Investment and Innovation Policy Review

UNCTAD/ITE/IPC/Misc.
United Nations Conference on Trade and Development
INVESTMENT AND INNOVATION POLICY REVIEW
ETHIOPIA
UNITED NATIONS
New York and Geneva, 2002
Note
UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to
foreign direct investment and transnational corporations. In the past, the Programme on
Transnational Corporations was carried out by the United Nations Centre on Transnational
Corporations (1975-1992) and the Transnational Corporations and Management Division of the
United Nations Department of Economic and Social Development (1992-1993). In 1993, the
Programme was transferred to the United Nations Conference on Trade and Development.
UNCTAD seeks to further the understanding of the nature of transnational corporations and their
contribution to development and to create an enabling environment for international investment
and enterprise development. UNCTAD's work is carried out through intergovernmental
deliberations, technical assistance activities, seminars, workshops and conferences.
The term “country” as used in this study also refers, as appropriate, to territories or areas; the
designations employed and the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal
status of any country, territory, city or area or of its authorities, or concerning the delimitation of
its frontiers or boundaries. In addition, the designations of country groups are intended solely for
statistical or analytical convenience and do not necessarily express a judgement about the stage
of development reached by a particular country or area in the development process.
The following symbols have been used in the tables:
Two dots (..) indicate that data are not available or are not separately reported. Rows in tables
have been omitted in those cases where no data are available for any of the elements in the row;
A dash (-) indicates that the item is equal to zero or its value is negligible;
A blank in a table indicates that the item is not applicable;
A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year;
Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifies the full period
involved, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.
Annual rates of growth or change, unless otherwise stated, refer to annual compound rates.
Details and percentages in tables do not necessarily add to totals because of rounding.
The material contained in this study may be freely quoted with appropriate acknowledgement.
UNITED NATIONS PUBLICATION

Copyright © United Nations, 2002
All rights reserved
CONTENTS
Abbreviations............................................................................................................................vi
Preface......................................................................................................................................vii
Introduction................................................................................................................................ 1
CHAPTER I
National Determinants of Investment Flows into Ethiopia
A. Recent Changes in the Macro-policy Environment........................................................ 10

B. Policy Coordination in a Federal System ....................................................................... 11
C. The Need for Core Competence at the Regional Level .................................................. 12
D. Comparative International Position of the Ethiopian Economy ..................................... 13
Overall Assessment......................................................................................................... 16
Tables ............................................................................................................................. 17
CHAPTER II
Investment Policy and Promotion
A. FDI Inflow to Ethiopia: 1991-1999 ................................................................................ 23

(i) The level and value of new investment projects ................................................... 23
(ii) Regional and sectoral distribution of investment benefits .................................... 24
(iii) The origin of FDI in Ethiopia................................................................................ 25
B. The FDI Regulatory Framework..................................................................................... 26
(i) Economic sectors open to FDI .............................................................................. 26
(ii) Ownership limitations and requirements............................................................... 27
(iii) Monitoring and reporting requirements ................................................................ 28
(iv) Financial incentives for FDI.................................................................................. 28
C. Institutional Framework for FDI Promotion................................................................... 30
(i) Ethiopian investment authority ............................................................................. 30
(ii) Investment promotion by other Government agencies.......................................... 34
(iii) Private sector FDI promotion ................................................................................ 38
D. Current and Future Challenges in Investment Policy and Promotion ............................ 40
(i) Ethiopia’s international investment challenges..................................................... 40
(ii) FDI targeting and project development................................................................. 42
(iii) Targeting FDI opportunities.................................................................................. 42
(iv) Ethiopia’s FDI targeting capability ....................................................................... 44
(v) The FDI policy challenges to 2010 ....................................................................... 44
E. Investment Policy and Promotion Strategy for Ethiopia to 2010 ................................... 45
(i) Ethiopia's international investment opportunities ................................................. 45
Overall Assessment ........................................................................................................ 47
Tables ............................................................................................................................. 49
iii
CHAPTER III
Agricultural Sector
Introduction.............................................................................................................................. 51
A. Agricultural Development in Ethiopia............................................................................ 51
B. The Organizational and Management of Technological Change in
Ethiopian Agriculture: Review and Assessment of Recent Reforms ............................ 53
(i) Strategic and organizational changes.................................................................... 53
(ii) Agricultural research and extension in the smallholder sector ............................. 54
(iii) Revised strategy .................................................................................................... 55
(iv) Agricultural extension........................................................................................... 57
(v) Human resource development plan (HRDP) ........................................................ 57
(vi) Seed multiplication and fertilizer facilities ........................................................... 58
(vii) Research and development management .............................................................. 59
C. Case Studies in Agricultural Development..................................................................... 60
(i) Textile ................................................................................................................. 61
(ii) Learning institutions ........................................................................................... 62
(iii) Horticulture ......................................................................................................... 63
D. Investment Potential in the Agricultural Sector.............................................................. 64
Boxes .............................................................................................................................. 67
CHAPTER IV
The Leather Sector
Introduction.............................................................................................................................. 73
A. The Value Chain in the Leather Goods Industry of Ethiopia ......................................... 74
(i) The Ethiopian livestock base ................................................................................ 74
(ii) The tanning sector................................................................................................. 76
(iii) The footwear and leather products sub-sector ...................................................... 76
B. Strengths, Challenges, Opportunities and Constraints ................................................... 77
C. Support Systems for Investment and Innovation ............................................................ 78
(i) The Ministry of Agriculture (MOA) ..................................................................... 78
(ii) The Ministry of Trade and Industry (MOTI) ........................................................ 79
(iii) The Ethiopian Tanners Association (ETA) ........................................................... 79
(iv) The Quality and Standards Authority of Ethiopia (QSAE)................................... 80
(v) The Productivity Improvement Centre (PIC)........................................................ 80
(vi) The Leather and Leather Products Training Development Institute (LLPTD) ..... 81
Chart 1 ............................................................................................................................ 83
Boxes & Tables .............................................................................................................. 84
iv
CHAPTER V
Small and Medium-size Enterprises (SMEs)
Introduction.............................................................................................................................. 87
A. The Evolution of Manufacturing Activities in Ethiopia ................................................. 87
B. Method of Analysis......................................................................................................... 88
C. Investment and Innovation Potential and Constraints .................................................... 89
D. Market Orientation.......................................................................................................... 93
E. Innovative activities in SMEs ......................................................................................... 94
F. Attracting FDI from SMEs ........................................................................................... 100
G. Support Infrastructure for SMEs................................................................................... 101
(i) The Ministry of Trade and Industry (MOTI)...................................................... 101
(ii) The Federal Micro and Small Enterprises Development Agency (FeMSEDA). 101
(iii) The Regional Micro and Small Enterprises Development Agency (ReMSEDA)102
Overall Assessment ...................................................................................................... 104
Conclusions and Recommendations
A. Conclusions .................................................................................................................... 107

