Ethiopia FDI Policy Report 2022
Main Findings and Recommendations

Kenichi Ohno
GRIPS Development Forum
January 27, 2022

Background• GRIPS and JICA have conducted Industrial Policy Dialogue with
Ethiopia since 2008. This report is one of its outputs.
• In 2020, Policy Studies Institute (PSI) and GRIPS Development
Forum (GDF) co-authored the Ethiopia Productivity Report.
This FDI study is the second joint product of PSI and GDF.
• Key authors are Dr. Mulu Gebreeyesus, Dr. Kiflu Gedefe Molla (PSI); Prof.
Kenichi Ohno, Prof. Izumi Ohno, Ms. Sayoko Uesu (GDF); and Mr. Toru
Homma (JICA) with secretarial and editorial support of Ms. Mieko Iizuka.
• There is a companion policy paper drafted by GDF which includes
additional policy recommendations.
Ethiopia FDI Policy Report (2022) https://www.grips.ac.jp/forum/pdf22/EthiopiaFDIReport_final2.pdf
Companion paper (2021) https://www.grips.ac.jp/forum/pdf21/FDI_proposal_08.pdf
Ethiopia Productivity Report (2020) https://www.grips.ac.jp/forum/pdf20/ETProductivityreport_20200228.pdf

FDI Policy Report: Contents xv + 243 pages
A Compact Summary of Policy Recommendations (2 pages)
Overview and Summary (13 pages)
1

Ethiopia’s FDI Policy Evolution and Performance2

FDI Policy for Industrialization: From Quantitative Accumulation to Value
Creation3

Dynamics of FDI in Ethiopia: Bridging the Balance of Payments Gap

4

Enhancing the Role of FDI in Technology and Knowledge Transfer

5Foreign Direct Investment in Ethiopia: A Survey Report

6

Current Status and Challenges of the Garment Sector: A Comparison ofVietnam, Bangladesh and Ethiopia

7

Pursuit of Product Quality and Ethical Correctness in Developing theGarment Industry

8

FDI Strategy in the Age of Industry 4.0 and Post COVID-19

Executive summary
Comprehensive
policy review andproposals
BOP impact andtechnology transfer
Domestic andinternational
surveysGlobal trends that
affect Ethiopia

Companion Paper: Contents“FDI Policy for Enhanced Value Creation in Ethiopia: Situation Analysis and Policy Proposals” (GDF, Oct. 2021), 28 pages

PART I – Current Status and Future Orientation
1

Where Ethiopia stands

2

Realization of dynamic comparative advantage
PART II – Policy Challenges and Recommended Actions

1

Upgrading Ethiopian labor and enterprises

2

FDI attraction and linkage formation

3

Industrial park management

4

The productivity-wage balance and minimum wage setting

5

Improving business environment

6

Benchmarking and mobilization of competent foreign experts

7

Rebuilding and augmenting confidenceGeneral Observation
Despite high growth and large FDI inflow in the last two decades, theEthiopian economy faces several problems.
• Macroeconomic difficulties—inflation, fiscal deficit, balance-ofpayments imbalance, the chronic shortage of foreign exchange, andthe shortages of basic commodities• The lack of structural transformation and the weak performance of
manufacturing• Problems in the quality of growth, productivity and labor quality• A weak private sector and low domestic value creation• Recent growth slowdown
FDI policy revitalization is needed as one of the key measures toovercome these difficulties.
This report discusses FDI strategies to put Ethiopia on a robust growthpath. We mainly focus on long-term and structural issues.

Net FDI Inflow into Ethiopia
Manufacturing Share of GDP

Sources: For 1977-2019, World Bank, World Development Indicators (last updated on
July 30, 2021, accessed on September 6, 2021. For 2020 and 2021, National Bank ofEthiopia data as reported in TradingEconomics.com which includes the license fee forforeign participation in the telecom sector amounting to $850 million; supplemented byrecent news reports.
Source: World Bank (2021c). East Asia and Pacific excludes high-income
economies in the region.

