Knowledge transfer — one major advantage of FDI can only be realized if local investors start to be engaged in the manufacturing sector.

By Abiy Hailu |

More local investors needed in manufacturing sector

Being the source of employment opportunity, income generation as well as goods and services, and contributor of public revenue, the private sector is widely seen as a major stakeholder in and driver of economic growth and development. The sector has a vital role to play in poverty reduction and raising standard of living of citizens. Further, its investment in innovation and sustainable business models can also boost national productivity and efficiency.

Economic growth and development depend essentially on a country’s ability to invest and utilize its resources efficiently. In this regard also, the role of the private sector is important in terms of its efficient allocation and utilization of resources and its contribution to the GDP. Once it becomes highly developed, the private sector would also play a key role in the provision of both infrastructure and social services.

As Ethiopia embraces a developmental state model, it requires the alliance of the public and the private sectors for the model to be successful. While the state is responsible for taking care of infrastructure development and supply of public goods and services, the private sector is still considered as engine of development.

One major factor that would allow the private sector to play its expected roles in the economy is capital accumulation. Domestic capital accumulation by the private sector expands the productive potential of the economy. At present, the rapid economic growth that has been registered in Ethiopia has created several conducive conditions for the private sector to accumulate capital.

Certainly, in Ethiopian case, many economic commentators argue the role the private sector plays in the economy is very limited compared to other countries in similar stage of development. However, in recent times, the private sector is gaining a lot of momentum in the economy and has started to accumulate capital. Yet, whether local investors are investing their accumulated capital in a manner which brings about sustainable national development is a matter in question. In fact, most often than not, they prefer to be engaged in sectors where they can gain the return within the shortest possible time. Due to various social, economic and cultural factors, local investors prefer short term investment and see it as a safer alternative. This is because, short-term investment allows them to invest their money with little or no risk, while knowing their money is not going to be tied up for long periods of time. For instance, they prefer to invest in the construction of huge buildings for rent in the capital, or be engaged in consumer or demand based import-export and wholesale trade than establishing small, medium or large size manufacturing enterprises whose investment pays off in the long run. In addition there are also non-productive private sector actors prefer to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.

Yet, the reality is that in developing country like Ethiopia, besides creating large number of jobs for citizens, investment in the manufacturing, investment in the manufacturing sector could be used as springboard for achieving future industrialization objective of the country.

As stipulated by Uremadu (2006), Adegbite and Owuallan (2007), although foreign direct investment (FDI) is beneficial to host countries by speeding up the process of economic growth and development, its repercussion effect is greater. Hence, FDI should at best complement domestic private investment and developing countries should depend greatly on domestic savings and investment. Knowledge transfer — one major advantage of FDI can only be realized if local investors start to be engaged in the manufacturing sector. This requires active long-term investors who can invest in sectors that bring about sustainable development.

Hence, once accumulating adequate capital, local investors should aspire to take risk and make long-term investment particularly in the manufacturing sector. This would have a paramount importance for the economic transformation of the country and hence would greatly benefit the investors in long run.

By doing this, the private sector can play irreplaceable role in enhancing industrialization, creating massive job opportunity and transferring technology. Further, its potential to support the country’s economic growth through providing quality goods and services to the international market would also improve.

In this regard, creating developmental investors by changing the attitude of investors and entrepreneurs is essential. Once creating investors with developmental attitude, financial institutions would have an enormous role to play in supporting such local investors particularly in providing the necessary finance and capital for their long-term investments. The financial institutions should support the kind of entrepreneurial initiatives that help the country achieve sustainable economic growth.

In this regard, a critical challenge is to ensure the necessary internal conditions for mobilizing enough domestic savings to sustain adequate levels of investment. It is crystal clear that there cannot be growth without investment of sufficient amount and quality. In fact, investment is both a result and cause of economic growth, where the private sector is a major actor.

Recently, the Ministry of Industry has called on local investors to use the newly revised policy to ensure the benefits of local investors as good opportunity to extensively participate in the manufacturing industry. Ministry Corporate Communication Directorate Director Melaku Taye told the Amharic daily Addis Zemen that the policy revision has been carried out in order to facilitate the participation of local investors in the manufacturing sector of the country’s economy.

According to Melaku, in the past, local investors were required to present 30 per cent of the money the want to borrow from the bank. However, the revised policy has reduced it to 25 and 20 per cent for lower and medium level investors respectively.

Melaku also noted that previously only international companies and foreign investors took part in industrial parks development. Currently the participation of local investors in the industrial parks has reached 20 per cent. Several incentives have also been put in place to encourage them to take part in industrial development.

In order to put in place a system that benefit local investors at all levels, studies have been conducted to establish Integrated Agro-processing Industrial Parks, he added. The study have been finalized and the per-preparation phase to construct the parks in four regional states have been finalized. The sum result of all these efforts, according to him, is to improve the sustainable participation of local investors in the industry sector.

Source: The Ethiopian Herald
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