(i) Overall assessment................................................................................................ 107
(ii) The need for vision and a realistic view of the changing
global investment climate................................................................................... 107
(iii) Devolved responsibilities through enhancing the role of institutions................... 108
(iv) Policy analysis ...................................................................................................... 108
(v) Sector-system interactions .................................................................................... 108
B. Recommendations .......................................................................................................... 109
(i) Investment policy and promotion ......................................................................... 109
(ii) The agricultural sector .......................................................................................... 111
(iii) The leather and leather products sector ................................................................ 112
(iv) Small- and medium-sized enterprises (SMEs)...................................................... 112
BIBLIOGRAPHY.................................................................................................................... 115
Selected UNCTAD publications.............................................................................................. 121
v
ABBREVIATIONS
AACC Addis Ababa Chamber of Commerce
ADLI Agricultural-Development-Led Industrialization
ALID Agriculture-Led Industrial Development
APDF Agricultural Production Development Fund
ARTD Agricultural Research and Training Project
AUA Alemaya University of Agriculture
BOI Board of Investment
CGIAR Consultative Group for Agricultural Research
COMESA Common Market for Eastern and Southern African Countries
DBE Development Bank of Ethiopia
EA Ethiopian Airlines
EARO Ethiopian Agricultural and Technology Commission
EIA Ethiopia Investment Authority
ECST Ethiopian Commission for Science and Technology
ELICO Ethiopian Leather Industrial Corporation
EMDC Ethiopian Management Development Centre
ENA Ethiopian News Agency
EPA Ethiopian Privatization Agency
ESE Ethiopia Seed Enterprise
ET Ethiopian Television
ETC Ethiopian Tourism Commission
FDI Foreign Direct Investment
IAR Institute of Agricultural Research
ICC International Chamber of Commerce
IFAD International Fund for Agricultural Development
IFC International Finance Corporate
ISI Import Substitution Industrialization
MEDAC Ministry of Economic Development and Cooperation
MFA Ministry of Foreign Affairs
MNC Multinational Corporation
MOA Ministry of Agriculture
MOTI Ministry of Trade and Industry
NARS National Agricultural Research System
NFIA National Fertilizer Industry Agency
NIS National Innovation System
NLSC National Leather and Shoe Corporation
NSIA National Seed Industry Agency
OIO Oronia Investment Officer
QSAE Quality and Standards Authority of Ethiopia
RDA Regional Development Agencies
RIO Regional Investment Officer
TNC Transnational Corporations
SME Small- and medium-sized enterprises
vi
PREFACE
The UNCTAD secretariat carries out two types of national policy reviews namely, the
Investment Policy Review (IPR) and Science, Technology, and Innovation Policy (STIP) Review.
These reviews, carried out at the request of Governments, are intended to assist interested member
States in formulating national investment and technology policies through an in-depth country level
analysis and by sharing experiences with other developing countries. At the request of the
Government of Ethiopia, this review combines elements of both IPR and STIP in an integrated
manner to assess how the country could develop its technological and innovative capabilities with a
view to enhancing supply capacity and attracting foreign direct investment (FDI).
In preparing this report, the secretariat was assisted, especially during the field visit to
Ethiopia, by the Ethiopian Investment Authority (EIA) and the Ethiopian Commission on Science
and Technology (ECST). These agencies also collaborated in the preparation of background
documents that helped define the specific areas of focus for the review process. The support
provided by EIA and ECST as well as the Permanent Mission of Ethiopia to the United Nations
Organizations in Geneva, which assisted with logistical arrangements, was vital for the successful
completion of the report.
The report benefited from contributions by international experts, the UNCTAD secretariat
and UNIDO. The international experts included Norman Clark, John Firn and Banji Oyelaran-
Oyeyinka. The leather sector contribution was prepared by UNIDO under the responsibility of
Aurelia Calabro. The review process was undertaken by the Division on Investment, Technology
and Enterprise Development (DITE) of the UNCTAD secretariat, under the overall responsibility of
Taffere Tesfachew. The review team wishes to thank all those who provided valuable comments to
the first draft of this report presented in a Workshop held at Addis Ababa, Ethiopia. Appreciation is
also extended to Lynn Mytelka, Helen Argalias, Khalil Hamdani, Fiorina Mugione, Mussie Delelegn
and Taddele Taye for their comments and Debbie Wode-Berhan and Lilian L. Mercado for
providing timely secretarial assistance.
The secretariat wishes to thank the Government of the Netherlands and the Government of
Italy for supporting the project through financial assistance.
vii
Introduction
With the signing of the peace agreement between Ethiopia and Eritrea in December 2000,
effectively ending the two-year conflict between the neighbouring countries, there is a renewed hope
that Ethiopia will regain the economic growth momentum that it experienced in the post 1992
liberalization period. Key ingredients for renewed growth are increased investment, both domestic
and foreign, in supply capacity, including physical infrastructure, the generation of relevant skills
and the development of competitive enterprises through local technological and innovative
capability building.
Investment is, without doubt, one of the primary engines of growth in all economies.
However, its effectiveness rests on strong complementarities with other elements in the growth
process, most notably technological progress, skills acquisition and the development of innovative
capability. These elements make investment a natural point of departure for Governments seeking to
formulate a robust development strategy. The link between investment and these other determinants
of growth, however, is not an automatic process. It requires among other things a favourable macro
policy environment and specific policies and institutions aimed at encouraging savings and attracting
and directing investment to key sectors in the economy thereby enhancing the contributions of
investment to skills formation, technological change, competitiveness and economic growth. A clear
understanding of how such a synergy between investment policy on the one hand and technological
progress on the other can be created is an essential prerequisite for designing an effective national
investment policy and investment promotion strategy.
As shown in table 1, domestic investment in Ethiopia has increased rapidly since the
introduction of liberal policies in 1992. However, the gap between domestic investment and savings
has remained wide thereby reinforcing the need for FDI in the development of the economy.
Between 1990 and 1997, gross domestic investment as a proportion of GDP rose from 11.9 per cent
to 19.1 per cent, while gross domestic savings remained at the same rate. A large part of the
increase in investment has been attributed to the private sector whose share increased from 2.5 per
cent to 13.1 per cent. Public sector investment increased only marginally from 6.4 per cent to 7.4
per cent. It would appear, therefore, that if a high level of private investment is to be maintained,
concerted efforts should be made to promote domestic savings.
At present, the savings gap in Ethiopia is met through investments generated from foreign
savings, more specifically, development assistance and FDI.1 FDI flows to Ethiopia and the
country's investment framework are examined in Chapter Two. It shows that although the
investment climate has improved greatly in recent years, there are still many aspects of investment
promotion where improvements are urgently needed. More importantly, Ethiopia does not yet have
an investment promotion strategy nor does it have a clear vision of where it fits into the global
1
The IMF, the World Bank and other multilateral and bilateral donors have consistently supported the economic policy
reform programme in Ethiopia. This indicates the level of trust and confidence that donors have placed on the
Government and its efforts to change the political and economic policy-orientation of the country.
1
Investment and Innovation Policy Review of Ethiopia
investment strategies of transnational corporations (TNCs).2 At the time of writing this report,
investment policy/strategy in Ethiopia basically consisted of broad statements of development
objectives and an investment code elaborating the investment framework and the sectoral activities
identified by the Government as priority investment areas. Therefore, the need to develop an
investment promotion strategy and a vision of the country's investment objectives and expectations
is urgent.
Be that as it may, the liberalization measures undertaken in the post 1992 period have
encouraged foreign investment flows into the country. For a large country ─ the second most
populous in Africa ─ with great potential, in terms of resource endowment and geographical
position, it should be considered an attractive location for foreign investment. However, the
quantity of FDI that entered the country in the past decade was disappointedly small when compared
to other countries in the region. The cumulative FDI inflow to Ethiopia for the period 1994 to 1997,
a time of economic growth and rapid private sector development, illustrates this point clearly. The
cumulative inflow during this period was equivalent to 0.2 per cent of total inflow to Sub-Saharan
Africa. Compared to other countries in the region, the amount of foreign investment in Ethiopia
during this period was equivalent to only 5.3 per cent of FDI inflow to Uganda, 5.4 per cent to
United Republic of Tanzania, 34 per cent to Kenya, 0.9 per cent to Egypt and 1.8 per cent to
Morocco. In comparison with other countries in the region, therefore, the total FDI inflow into
Ethiopia in the past decade has been insignificant.
As the country enters a new post-conflict era, renewed and concerted efforts are required to
increase FDI inflow and to ensure that it contributes to improvements in domestic supply capacity,
skills, physical infrastructure, export diversification, technological development and economic
growth. However, in mapping out a strategy for attracting FDI, two critical points need to be taken
into account.
First, FDI is a complement rather than a substitute to domestic investment. Therefore,

efforts to attract foreign investment must not overshadow those aimed at boosting domestic
investment through higher domestic savings. Indeed, ultimately, the objective should be to
develop a vibrant and growing domestic enterprise sector supported by domestic investment.
There is ample evidence to show that, in the long-term, this process by itself is the best
strategy for attracting FDI as foreign investment tends to be strongly attracted to countries
that have achieved sustained rates of economic growth, market development and where
domestic investment is large enough to generate dynamic and technologically advanced
enterprises.
Second, in the current global economic environment, policies and incentive schemes
designed to attract foreign investment and to build the competitiveness of domestic
enterprises must take into account changes that are taking place in the global economy, in
particular the new mode of competition generated by rapid technological changes and
globalization. As an emerging economy with an open and outward-oriented trade regime,
2
However, the authorities in Ethiopia recognize this limitation. Indeed, at the end of 1999, the Government of Ethiopia
requested the Foreign Investment Advisory Service (FIAS) to design, in collaboration with the Ethiopian Investment
Authority, a strategy for the promotion of foreign direct investment. The new strategy is expected to be operational in
2001.
2
Ethiopia cannot escape the effects of these fundamental changes in the global economy and
their implications for competitiveness and FDI inflows. Awareness of evolving global trends
by policy-makers is essential for designing a realistic and an effective investment and
development strategy.
The following three aspects of fundamental changes taking place are worth noting:
The first relates to the growing knowledge-intensity of production and its generalization
across all sectors of the economy.3 Increasingly, knowledge inputs, in particular investments in new
technologies and the skills associated with it, have become important components of production
activities and in some cases, overshadowing investments in tangible goods such as machinery and
equipment. Moreover, this trend is not confined exclusively to high-tech industries or developed
countries only but also to developing countries and the so-called traditional industries such as textile,
forestry, horticulture, leather and food processing. Box 1, illustrates the importance of knowledge
inputs in assisting small-scale African farmers to secure markets globally.
Second, with knowledge-intensity, increasing volume of information essential for