Key Findings and Proposals
1. FDI policy: current status and future directions
2. Three-part strategy
3. Industrial park management
4. BOP and technology transfer
5. Comparing Ethiopia, Vietnam and Bangladesh
6. Two global requirements and challenges
7. Rebuilding and enhancing confidence1. FDI Policy: Current Status and Future
Directions (mainly ch.1&2)
 Ethiopia’s FDI policy has been revised through a series of Proclamations
and Regulations. It steadily became more open and favorable to FDI.
Restrictions on FDI entry have been eased in steps. However, opening up
is only the first step.
 The key argument of this report is that FDI policy should be more
selective and encouraging to FDI firms that bring new or additional
value to the national economy. This can be restated as a movementfrom quantity-based FDI to quality-based FDI.
 Here, value or quality refers to the generation of export earnings, transfer
of technology and management knowledge, introduction of products orprocesses new to Ethiopia, upgrading of workers and engineers,
procurement of domestic inputs and services, and assisting domestic firms
to actively participate in global value chains.

Recommended Actions
1. The current policy does not clearly state ultimate goals. The role FDI
should play in national development is also not plainly explained. A newpolicy document explicitly stating long-term goals, and strategies toattain them, is desirable (cf. Industrial Development Strategy of 2003).
2. The current policy is more administrative than promotive. It defines
procedures but it is weaker in presenting strategies to attract andincentivize high-quality FDI. It is these latter provisions that are vital.
3. Ethiopia favors large factory operations that hire many workers. This isappropriate when job creation is a paramount national goal. However,
FDI that brings high technology and new products should also bestrongly welcomed. They are needed to move Ethiopia from simple
manufacturing to more sophisticated one. Such investors are usuallysmaller and more varied in their requirements. For this:• Minimum capital requirement on FDI should be eased or removed.
• Smaller and more varied industrial space should be offered inaddition to large standard-size rental sheds.

Small Rental Factories in Vietnam
Large sheds are partitioned into 250-1,000m2 spaces

High-quality investor support and security are provided
500m2 rental space is highly demanded

Greenery is a pleasant additionAddendums and Caveats• FDI is a game of double maximization where foreign firms maximize
profit under the policy framework defined by the host government.
Government must set policy parameters in such a way to induce the best
response of foreign firms for national development.
• Value creation should not be forced but encouraged by incentives andother conditional favors. Government should not dictate foreign firms. The
final decision must be made voluntarily by each FDI firm.
• “Quantity” investors and “quality” investors should be simultaneously
pursued. Ethiopia still needs to create many jobs. Transition from quantity
to quality must be an overlapping process.
• For fairness and transparency, FDI’s performance criteria must be simple,
unambiguous and monitorable. The capacity of executing agencies
must be strengthened with good mutual coordination (EIC, MOI, IPDC,
revenue & customs, technical institutes, etc.)

2. Three-part Strategy (ch.2)
The strategy consists of:- Domestic capacity
improvement- Attraction of high-quality
FDI- Linking the two
Domestic firms must workwith FDI. Formation of FDI
enclaves should be avoided.
Blue letter items areconcrete policy actions
recommended in the
Ethiopian context.

Domestic Capacity Building• Strengthening domestic labor and enterprises is the very core of any
industrial policy.
• Recommended actions in the above diagram are all desirable, but all
cannot be introduced at once due to capacity and budget limits.
• Prioritize. Select a few actions, concentrate policy attention and resources,
and produce visual results rather than trying many measures superficially.
This process facilitates policy learning.

Attracting Value-creating FDI
1. FDI policy should gradually shift from quantity (investment size, job
creation, gross exports) to quality (technology, management, value
creation, GVC). Quantitative targets need not be abandoned, but quality
should also receive appropriate incentives.
2. FDI of all sizes, not just large labor-intensive ones, should be invited.
High-tech firms are usually smaller.
3. Government should respond to the diverse needs of value-creating FDI
firms. An effective mechanism to hear their voices must be in place.
4. Policy must be stable and predictable. Any change should be announced
well in advance to give sufficient lead-time for adaptation.

Linkage Formation• FDI-domestic firm linkage includes (i) procurement of materials, components
and services, and (ii) long-term business partnership through joint venture,
production cooperation, etc.
• Common tools include
Trade fairs and exhibitions

FDI-local firm matching service

Supplier database

Individual matching service

SME product display centers

Incentives for partner training, local
procurement and technology transfer• Government may directly offer linkage creating services, or indirectly
subsidize firms that engage in FDI-local linkage and technology transfer.
Encourage and guide them, but not force them into unwanted actions.

