Determinants Of Domestic Private Investment And Its Effects On Economic Growth In Ethiopia: Time Series Analysis

Abstract

An important factor in a nation's economic development is investment activity. The ability of a nation to invest and use its resources effectively and productively is a major factor in economic growth. Although domestic private investment is crucial for economic growth, its expansion in Ethiopia is still in its early stages. Hence, the primary aim of this study is to examine the factors affecting domestic private investment and its effect on economic growth in Ethiopia. To meet its goal, the study used a quantitative research strategy. The secondary data for this study were collected from National Bank of Ethiopia and Ethiopian Investment Commission. The study used descriptive statistics to clarify trends of study variables in Ethiopia during the study period. Using the ARDL model and the relevant software, E-views version 12, the study concentrated on 31 years of secondary data (i.e., from 1992 to 2022). The results of Augmented Dickey Fuller and Phillips-Perron for unit root test reveal that all variables are stationary after the first difference. All the results of post estimation tests indicate that the data are statistical good fit with ARDL model. The finding of the study shows that inflation rate, public investment, real effective exchange rate and annual interest rate were found negative and significant effects on domestic private investment in short run while unemployment rate was found positive and significant effect on domestic private investment. The results of long run shows that external debt service, inflation rate, public investment and real effective exchange rate were found negative and significant effect on domestic private investment. In long run, domestic credit to the private sector, foreign direct investment, real GDP and trade openness were found positive and significant effect on domestic private investment. Finally, the study suggested that since inflation has a negative relation with domestic private investment in short run and long run, policymakers should understand the cause for inflation volatility and keep in a stable manne