competitiveness and the decision-making process is generated. This requires organizational skills to
ensure vertical and horizontal information flows to relevant agents within the system. Unfortunately,
the process of information and knowledge flows in many developing countries such as Ethiopia is
still a significant problem. Lack of institutional capacity and a hierarchical approach to decision
making prevents horizontal interactions among key stakeholders in the system. This could be
detrimental to investment promotion and technological development because of the conflicting or
wrong signals it may send to potential investors.
Third, in conjunction with the above trends, the ability to learn, innovate, produce and utilize
knowledge, initiate organizational changes and generally adjust rapidly to changing market
conditions have become important determinants of competitiveness. This is not to imply that other
factors such as price no longer hold a dominant position as competitive factors. Far from it. The
cost of production still matters and in fact, for some products and markets, it is an important source
of competitive advantage. Moreover, innovative activities have the impact of reducing the cost of
production, for example, through the introduction of energy saving methods and the development of
alternative and cheaper raw materials. The point is, as diversification into higher-value products
takes place, knowledge and innovation-based competition as well as factors such as quality,
flexibility and design are becoming critical elements for the survival of enterprises both in home
markets and abroad. Today, dynamic enterprises are those that compete not only on price but also
on the basis of their ability to acquire knowledge and sustain a process of innovation ─ designing
new products, ensuring high quality output, modifying product processes and improving eco-
efficiency. This calls for investment and development policies that encourage knowledge flows and
innovative activities including the generation of a highly skilled labour force through formal
learning and on the job training
3
The concept of knowledge, as applied here, entails more than the results of R&D. It is a concept that includes product
design, quality control, process engineering, management routines, marketing, information processing, maintenance,
investment and change capabilities as well as networking and partnering skills.
3
What does all this imply for low-income developing countries like Ethiopia aiming to
improve competitiveness and integration into the global economic system by attracting foreign
investment and technology? If acquiring innovative capability is becoming increasingly important
for competitiveness, how can enterprises in a least developed country (LDC) such as Ethiopia
develop competitive advantages on the basis of innovation? How useful is the concept of innovation
in such a country where the productive population consists overwhelmingly of subsistence farmers
and artisans with low purchasing power and, thus, limited effective demand for new and improved
technologies? Will enhancing local innovative capabilities enable Ethiopia to create an economy
attractive to FDI? The answer to the last question is an emphatic yes.
While the focus of this report is on investment policy, it gives special attention, at the request
of the Government of Ethiopia, to local technological development and the process of innovation
and their implications for investment and competitiveness. For many policy-makers as well as
organizations, innovation is synonymous with inventions or major technological breakthroughs. The
latter is assumed to take place in specialized scientific or research and development (R&D) centres.
The image one gets is of a lonely scientist in a laboratory discovering new possibilities, often after a
lengthy period of research. Although such activities are vital for advancing the frontiers of
technology, they contrast radically with the reality of the innovative process in a highly competitive
environment. Nowadays, innovative activities are aimed at maintaining competitive advantages and
tend to be continuous, incremental and take place predominantly at the enterprise level. They
require interactions between key agents in the production system (for example, between users and
producers; between the knowledge producing sector such as universities and R&D institutions and
enterprises; between domestic and foreign enterprises) and need investment in learning, including at
the enterprise level.
The notion of innovation, as defined in this report, refers to "a process by which firms master
and implement the design and production of goods and services that are new to them, irrespective of
whether or not they are new to their competitors - domestic or foreign".4 Defined as such, the
innovation process encompasses the wide range of incremental changes that enterprises in both
developed and developing countries undertake in order to enhance their competitive advantages
through improvements in product design, technical performance and product quality and by
introducing changes in organizational structures, management style, marketing and maintenance
routines as well as other knowledge intensive elements of production. Unfortunately, however,
efforts by enterprises to introduce such changes receive very little attention, if at all, from policy-
makers, as they are not considered innovative activities. It is important that this misconception is
corrected and developing countries begin to initiate debate on the innovation process and how they
can generate a culture of innovation within enterprises. This report aims to emphasize the
importance of paying greater attention to the concept of innovation, as defined above, in the context
of designing policies to attract investment and enhance the competitiveness of domestic enterprises.
The report is structured as follows. Chapter I briefly examines the recent policy changes in
Ethiopia and the factors that determine its potential as an attractive location for FDI. Chapter II
4
Ernst et al., 1998.
4
reviews the investment policy of Ethiopia and the recent trends in FDI flows, the sectoral and
regional distribution and the institutional arrangements for attracting foreign investment. At the
request of the Government of Ethiopia, the report has focused its analysis on selected sectors and
issues. As a result, Chapter III reviews the country’s strategy for agricultural development.
Specifically, it reviews the potential for improving productivity and attracting investment into the
sector through technological changes and innovation. Case studies are used to analyze linkages with
industry. Indeed, since 1992, the Government of Ethiopia has identified Agricultural Development-
Led Industrialization (ADLI) as the main focus of its overall national development strategy. In line
with this objective and at the request of the Government, Chapter IV evaluates the opportunities for
investment and innovation in one of the branches of the agro-business sector in which Ethiopia has
comparative advantage namely, the leather and leather products industry. The value chains in the
production of leather-related goods, the strength and weaknesses of the leather goods production
system in Ethiopia and the policies and institutions supporting the sub-sector are analyzed. In
Chapter V, the potential for enhancing investment and innovation among SMEs in Ethiopia is
examined. SMEs make up the largest and the most important segment of the industrial sector in
Ethiopia. Finally, Chapter VI presents the conclusions and policy recommendations of the report.
5
Table No. 1
ETHIOPIA
INDICATORS OF MACROECONOMIC PERFORMANCE
Indicator / Year 1989 1990 1991 1992 1993 1994 1995 1996 1997
Real GDP Growth % 1.6 - 0.4 -6.0 12.0 1.7 1.6 6.2 10.6 5.2
Gross Capital 13.7 11.9 9.7 8.7 13.2 13.6 15 17 19.1

Formation % GDP
Domestic Saving, 8.4 7.6 3.2 2.8 5.8 4.6 6.0 5.8
% GDP
Annual Rate of 7.8 5.2 35.7 10.5 3.5 7.6 10.1 -5.1 -3.7
Inflation
GDP per capita, 392 369 370 ------ 420 ------ 455 ------ ------
(*ppp $)
Exchange Rate: 2.07 2.07 2.07 2.81 5.00 5.47 6.15 6.35 6.71
Birr/$1
Growth in 1.1 0.6 1.0 ------ 3.1 4.3 4.3 ----- -----
International Reserves
(months of import
coverage)
*ppp purchasing power parity
Source: IMF, Investment Financial Statistics

The Economist Intelligence Unit, EIU (Ethiopia 1997, 1998, 1999)
Human Development Report (From 1990 to 1998 annual reports)
World Development Report (1997, 1998/1999)
International Marketing Data and Statistics 1999 (23rd edition)
6
Box 1
Fresh Food global sourcing
Hilbre Farm, Zimbabwe, employs 1,000 workers, exporting fresh mangoes, asparagus, baby
carrots, baby corn and sugarsnap peas to Europe, Australia and the Far East. The elements of water,
cheap plentiful labour, a large farm, which provides economies of scale and a climate that facilitates
different crops to be produced year round, have always been there. What has changed recently is the
cost of two vital links in the chain: transport and information. Airfreight is now so cheap as to
make the shipment of vegetables economic, and computers and special software enable Hilbre and
its customers to make, track and record orders all the way from the field to the dining room table.
Seeds are planted every four days, according to a schedule laid out by Hilbre's United
Kingdom agent; Arbor International of Ascot, Berkshire, which takes responsibility for the product
from the seed to shopping basket. Planting patterns are calculated using historic buying patterns
provided by United Kingdom supermarkets. Also, packing schedules change daily in response to
information passed from United Kingdom to Zimbabwe via Electronic data Interchange, reflecting
previous day’s sales in the supermarkets.
Hilbre farm sells 120 tonnes of vegetables a month to industrial countries. It is the main
supplier of baby corn and out-of-season asparagus to Marks and Spencer, and also supplies other
British supermarket chains such as Sainsbury's, Asda and Safeway, as well as stores in France and
even Australia.
Proximity to Harare international airport and low cost airfreight and investments in
knowledge inputs are important elements in Hilbre's competitiveness. The vegetables are packed in
containers, cooled with cold air, and loaded onto planes for take off. The next day in the United
Kingdom the vegetables are distributed to regional depots.
Source: M. Prest and D. Bowen, 1996, "Vegetables Magic", 'Independent on Sunday', Business, Section,
July 7th 1996.
7
CHAPTER I
National determinants of investment flows into Ethiopia
There are a number of positive strategic factors that makes Ethiopia an attractive location for
foreign investment. Some of these positive elements include:
♦ A large domestic market and a unique geographical location enabling investors in

