Abstract:
In the growth and development literature, capital accumulation and industrialization are considered
the crucial and critical key to economic growth. Given this, many developing countries particularly
Ethiopia, which follows agriculture, led industrialization policy made number of attempts to increase
ratio of investment in the country. Tax incentives schemes are among the attempts made to create
investment friendly environment. To answer the research question, the study adopts mixed methods of
research by using both descriptive and inferential statistics where primary data from EIA and ERCA
officials and secondary data is used from different sources such as EIA, ERCA, IMF and World Bank.
Descriptive statistics is used to analyze the trends of private domestic investment, tax revenue and
expense rate of Ethiopia. Inferential statistics is also used by employing time series OLS model. A 23
years’ secondary data from 2000-2022 GC was used then time series OLS regression was applied by
employing Log PDI as dependent variable along with tax incentives as independent variable and GDP
growth rate, inflation, market openness and Log transport availability as control variables. The
regression result show that tax incentives and market openness have significant positive long run effect
on private domestic investment, inflation on the other hand has significant negative long run effect.
Hence to promote the performance of private domestic investment in the country, the study
recommended that the government should continue marketing the tax incentive scheme and bring them
to be on budget. Further, the study recommended that the government should continue working on
improving the trade and infrastructural environment of the country.