BUILD Office in Bangkok

Thailand BUILD• Thailand has a reasonably good (though not
perfect) linkage policy. The Board of Investment(BOI) and the Ministry of Industry (MOI) are the key official actors.
• The BOI Unit for Industrial Linkage Development (BUILD) specializes in
FDI-local firm linkage with the following functions:- Matching service for sourcing local inputs and finding business partners- Organizing a large annual subcontracting exhibition (SUBCON Thailand)- Managing ASEAN Supporting Industry Database which is accessible globally- Subsidizing Thai firms that participate in overseas trade fairs• Other linkage promoters in Thailand:

MOI Bureau of Supporting Industry Development (BSID), One Start One Stop
Investment Center (OSOS), Business Opportunity Center (BOC), Industrial Estate
Authority, component industry association (A.S.I.A.), private NPO (TPA), twoJapan Desks

3. Industrial Park Management (ch.2)• Industrial parks are a real estate business with inevitable ups and downs.
Ethiopian industrial parks must (i) generate profits, (ii) improve
competitiveness, and (iii) prepare against unfavorable times.
• Six suggestions are offered.
1. Diversify revenue sources (not just land and shed rents).
2. Provide facilities and services strategically; do cost-benefit analysis.
3. Customer-oriented investor services and park operation.
4. Protection against negative shocks; build slowly and cautiously.
5. Don’t insist on sector selectivity; accept all.
6. Offer diverse land and shed choices, including small ones.

4. BOP and Technology Transfer (mainly ch.3&4)
 The impact of FDI on the balance of payments (BOP) and technology
transfer are not automatic. They require appropriate domestic conditions.
 Both theory and international data suggest that FDI has an ambiguous
effect on BOP. The impact depends on the country and the specific sector.
 Possible negative effects come from (i) initial importation of equipment
and construction materials, (ii) a lead time before operation reaches full
capacity, (iii) heavy dependency on imported inputs, and (iv) projects thatgenerate little domestic value-added.
 Ethiopia lacks a clear strategy and effective incentives for technology
transfer and FDI-local linkage unlike China, Singapore or Malaysia. Other
problems include (i) foreign firms mainly interested in domestic market,
resources or cheap labor, (ii) limited local capacity, (iii) macroeconomic
instability, and (iv) political instability.

5. Comparing Ethiopia, Vietnam
and Bangladesh (ch.5&6)
Firm surveys were simultaneously conducted in three countries for qualitative findings
and identification of challenges during November 2020-January 2021.
Researcher(s)Number of firms

Location

Ethiopia

Dr. Mulu Gebreeyesus and
Dr. Kiflu Gedefe Molla, PSI

10 garment firms (4 local, 6FDI), 20 firms in automotive,
leather and food sector

Addis Ababa andvicinity only.

Vietnam

Dr. Le Ha Thanh, Vietnam 31 garment firms (21 local, 5Development Forum (VDF） FDI, 5 equitized SOEs)

Hanoi and vicinity
only.

Bangladesh

Dr. Monzur Hossain,
Bangladesh Institute ofDevelopment Studies(BIDS)

Dhaka andvicinity only.

30 garment firms (25 local
private, 1 JV, 4 FDI)

Ethiopia as a Newcomer• Vietnam and Bangladesh are well-established large apparel exporters while
Ethiopia is a latecomer. It is natural that Ethiopia lags behind the two in
product types, export volume, management and technology.
• However, we must ask whether Ethiopia’s less spectacular performance isdue only to time or if there is any structural problem that needs to be solved.
Textile and garment sector
Per capita GDP(WB 2019)
Export (UNCTAD 2019)
No. of firms

Employment

Ethiopia$856$0.143 billion
5.4% of total export

176

0.1-0.3
million?

Vietnam$2,715$40.3 billion
9.6％ of total export

7,627

1.56 million

Bangladesh$1,856$34.6 billion
Over 80% of total export

3,500

4 million

Note: comparison requires caution as definitions and scopes differ across countries, especially for the number of firms and workers.
Export data also have discrepancies depending on the source.