Ethiopia to service markets and customers in East Africa, North Africa and the
Middle East and to competitively supply specific products to selected European
markets. These are all reasonably affluent markets with positive growth prospects
over the medium-term;
♦ A unique history, national culture and tradition with a pool of highly educated and
dedicated elite to draw upon as managers and advisors, with English (the language of
business) widely spoken;
♦ A resurgent private enterprise ethos, with a portfolio of local and regional enterprises
established by indigenous entrepreneurs that deserves to be better promoted including
an emerging group of internationally recognized companies (e.g. Ethiopian Airlines)
that have already established a competitive market presence;
♦ A comparatively safe and less corrupt business and social environment that stands
out in stark contrast to many other countries and a generally friendly and helpful
attitude to foreigners;
♦ A capital city that hosts the headquarters of the Organization of African Unity, the
Economic Commission for Africa and other regional organizations as well as a
significant cosmopolitan middle class with experience in international business;
♦ An attractive climate and an evolving tourism sector that combines antiquities with
wildlife and visual beauty.
A national strategy to encourage investment inflow into Ethiopia must build on these positive
elements, in conjunction with other determinants. Often, a diverse and complex set of factors
determine the timing, scale and quality of investment inflow. Mapping out other determinants of
inward investment flows and identifying appropriate policy response is necessary in order to design
an effective investment promotion strategy. This Chapter will identify some of these factors starting
with recent reforms in the political and economic sphere introduced by the current Government of
Ethiopia.
In the last three decades, Ethiopia has undergone major socio-economic and political
transformations ranging from a feudal system to socialist and more recently an open market-based
economy and democracy. These changes have been accompanied by various attempts at institutional
reform including the introduction of a new Constitution in 1993 which paved the way for the
movement toward federalism. The Constitution provides for a federal system based upon nine
regions and two chartered cities, each of which is endowed with legislative, executive and judicial
powers pertaining to all matters within their borders except those related to defence, foreign affairs,
macroeconomic policy and the printing of currency.
9
The "socialist period", from 1975 to 1991, was marred by political turmoil, a prolonged
armed conflict and economic restructuring based on a centralized planning system. Comprehensive
nationalization of private enterprises, including foreign-owned enterprises, were carried out. The
private sector was virtually reduced to micro- and small-scale manufacturing activities. By the time
the socialist regime was removed in 1991, over 95 per cent of the modern sector output in food
processing, textiles, beverages, tobacco and leather and footwear industries were produced by public
sector manufacturing enterprises. The public sector also employed over 70 per cent of the workforce
in the industrial sector. This legacy has dictated the nature and context policy reforms introduced in
the last decade.
A. Recent Changes the Macro-policy Environment
A plethora of macro-policy reforms have been implemented since 1992. They include: the
liberalization of trade policy; privatization of public sector enterprises; financial sector reforms; and
deregulation of prices and exchange rate controls. Non-tariff barriers have been eliminated. Import
tariffs have been progressively reduced from a maximum rate of 200 per cent before the reforms to a
current maximum rate of 40 per cent. Further reductions both in terms of tariff rates and the number
of tariff bands are expected during 2001. Controls over retail prices and interest rates, which were
prevalent during the centralized planning system, have been eliminated. Furthermore, fundamental
reforms have been implemented in the financial sector and in monetary policy. Private sector
financial institutions are now permitted to operate, although the financial sector is still closed to
foreign investors. There are now six private banks and five private insurance companies in the
country.
The reforms introduced in exchange rate policy have also been decisive with positive
outcomes are evident in the supply of essential raw materials, spare parts, replacement machinery
and critical inputs to the agricultural sector such as fertilizers. Since 1992, Ethiopia has cautiously
devalued its currency (the Birr) and has moved toward a market determined exchange rate system
through the use of periodic foreign exchange auction. Judging by the low rate in the parallel market
for foreign exchange, in spite of shortages in the supply of foreign exchange caused by the regional
conflict, it seems that the exchange rate policy reforms implemented to date have been successful.
However, further reforms are required to ensure that the policy remains effective and that the Birr
eventually becomes convertible. Convertibility of the local currency is an important component of
the investment promotion policy.
In line with market-oriented economic policy, the investment regime has also been
liberalized through a series of Government proclamations. Since 1992, the investment code has been
revised twice to ensure a wider coverage of the sectors and activities that foreign investors are
allowed to participate in. The latest revision has broadened the sectoral coverage to include
telecommunications and power sectors. The Ethiopian Investment Authority (EIA), which is an
autonomous Government body, serves as a one-stop-shop for the promotion of foreign investment.
After a slow start, the Ethiopian Privatization Agency (EPA) has also begun to promote Ethiopia as a
location for FDI. Many of the regulatory and policy constrains that bedevilled the economy in the
past have been removed and the investment regime is now relatively open. However, further
10
reforms are needed in regard to the minimum size investment requirements for foreign participation
in joint ventures, the activities that are still closed to foreign investment and the remaining
administrative and procedural obstacles to investment, which can raise the cost of doing business in
Ethiopia.
To promote exports, the Government has also initiated a number of measures including the
establishment of an export promotion agency, the introduction of a duty drawback scheme and the
elimination of foreign exchange surrender requirements. Exporters can now retain up to ten per cent
of their foreign exchange receipts in foreign currency deposit accounts and sell the rest to any local
bank or foreign exchange bureau at freely negotiated rates over an extended conversion period of
four weeks. In addition, foreign investors in the export sector are allowed to buy foreign exchange
for remittances. These incentives as well as the efforts by the Government, with the assistance of
bilateral and multilateral donors, to upgrade the domestic skill base and infrastructure capacity are
aimed at stimulating export expansion and creating an environment conducive to export oriented
FDI.
B. Policy Coordination in a Federal System
Federal systems have both advantages and disadvantages relative to centralized Government
structures in the development of investment and innovation strategies. Local Governments, for
example, are ideally situated to identify opportunities for the development of spatial clusters of
activities and the complementary policies and supporting institutions that may be needed to
strengthen them. They are also well positioned to build channels for dialogue with local actors that
facilitate the emergence of a consensus on the strategies and steps needed to develop the local
economy.
Within the context of a federal system, however, coordination is always a problem.

Competition among local Government authorities for domestic resources can lead to a duplication
rather than a complementary work process. The timing and sequencing of policies and the building
of infrastructure that strengthens investment potential and opportunities for innovation through
networking and interaction across regions, requires the development of structures for consensus-
building among regions and between regions and the federal Government. Within federal systems,
there is also a tendency for regional authorities to engage in bidding wars for foreign investment. A
lack of coherence in investment promotion strategy significantly reduces the contribution that
foreign investment can make both to Government revenues and to the strengthening of local
innovative capability. Here, too, structures for dialogue and coordination must be put in place.
Moreover, within all federal systems, there are grey areas with respect to the division of
powers between federal and regional governments that go beyond the role of adjudication assigned
by law. Constitutions, for example, do not specify the rules and procedures for arriving at
coordinated policies within a federal structure. Interest rates and exchange rates, both form part of
the macroeconomic policy-making prerogatives of the federal Government in Ethiopia. Yet both
serve to shape the parameters within which enterprises make decisions with regard to investment and
innovation, which has a bearing on convergence or divergence in regional development. Economic
policies that fall within the realm of macro-policy environment, such as those which fix tariffs and
11
determine investment codes create the incentives, which shape the amount and distribution of
foreign investment. This, too, affects possibilities for development across regions.
Federal structures must thus be flexible and oriented toward building trust and a sense of
partnership. Clarity and legitimacy of rules and procedures and a commitment to open bargaining
between all parties are a prerequisite to overcoming the problem of excessive politicization of the
policy-making process. They are an essential element in building a consensus among regional
Governments on investment policy and ensuring effective coordination in resource allocation, policy
sequencing and timing across regions.
Federalism in Ethiopia, as elsewhere, will necessarily involve a continuous balancing of

tension as part of the attempt to create unity and integration without imposition from the centre.
This will likely involve continuous adjustment in the establishment, distribution, location and
funding of national institutions.
C. The Need for Core Competence at the Regional Level
Policy-making and management at the Government level is centralized in Addis Ababa. In

the new dispensation, national policy in all sectors stress the autonomy of decentralized activities
with a pledge to strengthen the regional, zonal and district/woredas levels of Government. In the
main, the Central Government formulates overall policies and strategies and guides as much as
possible, the implementation of national programmes. Regional state Governments are given
considerable authority, and are responsible for implementation. For example, in the 1997/1998
fiscal year, about 80 per cent of education expenditure and approximately 90 per cent of health
expenditures were allocated regional budgets. However, field studies carried out for this report
show that most of the regional states require considerable injection of human and material resources
to develop viable investment, both domestic and foreign, opportunities at regional levels (this is
corroborated by the extremely low indices of practically all socio-economic development
indicators). It is important to note that decentralization in Ethiopia has entailed a high degree of
devolution of power, containing elements of democratization, fiscal and administrative
decentralization. This then means new structures at state and woreda levels which could be costly.
There are five dynamic conditions, that must all be simultaneously present and reinforcing
one another, for viable investment opportunities and technological development within Ethiopia's
regional system. These conditions are:
(i) Human capital (administrative and technical) in sufficient quality and quantity;
(ii) Adequate financial resources to develop institutional capacity;
(iii) Commensurate political and administrative powers sufficient to influence
development programming;
(iv) Physical and technological infrastructure;
(v) Horizontal linkages between key institutions dealing with investment, technology
and learning.
12
D. Comparative International Position of the Ethiopian Economy
Chart 1 provides the results of a recent business survey on policy and other changes taking
place in African countries and whether, from the business community perspective, the changes are
positive.5 The index, therefore, measures the level of "optimism" and confidence on the direction of
change and the improvements that are introduced by different African countries. It is shown that out
of 20 African countries included in the "optimism index", Ethiopia ranks among the top five
countries, after Mozambique, United Republic of Tanzania, Uganda and Egypt. This indicates an
overwhelming vote of confidence in the reforms the Government has implemented since 1991.
However, although this is encouraging news for Ethiopia, it should be noted that, the optimism index
is only an expression of the country’s positive image and its prospects by potential investors. It may
not necessarily mean that large scale investments will follow as a result. To maintain the high level
of confidence and to ensure that it results in investment inflow, continuous improvements in the
investment climate and domestic supply capability is required. It calls, above all, for a stable macro-
economic environment, a pro-active investment promotion strategy, an industrial policy that
stimulates learning, technological upgrading and innovation in the productive sectors and a
dedicated leadership committed to well-functioning markets and with a clear vision for the
immediate and long-term future.
As shown in Chart 2, accompanying optimism is a realistic assessment of Ethiopia's

