Alleviating the Barriers to Domestic Investment in Addis Ababa: Underlying Causes and Proposed Solutions

Ethiopian Investment Commission (EIC) database shows that only 9.5% have become operational out of the total number of 80,419 domestic investment projects who received investment license in the last 25 years (1992-2017). The conversion rate of investment projects into operation in the capital city, Addis Ababa, is even much lower (only 6.4%) than the national average (9.5%). By any standard, this is one of the lowest investment conversion rates, and hence is quite worrying. This study tries to answer why above 90% of domestic investors were not able to move beyond the licensing stage to start operating and specifically identify the major constraints face by the domestic private investors. Unlike previous studies who rely on survey of existing firms, this study gathered information on the major constraints not only from successful ones but also from those investors got stacked or discouraged. A qualitative survey was conducted on a total of 42 firms (investors) in Addis Ababa mostly from manufacturing. The main finding of the study is that the key barriers to investment are related to lack of access to land, finance, regulatory and institutional inefficiency, poor infrastructure particularly power and lack of skills. The study contains a detailed manifestation of each of these problems. The overall implication is that the poor business environment is not only undermining exiting firms but also discouraging new investments and transition from project to operation. This study provides some policy suggestions on how to improve the low conversion rates and induce the development of a more dynamic domestic manufacturing sector.