Determinants of Domestic Private Investment in Ethiopia during 1971 to 2014: An Empirical Analysis

Though, various economic and political reforms which are expected to stimulate the role of private sector in the economy have been made over the last couple of decades, the performance of private sector has remained relatively low so far. Hence, this study was conducted with the main objective of investigating and analyzing factors that determine domestic private investment in Ethiopia by using the framework of VAR and vector error correction mechanism using annual data covering the period from 1971 to 2014. The regression results show that public investment, real GDP, exchange rate and credit have significant positive long run effect on private investment, while interest rate has significant negative long run effect. In the short run, exchange rate has significant positive contribution to private investment, while inflation has significant short run negative effect on private investment after one lags. 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 public investment in basic infrastructures and institutions that are crucial to attract private investment. Besides, ensuring stable investment environment and macro-economic and political stability are necessary to build lasting confidence of private investors.