competitive position compared to other countries in the region. The "competitiveness index", which
shows the degree of competitiveness of 23 African countries6, indicates that Ethiopia is among the
least competitive countries on the continent. It ranks 17 and scores less than other East African
countries such as Kenya, Uganda and the United Republic of Tanzania. It is interesting to note that
the top performers, Mauritius, Tunisia, Botswana and Morocco, are countries that have invested
heavily in infrastructure development, diversified their export base through domestic supply
capability-building, created an environment favourable to a sustained inflow of FDI and managed
over time private-sector led development under stable economic and political conditions.7 The
lesson for Ethiopia is that moving up in the competitiveness index may require among other things
the strengthening of domestic supply capability through technological upgrading, increased
investment (domestic and foreign) and infrastructure development.
Tables I.2, I. 3 and I.4 provide selected indicators for inter-country comparisons. From
these, it is possible to identify some of the strengths and weaknesses of the Ethiopian economy as
well as its comparative advantage with other countries of the region competing to attract foreign
investment. More importantly, they point to some areas that future policy attention should focus in
order to build a national economic environment which is technologically dynamic and attractive to
investment, both domestic and foreign.
5
The chart is obtained from The Africa Competitiveness Report 1998, prepared by the World Economic Forum.
6
The competitiveness index is measured on the basis of a set of criteria which includes openness, Government, finance,
labour, infrastructure and institutions. Although, the determinants of competitiveness nowadays are more complex than
implied here, for the sake of comparison, the index serves a useful purpose.
7
For explanations of the differences in the performance of the countries, see Sachs, J and G. Stone, “Executive
Summary”, The Africa Competitiveness Report, 1998, World Economic Forum, Geneva, Switzerland.
13
Market size: As shown in table 2, nearly 10 per cent of Sub-Saharan Africa's population live
in Ethiopia which makes it the second most populous country in that region. In addition, Ethiopia is
a member of the Common Market for Eastern and Southern African Countries (COMESA), which is
a regional trading group incorporating 20 countries. A large domestic or regional market, other
things being equal, is attractive for local investment. It offers easy entry opportunity as well as the
opportunity to understand market conditions and is also attractive to foreign investment. Given the
fact that, at present, modern sector goods and services are accessible to only one-third of the
Ethiopian population, the potential for industrial expansion through investment and acquisition of
technology even within the country is great.
Natural resources: Despite Ethiopia’s wealth in natural resources, their extraction and
development, especially mineral resources, remain unexploited. The mining sector currently
contributes to less than 5 per cent of industrial output. Known reserves of metallic and industrial
minerals include gold, phosphates, nickel, copper, zinc, platinum and soda ash. Ethiopia also has the
largest livestock population in Africa and the tenth largest in the world. As shown in Chapter IV,
recent policies have encouraged the development of the leather sector. Principal products of this
sector being semi-processed skins, crust hides, wet blue hides, leather boots and footwear. Great
potential exists for turning this industry into a competitive and an attractive sector for FDI.
Although Ethiopia also has a large water resource capacity, which could be used for large scale
irrigation and power generation, it has yet to sufficiently exploit it, due partly to geo-political
factors. Currently, less than 25 per cent of the arable land is under cultivation and only 2 per cent of
the country's substantial hydro-electric potential is being utilized.
Agriculture: Ethiopia is an agricultural based economy. It generates over one-half (56 per
cent) of the country's GDP ─ more than double the average for Sub-Saharan Africa ─ and over 80
per cent of export earnings. Production is predominantly in the hands of small farmers working
individual smallholdings mainly for household consumption. While smallholdings can be efficient
and an important source of surplus, this sector remains underdeveloped and in need of more policy
attention. Currently, Ethiopia's agriculture is characterized by its low level of fertilizer application,
one of the lowest in Africa, and its low level of mechanization. As explained in Chapter 3, an
integrated policy approach may be required to make this sector receptive to technological adaptation
and diffusion and attractive to investment, both foreign and domestic. A key structural weakness in
the Ethiopian economy is its dependence on a single agricultural product, coffee, for exports and
foreign exchange earnings. Coffee accounted for some two-thirds of total export earnings over the
past two decades. Volatile international coffee prices result in erratic patterns of economic growth
as demonstrated by sharp changes in the annual rate of GDP growth (table 1). Manufacturing
exports accounted for less than 1 per cent of total exports. Export diversification, which is now a
major policy priority, will help remedy the imbalance in the export structure.
Technological development: Ethiopia’s general level of technological capability is low and

lags well behind other countries in the region (table 2). It has one of the lowest levels of primary
and secondary school enrolment ratios and expenditures on education. National average for primary
education of school age children is 30.1 per cent and for secondary 8.1 percent. In four regional
states, Afar, Somali, Amhara, and Oromiya the figures fall below the national averages. The average
gross enrolment for Sub-Saharan Africa (SSA) is 25 per cent for secondary schools or three times
14
Ethiopia's national average. Human capital is the sum total of the skills level of a country's entire
workforce including managers and administrators. This is underpinned by a strong foundation in
formal education from the primary to the tertiary level. However, Ethiopia’s low level of primary
school enrolment rate would still leave a lot of the school-aged population out of the educational
system. At this rate, the number of school children, in school, by the year 2020 is estimated to be
about 7.6 million out of the projected population of 97.9 million, a mere 7.7 per cent of the
population. This is approximately 20 per cent of the 0-14 age group for that year.
Reliable science and technology indicators for African countries are not easily available but
the limited information obtained (table 2) suggests that access to and application of technology,
especially information and communications technologies are still at the rudimentary stages. In
Ethiopia, only 3 per 1,000 persons have access to main telephone lines and 4 per 1,000 persons to
television sets. The ratio for computers is even less. The waiting time for main telephone line
connections has improved in recent years going down from more than 10 years, prior to 1995, to 5
years by the end of 1999. Internet connectivity was 0.01 per 10,000 by the end of 1998. As
Ethiopia's integration into the global economic system intensifies with liberalization and trade
expansion, it will become increasingly necessary to attract not only investment but also the
technology and knowledge needed to build a competitive enterprise sector and to sustain the
attractiveness of the economy for further investment. This will require increased public investment
in communications infrastructure, but also active private sector involvement, including foreign
investment, in the development of the communications sector.
Physical infrastructure: Another weak link in Ethiopia's economic system that has direct
implications for investment prospects is the poor state of physical infrastructure. In the area of
energy consumption, for example, traditional fuel still accounts for 91 per cent of total consumption
(table 2). Electricity, one of the essential requirements for industrialization, is underdeveloped in
Ethiopia. It has the lowest kilowatt per hour (KWH) per capital consumption in the region. Only 5
per cent of the population has access to electricity.
In terms of transport, Ethiopia has a reputable national airline which provides efficient air
links nationally and with many countries around the world. The airline and all its technical and
training activities provide an opportunity for building Addis Ababa as a regional hub for air
transport. Currently, there are plans to expand the Addis Ababa airport and improve its facilities.
This provides a unique opportunity for considering the option of turning the country into an
important regional centre for air transport. In contrast to air transport, Ethiopia has a limited railway
service, the lowest road densities in Africa with only 15 per cent of the national road network paved.
Large portions of rural areas are still inaccessible by road. As a landlocked country, the main
external trade route at present is through Djibuti. Improvement in physical infrastructure, in
particular the transport system and energy, is, therefore, one of the major challenges facing the
Government. Indeed, in recognition of this problem, the Government has singled out these two areas
as top priorities for public investment.
15
Overall Assessment
In the last decade, Ethiopia has worked tirelessly to transform its economy from a closed,
highly regulated, centrally planned and dominated public sector to an open, deregulated and market-
based economy. To a certain extent, the reform programme has seen successful economic growth
rates, foreign investment, and significantly higher volume of exports and export earnings.
Unfortunately, some of these advances have been negatively affected by the recent conflict with
Eritrea, despite Government efforts to shelter the economy from the impact of the war. Although the
immediate impact was felt mainly in the conflict area, for example, in terms of the displacement of
over half a million people, it did have wider implications. There was a slow-down in private sector
investment and donors significantly reduced and in some cases withdrew, their support. Now that
peace has prevailed again, additional efforts are required in investment promotion and in the
development of local technological capability and infrastructure, both physical and institutional. In
designing a strategy for investment promotion, the Government needs to map out a clear perspective
of the national context, in particular the policy and regulatory environment and the strengths and
weaknesses of the economy.
16
Table No.I.1
INTER-COUNTRY COMPARISON: SELECTED INDICATORS
Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-Saharan

Republic Africa
of
Tanzania
Population (millions) 60 28 20 31 60 9 28 614

1997
GNP Per capita 1997 110 330 320 210 1,180 2,090 1,250 500
GDP (millions $) 1997 9.85 9,899 6,555 6,707* 75,482 19,069 33,258 320,252
Agriculture % of GDP 56 29 44 48 16 14 20 25
1998
Manufacturing, 7 11 8 7 25 18 17 16
% of GDP 1997
Total Exports of good 783 3,027 726 1,372 15,245 8,151 9,246 83,985
and services (millions
$, 1996)
Total Exports of good 16 32 11 22 21 42 25 28

and services (as % of
GDP, 1997)
Non-manufacturing 89 73.6 99.3 82.5 68.4 20.2 49.7

goods (1995) (1996) (1992) (1992) (1996) (1996) (1996)
(as % of total exports )
FDI (inflows, millions 15 40 250 250 834 360 500