Country Profiles

Vietnam• Apparel export boomed after opening up in the 1990s. FDI from Japan, Korea,
Taiwan, etc. Cheap and hardworking labor. Many regional and bilateral trade
agreements ensure overseas markets.
• Many firm types including private, FDI, former state-owned and military.
Private sector dominates in firm number (98.6%). Garment association(VITAS) supports the industry.

Bangladesh• In 1974, Daewoo (Korea) assisted the creation of the Ready-made garment(RMG) industry. Robust growth despite many challenges (end of MFA 2005,
Rana Plaza accident 2013). No FTAs with major markets.
• Domestic private firms dominate (98%), FDI firms are few. Two powerfulgarment associations (BGMEA & BKMEA) support the industry effectively.
Government provides subsidies for domestic fiber use, short-term loans forexport, 10-15% F/C retention, low currency value, bonded warehouses, etc.

Ethiopia• The arrival of Turkish apparel makers from around 2008 (Turkey declined
thereafter). China, India, Bangladesh, Sri Lanka, etc. also came. Active
construction of state-run industrial parks. AGOA and EBA (however, AGOA
was suspended in January 2022).
• Less than 100 firms have export capability dominated by FDI. ETIDI provides
training and technical support. EKI supports with kaizen. ETIGAMA has about
100 members but its activities are relatively limited.

Domestic Value Creation

CMT (cut-make-trim), CM(cut-make) or CMP (cutmake-pack)
Receiving all materials frombuyer; processing fee only
OEM/FOB (original
equipment manufacturing/free on board)
Manufacturer procuresmaterials at own cost and risk;
receiving total product value
ODM (original design
manufacturing)
Manufacturer proposes design,materials and specs to buyer

Source: General Statistics Office of Vietnam, Percentages show Vietnam’s situationin 2019.

OBM (original brandmanufacturing)
Manufacturer establishes own
brand, and produces and sells
for itself

Value Chain and Smile Curve
Latecomers usually startfrom the bottom of the curve
where value is lowest, andtry to expand vertically(productivity improvement)
and horizontally (upstream
and downstream expansion).
The two directions may befurther subdivided into theupgrading of process,product, supply chain, end
market, functions, etc.

From CMT to FOB• In Bangladesh, FOB already occupies 70% of garment production while theremaining 30% is CMT. Fabrics and other materials are imported mostly
from Hong Kong/China. Some accessories and knit fabric are locally
produced. Some large firms even engage in ODM but the number is small.
• In Vietnam, CMT is still dominant (65%). FOB is reported to be 25%, ODM
9% and OBM 1%. The movement from CMT to FOB has been a policy goal
since the 1990s but progress is slow. Domestic fabric and fiber production
exists, but only for domestic use due to quality problems (separation of
upstream and downstream).
• In Ethiopia, it is reported that, among FDI firms, 2/3 are FOB and 1/3 are
CMT. But this reflects the strategies of individual foreign firms rather thanEthiopia’s domestic capability. Virtually all inputs are imported.

Participation in Global Value Chain
Vietnam and Bangladesh (Incomplete Data)

In both countries, domestic
value creation is about 60%
of apparel export value FOB.
(No data for Ethiopia)

Note: the diagram shows the composition of export value FOB. The value in foreign
retail markets, including the costs and profits of buyers and distributors, must be far
greater than this. According to WTO, global apparel export (SITC84) was $495
billion while global apparel retail value was $1,438 billion in 2019. This means anadditional $946 billion was created between export shipment and final purchase, avalue almost twice as the export value.

Labor Cost and Productivity• Monthly manufacturing wage (including bonuses,
overtime, social security) was $344 in Vietnam, $154
in Bangladesh (2020); and $83 in Ethiopia (2016).
• Labor productivity: $12,700 in Vietnam, $10,400 in
Bangladesh (2018); and $1,271 in Ethiopia (2016).
• Unit labor cost (labor cost for producing $1):
32.5 cents in Vietnam, 17.8 cents in Bangladesh(2018); and 6.5 cents in Ethiopia (2016).
• Ethiopia’s labor cost appears very low. However,there are disadvantages that offset low labor cost:
1. Products are relatively simple.
2. Workers must be taught basics (rules, timeliness, discipline, etc.)
before teaching technical skills.
3. Investment climate is poor (F/C, power, logistics, customs, etc.)

