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1. Introduction
Foreign direct investment (FDI) and its role in host countries economy have been a center of debate in the literature as some identify FDI as an engine of economic growth in capital deficient countries through a chain of economic activities; increasing productivity, technology transfer and innovative capacity building, foreign exchange earnings, etc. Some literatures on the other hand argue that FDI has no significant role in boosting host countries economy (Metaxas and Kechagia, 2016).
In spite of this division in the literature, most countries are implementing policies targeted toward attracting FDI. Several empirical studies have also proved the positive economic impacts of FDI. Ethiopia, being one of the developing and capital deficient country has been working hard to attract FDI over the past years through the effort took a long to bear fruits. Under the growth and transformation plan (medium term growth plan) (GTP) the government of Ethiopia has targeted to elevate the country into lower-middle-income status by 2025. One of the pillar strategies in the GTP is attracting FDI, which can create massive jobs, transfer technology, uses domestic raw materials and at the same time oriented toward the export market.
In line with this, several policy interventions have been put into action. From opening the market for the private sector (shifting from command to free market system) in 1991 to designing special sector specific incentives and development of industrial parks, the country has undertaken a number of reforms to make the investment climate more favorable and attractive in the past three decades. The data from Ethiopian Investment Commission (EIC) (2019) indicates that the number of FDI projects registered has increased from 3 in 1992 to 5,313 in 2018. Out of the 5,313, around 56% became operational and able to create 328,844 permanent and 283,695 temporary jobs. Looking at the sectoral distribution about 49% of the FDI engaged in the manufacturing sector, 11.6% in agriculture and mining and the rest in construction and service sectors. The sustainable record economic growth (9.3% average annual growth during 2013/2014–2017/2018), comparable macroeconomic and political stability, huge infrastructural investments, availability of trainable labor and economic reforms targeted toward improving the investment climate mentioned as the main factors behind the increase in FDI inflow (EIC, 2019; NBE, 2019).
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