$, 1997**)
* Data cover mainland United Republic of Tanzania only

** Estimates obtained from WIR
Source: The World Bank, World Development Report 1989/1999
United Nations, World Investment Report, 1998
United Nations, Handbook of International Trade and Development Statistics, 1996/1997
17
Table No.I.2
NATIONAL LEVEL TECHNOLOGY CAPABILITY INDICATORS
Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-

Republic Saharan
of Africa
Tanzania
S & T Indicators
Tertiary natural and 36 --------- 13 39 15 24 29

applied science enrolment
(as % of total tertiary
1995)
Tertiary engineering 0.1 --------- 0.1 0.1 1.0 0.8 0.1 ---------
enrolment
(% 20-24 age group,
1990-1995*)
Public expenditure on 11 14 --------- 17 36 19 16

higher education
(as % of all levels, 1990-
1995)
Access to Information Technology
Radio 206 96 123 398 312 176 226 --------

(per 1,000 people, 1996) (1995) (1995) (1995)
TV 4 19 26 16 126 156 145 43

( per 1,000 people, 1996)
Main telephone lines 3 8 2 3 50 64 45 14

(per 1,000 people)
Waiting time for main >10 4.5 0.7 >10 5.0 1,5 0.3 5.4
telephone lines
(Years, (1996)
Personal computers ---------- 1.6 0.5 --------- 5.8 6.7 1.7 ---------
( per 1,000 people, 1996)
Internet hosts 0.01 0.14 0.01 0.01 0.29 0.05 0.51 0.07
(10,000 people, 1997)
18
Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-

Republic of Saharan
Tanzania Africa
Human Capital
Primary schools gross 31 85 73 67 100 116 83

enrolment ratio % (1995)
Pupil/teacher ratio 38 30 35 36 (1996) 23 24 28

(1995/1996) (1995) (1995) (1996/1997) (1996/1997) (1996/1997)
Secondary gross enrolment 11 24 12 5 74 61 39

ratio % (1995)
Tertiary natural and 36 --------- 13 39 15 24 29

applied science enrolment
(as % of total tertiary,
1995)
Public expenditure on 13.0 16.1 15.0 11.4 13.8 17.4 22.6 ------------
education as % of total
government expenditure
(1993-1995)
Infrastructure
Electricity consumption 22 144 34 58 787 848 480

KWH per capita (1995)
Traditional fuel 91 78 90 91 4 14 5
consumption
(as % of total
consumption, 1995)
Commercial energy use 22 110 23 34 600 595 327

(oil equivalents
per capita Kg, 1994)
Paved road % of total 15 14 --------- 4 78 79 50 17

(1996)
* Data are for the most recent year available
Source: African Telecommunication Indicators 1998

Human Development Report 1998
World Development Report 1998/1999
19
Table No. I.3
FACTORS THAT CONTRIBUTE TO ETHIOPIA'S COMPETITIVENESS
Strengths Weaknesses
Political environment < Democratic system of < Regional instability

government
< The seat of many multilateral
organizations, including the
OAU and ECA
< Serious Government with the
determination to achieve
private sector led rapid
economic growth
< Membership of the Lomé
Convention
Macro-economic environment < Consistent market reforms < Low domestic saving
since 1991 < Recent growth dependent
< Fiscal stability and low on weather conditions
inflation < Bottlenecks in the
< A strong growth record in implementation of
recent year policies due to weak
< Liberalization of trade, administration and
financial and monetary policy institutional structure
< Strong donors support,
including multilateral
agencies such as the IMRF
Market potential < The second most populous < Low purchasing power
country in Sub-Saharan (with GDP per capita of
Africa $110, one of lowest in
< Member of a regional trading the world)
block, COMESA
Natural resources < Abundant agricultural < Only 4 per cent of

resources with potential potentially irrigated
irrigated land of about 3.5 land developed
million hectares
< The largest cattle population
in Africa and tenth largest in
the world
20
< Nine major river basins and