6. Two Global Requirements and Challenges(ch.7&8)

 Global buyers impose product quality. They also require sociallydecent conduct in manufacturing. Ethiopia must fulfill both. One problem
is the proliferation of many overlapping standards and certifications(especially for ethical conducts).
 Assistance is sometimes available from foreign buyers, donors andinternational organizations. Domestically, government and industrial
associations, if they are capable, should provide necessary support.
 Many developing countries incorporate the idea of Industry 4.0 in theirdevelopment plans, but substance is often lacking.
 Capacity building is needed to cope with the negative aspects of AI and
automation, especially the fear of job loss.
 The COVID pandemic may accelerate the use of Industry 4.0 and open
up new business opportunities. FDI and international cooperation mustreflect these New Normal facts.

7. Rebuilding and Enhancing Confidence
 Ethiopia needs to augment investor confidence to fully realize its economic
potential. FDI is affected by both concrete facts and investor psychology.
Ethiopia must work on both.
 Lost confidence is always recoverable even after a severe crisis orconflict (cf. Cambodia, Rwanda, Vietnam, Sri Lanka, Ethiopia after Derg).
But restoration may take a long time (many decades).
Policy must accelerate and shorten it.
 Investor psychology is not linear but hysteretic.
Perception first moves slowly, then begins tochange rapidly. Policy effort may not produce
immediate results but it must be continued until
the critical point is reached.

Working on Investor Psychology
1. Investors evaluate credible future policies highly even if the status quo
is far from satisfactory. Plan a bright future—large demand, ample skilledlabor, rise of targeted sectors, etc.—and back it up with concrete actions.
2. Ethiopia should stage a big policy regime change with effective
presentation. Policy components should not be offered piecemeal but in a
coherent package with high visibility.
3. At the same time, produce small but visible early results. Initial results
increase policy credibility and justify an investment decision.
4. Know the differences among investors and nationalities. Decisionmaking speed, time scope, technology transfer, etc. differ among Chinese,
Indians, Koreans, Europeans, Japanese, etc. and even across individual
firms.

Summary of Core Recommendations
1. A comprehensive FDI policy should be drafted
A new ground-breaking document should be created for renovating Ethiopia’s FDI policy
containing policy philosophy, long-term objectives, issues and areas to be improved,
envisaged stages and concrete action plans. [Section 1-5; also 1-2 and 4-6]

2. A shift from administrative to proactive FDI policy
The main weight of FDI policy should shift from administrative provisions to more
substantive promotional issues such as policy goals, targeted sectors, incentives associatedwith performance criteria, official support and public-private cooperation [Sections 2-6, 3-3
and 4-6; also 1-5, 3-4, 4-2]

3. Invite high-tech FDI along with large labor-intensive FDI
Ethiopia needs both types. High-tech FDI firms are smaller and more varied in needs thanlight manufacturing, and policy should hear and cater to their diverse requirements. The
minimum capital requirement for FDI should be eased. [Sections 2-6 and 2-8; also 4-6]

4. Three-part strategy for capacity building, FDI and linkage
The strategy consists of (i) strengthening domestic firms and labor, (ii) proper FDI selection andattraction, and (iii) the creation of FDI-local firm linkage. Each demands serious learning andextensive preparation. Domestic capacity must be raised first to a certain level before FDI-local
linkage can occur. [Section 2-7]

5. Industrial park management reform
Industrial park management should be upgraded in the following six aspects: (i) revenue
diversification; (ii) strategic provision of facilities and services based on cost-benefit analysis; (iii)
customer-oriented investor services and park operation; (iv) protection against expectablenegative shocks; (v) invitation of FDI from all sectors; and (vi) diverse land and shed choices
including small ones. [Section 2-8; also 1-3, 1-5 and 3-3]

6. Policy capacity building
To effectively execute the policy agenda above, Ethiopia needs clear performance criteria andthe enhanced capacity of industrial officials to conduct and monitor each policy. In addition, theinvestment climate must be greatly improved. [Section 1-2]