural and historical heritage sites,
nine of which are included in the UNESCO list of world heritage.
Energy
Ethiopia has a tremendous potential for renewable energy generation – hydropower generating
capacity of about 45,000 MW, wind power of about 10,0 00 MW, and geothermal capacity of about
5,000 MW.
Mining
Ethiopia has a wide variety of untapped mineral resources and offers opportunities in upstream and
downstream operations. Ethiopia also offers an excellent opportunity to invest in mining. According to
the Ministry of Mines. Ethiopia has a great potential in mining in general, and gold in particular.
Ethiopia has also a good potential in deposits of tantalum, platinum, nickel, potash and soda ash. In
addition, marble, granite, limestone, clay, gypsum, gemstone, iron ore, coal, copper etc are found in
Ethiopia. The Ogden, the Gambela, the Blue Nile and the Southern Rift Valley sedimentary basins also
offer significant opportunities for oil and natural. Ethiopia is the only producer of opal in Africa, major
gold exporter, and emerging
country for oil and natural gas exploration. Mining potentials: gold, potash, platinum, opal, iron,
tantalum, marble, granite, limestone etc
Tourism
As per the information provided by the Ministry of Culture and Tourism, Ethiopia is endowed with
various tourist attractions having natural, historical and cultural attractions. For instance, the Country
has a land of natural contrasts, from the tops of the rugged Semein Mountains to the depths of the
Danakil Depression, at 120 meters below sea level of the lowest dry land points on earth. It is a country
of great antiquities, cultures and traditions.
Restrictions on Foreign Direct Investment
Foreign Direct investment (FDI) is investment that is made to acquire a lasting interest the
investor’s purpose being to have an effective choice in the management of the enterprise. To be more
specific, a foreign direct investment is ownership of assets by foreign residents for the purpose of
controlling the use of these assets. The power to control the management of the enterprise could vary
according to the type of business organization in question. For example, in cases of partnership, all
shareholders have equal voting powers irrespective of their contribution unless otherwise agreed.

In case of foreign direct investment, the foreign investor directly controls his/her assets that are made
on investment in host country. First and for most, a foreign investor uses the economy that would have
been used to advance the economy of the home state. Therefore, the home state is justified in ensuring
that the resources invested in a foreign country (host state) are protected.
 The investment made in the host state definitely will enhance the economic development of the
host state.
 It would create an employment opportunity for the residents of the host state.

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Foreign direct investments are made largely by multinational corporations. Multinational corporations
are large business organizations so the sum of money invested is large. Further, those multinational
corporations will implement a global strategy in making foreign investment. Consequently, controlling
is essential for the implementation of the global strategy.
Two factors are pointed out as reasons for the decline in the inflow of FDI in East Africa.
 These concern the fact that the sub-region is poor in resources, and
 There is a political instability.
Investing in developing countries abroad
Foreign investors are encouraged by several factors to invest abroad in general and in a developing
country in particular. There are also factors that pull investors to invest abroad. These factors may be
categorized as pull factors and push factors. Pull factors are factors that attract the investor towards
developing countries to invest. Push factors, on the other hand, are unfavorable factors in the home
state of the investor that repel the investor from that country. Thus, push factors have the force to push
the investor to opt for a favorable condition to invest in. Therefore, the investor will go to abroad to
invest.
It is worth noting that push factors are the opposite of pull factors.
The following may be the pull factors for investors to invest in a developing country:
1. Market pull factors– Investors need market for their production. Now days, the world is
divided into different economic blocks. For example, there are the common Market of Eastern
and Southern Africa (COMESA), European Union (EU) etc. For example, a product originates
from Ethiopia will get a preferential tax treatment in COMESA than a similar product that
originated from China because Ethiopia is a member to COMESA while China is not. Thus, if
the particular product has a demand in COMESA, Chinese investor may want to invest it in
Ethiopia to be a beneficiary of the COMESA.80Market pull factors are the most important
determinants of FDI especially in host economies. Large Markets that are emerging in
developing countries will be more attractive.
2. 2. Resources: An investor needs natural and human resources in a reliable manner to produce or
manufacture. Thus, the investor could be attracted by the abundance of natural and human
resources available in developing countries. An investor will prefer to invest in a country where
natural resources needed for the manufacture of his/her/its produce are available in a large
quantity and at a cheaper in price. In addition, an investor will be attracted to invest in a country
where skilled, disciplined and cheap labour force is found, other factors being equal.
3. Policy frameworks of a host country also determine the direction of FDI. Liberalized
economic policies and privatization policies of a host country attract FDI. Regulations and
inducements encouraging FDI and investment treaties (bilateral or multilateral) facilitating FDI
are pull factors.
4. Political and economic stability: Investors are investing with a view to gaining profit which
would be realized through time. Thus, to gain profit, the political and economic stability of a
country are essential. Therefore, investors will be attracted to invest in a country where there is
political and economic stability.
5. Existence of relevant clusters: - The nature of investment requires the existence of some
inputs from other enterprises. A group of enterprises feeding each other within put are known as
a cluster. For example, a textile factory needs an enterprise that spins cotton and produces raw
material to produce clothes. An investor will be attracted to invest in a country where inputs are
available for him/her/it to produce.

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 6. Growth: An investor wants to invest in a country where there is a demand for the product
because this may reduce cost to transport the product to such country by producing it in the
country. This definitely will increase the profit from the investment. Investing in the country
where there is demand for the product will also enable the investor to adapt the product to local
needs and taste.
Push factors that repel FDI in developing countries include:
1) Market push factors- Developing countries have limited home market that may not expand as
required by investors. Thus, this is a push factor since the investor may wish to go out to find
market.
2) Increases in production costs are also driving factors. Increase in production costs may be the
result of rapid economic expansion, or scarcity of resources or inputs. Increase in labour costs is
a crucial factor that pushes investors. In addition, inflationary pressures also are pushing factors.
3) Home country business conditions-may be the cause for the investor to opt for international
investment. For example, if the competition in the home country is stiff, the investor may need
to move into a foreign market.
MOTIVATION AND STRATEGIES
A. Market-Seeking – FDI is the most common type of strategy for TNCs in their places of
internationalization. This was confirmed by a study conducted by UNCTAD as the most
significant motive for FDI. Particularly NTCs in developing countries invest to open or
secure markets since the resources, like oil gas, are available in their home countries.
B. B. Efficiency-seeking –FDI is an important motive. In Asia FDI investments in electrical
and electronic products, garments and IT services are made based on the principle of
efficiency seeking.
I. Buyer driven – Large buyers control branding, marketing and access to markets and strive to
organize, coordinate and control the value chain in industries such as agro-industries, garments,
furniture &toys.
II. Product driven – Key companies own crucial technologies and other firms in the net work,
especially supplies e.g. Electronic & automobiles. Industry clusters are also an important aspect of
product driven global production networks.
C. Resource- seeking:- is of moderate significance. FDI may be made to secure material resources
abroad, e.g. China, India, and Turkey.

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