diverse mineral resources
such as gold, nickel, potash,
soda ash, platinum and
marble.
Human resource development < Relatively young and < High level of illiteracy
disciplined labour force
< Competitive wage structure < Shortage of skilled
(minimum wage $15 and technical personnel
gradate salaries range from
$75 to $100 per month)
Infrastructure < Reputable national airline < The lowest road densities
providing efficient air links in Africa
with many countries around < Limited railway service
the world < The lowest levels of
energy consumption in
< Privatization programmes in the world (only 5% of
the energy and the population has
telecommunication industries access to electricity
< Limited access to
telephone services
Investment environment < A liberal and attractive < The cost of doing
investment climate business is still high due
< Opportunities for FDI in many to remaining
areas including agro- bureaucratic procedures
business, manufacturing,
tourism, infrastructure (in < Lack of clearly defined
particular energy and instrument promotion
telecommunications) strategy
< An artesian tradition and
proven record of dynamic
entrepreneurship
21
Chart 1: Optimism index (1997 - 1999)
0.0 5.0 10.0 15.0 20.0 25.0
Mozambique 23.13
20.55
Uganda 18.88
17.76
Ethopia 15.43
15.06
Morocco 14.09
13.89
Malawi 12.6
12.2
Cameroon 12.03
11.91
Kenya 11.45
11.27
Burkina Faso 11.21
9.55
Tunisia 9.31
8.99
Namibia 6.99
3.61
Chart 2: Competitiveness index
1 Mauritius
0.87
2 Tunisia
0.79
3 Botswana
0.54
4 Namibia
0.43
5 Moroco 0.40
6 Egypt 0.38
7 South Africa 0.34
8 Swaziland 0.22
9 Ghana 0.09
10 Lesotho 0.06
11 Côte d'iivoire -0.09
12 Zambia -0.09
13 Kenya -0.15
14 Uganda -0.16
15 Burkina Faso -0.21
16 United Republic of Tanzania -0.24
17 Ethiopia -0.25
18 Mozambique -0.32
19 Cameroon -0.38
20 Zimbawe -0.40
21 Malawi -0.43
22 Nigeria -0.48
23 Angola -0.79
Source: The Africa Competitiveness Report 1998.
22
CHAPTER II
Investment Policy and Promotion
This chapter focuses on investment policy and promotion and specifically on potential
contributions of foreign direct investment (FDI) to Ethiopia’s economic, social and regional
development. The review of the current FDI policy framework and priorities is undertaken within
the context of the major changes underway in international private capital flows and especially in the
structure and strategic perspectives of the multinational corporations that decide the destination of
direct investment. Understanding and positively responding to these global shifts and trends is an
important policy priority for Ethiopia during the decade ahead. The following section reviews the
flow of FDI into Ethiopia since the opening up of the country to international investment in early
1991. This relatively short period has met with a degree of success in attracting new direct investors
and joint ventures. The effectiveness of the investment promotion activities undertaken by the
Ethiopian Investment Authority (EIA) as well as the current and future challenges in investment
promotion is then assessed. Finally, the priorities to be pursued by EIA and the Government over
the next decade will be identified.
A. FDI Inflow to Ethiopia: 1991-1999
FDI is only one component of new capital formation in the Ethiopian economy. Ideally, its
magnitude and contributions should be assessed in relation to total capital formation including
federal and regional Government capital expenditure, investment funds and services in kind
provided through multilateral and bilateral development assistance, and capital expenditure by
domestic and personal sectors. Unfortunately, the data needed to conduct a detailed assessment is
not available. Therefore, the following comments relate purely to domestic and foreign investment
(including joint- ventures) that were made in commercial projects as identified and reported by the
EIA. It is, however, worth noting that in 1999, private investment in Ethiopia accounted for over 60
per cent of gross domestic fixed investment. Moreover, it is believed that domestic and foreign
private investment continues to form the majority of real capital investment.
(i) The level and value of new investment projects
The number, scale and origin of new capital investment projects as reported by the EIA are
shown in table II.1, which covers the post 1992/1993 period. There may be an element of under-
reporting of investment projects during the earlier years. It is also possible that new project
expenditure by existing FDI in Ethiopia has not been fully recorded. The figures are thus best seen
as major new capital investment projects and representing genuinely important additions to the
nation's capital stock.
The main points to note in relation to the number, value and scale of new investment projects
which have commenced operation in Ethiopia (as distinct from being approved or in process of
implementation) are that:
23
♦ Only 19 new and expansion FDI projects have become operational in Ethiopia over
the post-1992/1997 period, compared to over 1,160 domestically funded projects.
Nevertheless, there has been a distinct growth recently in operational FDI projects as
approved projects move into operation;
♦ As expected, the average value of FDI projects at EB 169 million is much bigger
than domestic projects which have averaged EB 4.8 million to date. This varies a
little by sector and region. Foreign capital and joint-ventures represent the main
source of major industrial ventures;
♦ The recent growth in FDI resulted in a situation where, for the first eight months of
1998, overseas investment accounted for nearly 60 per cent of the value of
operational project investment in Ethiopia. This level will probably continue given
the recent pattern of project approvals.
Although domestic investments are still the major sources of capital formation in the country
accounting for about 62 per cent of total capital invested, FDI has began to make headway implying
that the role of EIA in supporting and servicing international investors will play an increasingly
important role in the future.
(ii) Regional and sectoral distribution of investment benefits
There are a number of features of domestic and international investment that are important to
future investment policy and promotion in terms of the spatial and sectoral priorities of investors
(summarized in table II.2). Although the results have been aggregated for presentation purposes, the
EIA investment project statistics are reported in detail for each of the regions and by industry
segment, enabling an effective monitoring of new operational projects.
The main points of the regional and sectoral distribution of domestic and foreign investment
in Ethiopia over the recent past and relevant to policy priorities for the future are that:
♦ Domestic and foreign investments since 1992 have been unevenly distributed among
the various regions. As shown in table II.2, over 50 per cent of total domestic
investment and nearly 98 per cent of foreign investments have been directed at three
regions, namely Addis Ababa, Amhara and Oromia region;
♦ Foreign investment appears to be concentrating largely within Addis Ababa and the
Amhara region. In terms of the overall value of FDI (including joint-ventures) 54
per cent went to Addis Ababa, 43.5 per cent to Amhara and the remaining 2.5 per
cent to other regions. Overseas investment in operational projects is not as
concentrated in the Capital as widely supposed;
♦ Domestic investment projects are concentrated in five regions namely, Addis Ababa,
Oromia, Tigray, Amhara and Southern Nations, Nationalities and Peoples (SNNP)
accounting for 21 per cent, 22.8 per cent, 36.7 per cent, 7.9 per cent and 6.8 per cent
respectively.
♦ It is, however, important to note that overseas capital has represented 77 per cent of
total investment capital in Amhara and nearly 60 per cent of new capital project
funding in Addis Ababa but a mere 2.6 per cent in Oromia;
24
There is, therefore, a tendency for overseas investors to focus on a relatively limited number
of locations within Ethiopia. This has implications for future promotion priorities and investment
incentives.
The pattern of foreign investment in terms of broad economic sectors and industrial segments
is more balanced than its spatial distribution. As can be seen from table II.2, the main divergence of
foreign investment is that it is relatively higher in primary sector projects (42.5 per cent) and
comparatively lower in terms of secondary sector manufacturing ventures (26.8 per cent) when set
against the 36.3 per cent of overall investment capital provided by international investors.
To date, operational FDI projects have been concentrated in a few industrial sectors: two
projects in each of the food crops, farming, beverages and chemical product sectors; four
construction projects; three projects in the metal fabrication sectors; and the remaining six projects
dispersed across a range of sectors. The single largest project (at EB 1,186 million) is in the hotel
sector (the Sheraton hotel in Addis Ababa). This accounts for 37 per cent of the total post 1992-
1993 value of investment in Ethiopia. This domination of FDI by a single project (albeit one with
major economic development linkage potential) is perhaps unique in the larger low-income
countries. The importance of flagship FDI projects is further considered below.
(iii) The origin of FDI in Ethiopia
Estimates of the value of the stock of FDI in Ethiopia in mid-1975, when the previous regime
appropriated most foreign enterprises, are not available. For the post 1992/1993 period, however,
the EIA maintained information on the country of origin of foreign investors (both corporate and
private) invest in new wholly-owned or joint-venture projects. The figures produced by the EIA,
which are summarized in table II.3, are more complex than they initially appear, as around 20 per
cent of both wholly-owned and joint-venture projects involve investors from two (occasionally
three) home countries coming together to make investments. Therefore, the data, as recorded may
thus not be fully accurate in terms of allocating capital flows between home countries. The EIAs
review of investment applications and direct contact with investors suggest that a large proportion of
these multi-nation FDI consortia are expatriate Ethiopians (sometimes from a single family)
initiating steps to invest in new projects or rebuild long-established Ethiopian businesses. The
investment figures presented in table II.3 include the geographical origin of FDI projects (wholly-
owned and joint-venture) approved by the EIA. Caution is necessary in interpreting this data as
approval may not necessarily mean the projects are operational. Nevertheless, they indicate the home
country origins of new post-1992 capital stock and its main features.
♦ Private investors from the Middle East region have generated one-third of new FDI
projects and have contributed two-thirds of the new capital associated with these
projects. Saudi Arabia is by far the largest source of investment with EB 4,981
million of committed capital to date, or 60 per cent of the overall FDI approved. It is
believed that MIDROC Ethiopia plc represents a significant share of these Saudi
Arabian investments;
♦ The second most important source of FDI to Ethiopia over the period 1992/1993 to
1997/1998 has been the European Union, which generated nearly 30 per cent of the
projects but only 15 per cent of the new capital approved. Within the European
25
Union, private capital flows from most major European Union member States were
represented, though no single State had a dominant role. Multi-state projects were
present suggesting an involvement by expatriate Ethiopians;
♦ The third largest source of FDI has been the Africa region which generated 17 per
cent of FDI projects approved by the EIA, but a smaller proportion (11 per cent) of
the capital value. These projects were comparatively small and again multi-nation
projects (12 of which involved the United Kingdom) suggesting the involvement of
Ethiopians residing abroad.
The remaining 8 per cent of FDI capital value had a variety of origins including North
America, Asia (predominantly India) and European and East European Countries.
The important implications of this revealed pattern of recent FDI capital flows to Ethiopia
are that the Middle Eastern countries, the adjacent African nations and the corporations in the
European Union are appropriate FDI targets. However, in terms of transfer of technology, benefits
arising from European and North American corporate investments will probably be more important.
In addition, existing multi national corporation (MNC) operations in Ethiopia, especially in fuel
distribution (that is, Shell, Texaco, Agip, etc), truck assembly (NECO) and food products form
another important investment promotion priority where follow-up investment projects may well be
possible. This again emphasizes the need for a detailed understanding of the business needs and
priorities of international corporations.
B. The FDI Regulatory Framework
The present regulatory regime governing FDI in Ethiopia is based on a series of Investment
Proclamations issued between 1996 and 1998, principally Proclamations 7/1996, 37/1996, 35/1998,
36/1998 and 116/1998. In combination, these establish the economic sectors open to FDI; the
financial limits and requirements for FDIs; the monitoring and reporting requirements; and the
financial incentives that are available. It is worth briefly summarizing the main features of the
present regulatory regime in each of the above areas.
(i) Economic sectors open to FDI
Foreign investors are encouraged to invest in all economic sectors, except those currently
reserved for domestic private and state investment, with the domestic private investor category
including foreign nationals who are permanent residents in Ethiopia. There is a continuous review
of the sectors closed to FDI. Indeed, the amendments to the Investment Code made in June 1998
have opened up energy generation and telecommunication services to the private sector, both foreign
and domestic. Under this Proclamation, the generation of electricity from hydro-power is allowed
for both foreign and domestic investors without any limitation on generation capacity. In addition,
private investors, both foreign and domestic, are permitted to invest, in partnership with the
Government, in defense industries and telecommunication services.
Sectors reserved for Government at the end of 1999 included air transport (where passenger
seating exceeds 20 or cargo exceeds 2.7 tonnes); rail transport services; and postal services and
telecommunications (excluding courier services). There are plans to reduce these reserved areas.
26
However, telecommunications (including Internet access) is seen as remaining State owned in the
immediate future. In general, therefore, although the FDI regulatory framework in Ethiopia is more
open now than during the 1980s, it is still highly restrictive compared to many other developing
countries, including those in the region.
Sectors reserved for domestic investors as of mid 1999 included banking and insurance;
small-scale electricity generation except from hydro-power; small scale air transportation services;
radio and television broadcasting; retail trade and product brokerage; wholesale trade and
distribution (excluding fuel and the domestic sale of locally produced goods from FDI plants);
importing; exports of raw coffee, oil seeds, pulses, hides & skins, and live sheep, goats and cattle;
construction companies (excluding grade one contractors) and building maintenance; tanning hides
and skins up to crust level; hotels other than star designated; motels, tearooms, coffee shops, bars,
night clubs and restaurants excluding international and specialized restaurants; tour and travel
operators; car-hire, taxis and commercial road and water transport; grain mills and domestic
batteries; barber & beauty shops; goldsmiths; non-export tailoring; saw milling and non-export
forest products; and the printing sector. This large exclusion of FDI from the Ethiopian economy is
designed to encourage indigenous entrepreneurship and the domestic private sector.
The Government has indicated that it will continue to review these exclusions, with the
intention of reducing sectors closed to FDI to the minimum level. Whilst many of the sectors
currently closed to FDI are not those where international corporations normally operate, it is
important to recognize that such restrictions (however well-intended) may not give a positive
welcoming image to potential foreign investors. Reserved sectors are not a feature of most FDI
home countries. Furthermore, in some of the reserved sectors, in particular air transport, travel
operations and certain services, the financial and trading skills of FDI may be important positive
influence and stimulus on domestic investors.
(ii) Ownership limitations and requirements
Under Proclamation 37/1996 a minimum investment sum is required for both wholly-owned
operations and joint-ventures with Ethiopian companies or individuals. The value of the investment
must be in either cash or in-kind.
For wholly owned FDI into the open sectors, an initial investment of $500,000 is required
and in the case of engineering or technical consultancy an initial investment of US $100,000.
For joint-ventures with Ethiopian investors, the foreign partner is expected to contribute
$300,000, with this minimum equity requirement representing either cash or the value of the capital
equipment imported to establish the venture. There is also a further requirement stipulating that
Ethiopian partners must hold in excess of 27 per cent of the equity in each joint-venture.
If the Government wishes to give priority to attracting larger FDI projects, it may be right to
have a threshold level to ration the presently limited FDI promotional and management capability in
EIA and the regional promotion agencies. However, a minimum investment requirement is not a
common feature of investment regulatory regimes of most host countries that are competing to
attract FDI.
27
Apart from these minimum capitalization conditions, the investment code does not require
FDI to meet specific performance goals or guidelines through their operations. There are no
requirements in terms of export levels, minimization of foreign trade balances, foreign exchange
restrictions for imports, minimum local content levels in manufactured goods, or employment limits
on expatriate staff. Once an investment project is established and operational, it is clearly left to a
company’s managers to make all key decisions without Government authorization or interference.
(iii) Monitoring and reporting requirements
There is currently a requirement for both FDI and domestic investors, under Proclamation
37/1996, to submit progress reports to EIA on the status of projects every six months once the
original investment permit has been issued. The purpose of this is for EIA to be regularly informed
on progress and also to identify (as early as possible) emerging problems in order that EIA or other
Government agencies can help resolve the problem or constraint. Staff in the Project Evaluation,
Follow-Up and Consultancy Service Departments of EIA also undertake (when resources and
workloads allow) monitoring of major or sensitive FDI projects to assess progress against the
original plan and intentions submitted to EIA to gain their permit. Should variations from the
original proposals occur, the EIA seeks to understand why, and if necessary will help investors bring
it back on track where the original plans have not been rendered inappropriate through external
economic or market changes.
There is some concern amongst foreign investors already established in Ethiopia (on the
basis of limited discussions with senior executives) that such monitoring tends to be undertaken in a
relatively mechanistic manner. Although EIA managers are adept at helping resolve inter-agency
conflicts (for example, land availability), they have little understanding of business factors causing
divergence from original plan intentions and no real capability to advise on how to resolve these.
This is a common problem in many countries, including developed countries where FDI promotion
staff often have very limited advisory skills in business development. However, there will normally
be a local advisory capability that can be brought in to assist investors. Although it is difficult to
determine whether such limitations are hampering foreign investment plans in Ethiopia, it is,
nevertheless, advisable that the EIA improves its monitoring capacity.
(iv) Fiscal incentives for FDI
Since 1991, Ethiopia has introduced a combination of investment guarantees and investment
incentive measures designed to provide a supportive and reassuring business environment for
potential foreign investors. These are broadly in line with the guarantees and incentives of
competitor nations and are being reviewed by Government on a continuing basis.
♦ Investment incentives for FDIs are significant and include 100 per cent exemption
from customs duties and import taxes on all capital equipment and up to 15 per cent
on spare parts; exemption from export taxes (except for coffee); income tax holidays
varying from one to five years (depending on the sector and region within Ethiopia);
tax deductible R&D expenditure; no taxes on the remittance of capital; the carrying
28
forward of initial operating losses; and investor choice in depreciation models.

These incentives apply to eligible sectors open to FDI;
♦ Investment guarantees for FDIs include full repatriation of capital and profits
encompassing not only profits, dividends and interest payments on foreign loans but
also on asset sale proceeds and technology transfer payments. There is also a
guarantee against expropriation, except in major cases of public interest when full
market value compensation will be paid promptly8.
These guarantees and incentives are clearly presented by EIA and the Government in current
promotional material. The documentation and monitoring of these by EIA also appears to be
efficient. There has as yet been a review on the relative attractiveness and benefits of the present
guarantees and incentive of programmes with recent foreign investors, nor any comparative
benchmarking of the Ethiopian incentive package with those in competitor nations. The perception
of both the Government and existing foreign executives is that the prime investment promotion
challenge for Ethiopia is not in relation to the FDI incentive package. Rather, it is in relation to the
external perceptions of Ethiopia as documented by the prevailing international media picture, in
particular following the recent regional conflict.
The investment incentives offered to FDIs locating in Ethiopia are designed primarily to be
effective through the reduction of corporate taxes and import duties, including the carry forward of
initial operating losses to offset against subsequent profits. Whilst this is standard for emerging
economies, it must be noted that Southern European, Latin American and Asian countries seeking
inward investment often include investment grants and other financial support usually tied to
employment, export and capital commitment goals. Such grants and/or loans may be reinforced by
the provision of sites and property with rent-free periods running up to five years and by the State
picking up part or all of the initial vocational skills training costs for locally-recruited employees.
The financial constraints facing Ethiopia makes such direct financial contributions to the
costs of new capital investment by FDIs almost impossible, but EIA and other agencies should be
aware that the corporate views of the main Northern Hemisphere FDI home countries will be
coloured by their experience as inward investors elsewhere. As Ethiopia aspires to attract greenfield
investments by corporations which have no previous knowledge of the country, EIA staff must be
able to positively respond to possible FDI concerns about incentives other than tax holidays and free
import duties. Discussions, during the Mission to Ethiopia revealed that a considered response on
this will at present be unlikely. Again, this gives support to the need for enhanced project
development knowledge within EIA, especially in terms of financial aspects and investment
targeting (discussed below).
8
Ethiopia has signed the World Bank's convention on the settlement of Investment Disputes and Nationals of other
States, which provides for the international arbitration of disputes with foreign investors. MIGA (Multilateral Investment
Guarantee Agency) guarantee programme will become operational as soon as pending claims for compensation left over
from the period of the previous military Government have been resolved.
29
C. Institutional Framework for FDI Promotion
The principal Government agency responsible for most aspects of FDI in Ethiopia is the EIA
which has the lead remit for promoting, coordinating, managing and monitoring all types of inward
investment including joint-ventures. EIA reports to the Board of Investment (BOI) chaired by the
Prime Minister. The General Manager of EIA is one of the seven Board Members of BOI. EIA is
still a relatively young agency in comparison with its regional and international investment
promotion competitors. It is seriously under-resourced; has not yet evolved a strategic planned
approach to its promotion activities; and is constrained by a current lack of operational integration
with the emerging strategies of the other key Government ministries and agencies.
A number of other Government agencies and private sector organizations are involved
alongside EIA in delivering or contributing to Ethiopia's investment promotion effort. In the State
sector, these include the Ethiopian Privatization Agency (EPA), established through Proclamation
87/1994 to privatize over 200 state enterprises accounting for some 20 per cent of GDP; the Ministry
of Trade and Industry; the ministries and agencies associated with specific sectors such as mining
and tourism; the Ministry of Foreign Affairs; the Development Bank of Ethiopia; and the ministries
dealing with taxation remits including customs. Of these, EPA is potentially the most important as it
regards FDI as an important privatization mechanism. The Regional Investment Promotion
Agencies, known as investment bureaus, also have an important contribution to make in identifying,
defining and promoting specific investment project opportunities and in encouraging FDI into their
region.
The Ethiopian private sector plays a much smaller role in FDI promotion than in many
similar emerging economies. This is the case, principally because of the absence of international
commercial banking and financial services companies, as these remain reserved sectors for
Government and Ethiopian investors. There are thus few effective private sector links into the
international corporate community. Even the relationship of FDI with EIA's promotion activities is
limited for reasons discussed later in the report. The national and city Chambers of Commerce are
perhaps the most active (but irregular) participants in the FDI process but, will become a more
important part of the FDI delivery framework in Ethiopia. It is suggested that there is merit in
directly involving key private sector organizations and enterprises in investment promotion. The
respective roles and contributions to FDI promotion of these key institutions will now be analyzed.
(i) Ethiopian investment authority (EIA)
The EIA is a relatively young agency which is still evolving its approach, ethos and
organization. The evaluation of EIA's promotional and other activities is discussed under the
following six broad headings.
(a) Mandate, strategy and planning;

(b) Organization and management;
(c) Activities and influence;
(d) Capability and resources;
(e) Promotional integration;
(f) Future development priorities.
30
The review in each section brings together the results of the review team's discussions with
EIA executives and managers. The overall development priorities identified are those where
progress can be achieved in the near- to medium-term.
(a) Mandate, strategy and planning
The EIA’s mandate for investment promotion is fully recognized and supported by the
Government and private sectors. The EIA has already established itself as the focus for national FDI
initiatives. There is perhaps a need to extend its mandate to encompass the presently reserved
sectors, especially as these sectors are considered for FDI participation. There is also a need to
review the post-location monitoring service which (in most cases) is transferred after operating
commence to other relevant Government agencies. Careful planning of such services is needed as
they affect the continuity, understanding and partnership essential for securing follow-up investment
projects as well as all necessary additional investment. The mandate to provide and monitor
aftercare services is an important policy objective and consequently should remain with EIA. This,
of course, will have major resource and funding implications.
Strategy and Planning are areas the EIA is still evolving a capability and that would perhaps
benefit from technical assistance support, including the EIA staff secondments to investment
promotion agencies in more successful countries. Through the EIA's Planning and Foreign
Assistance Coordination Service, in conjunction with inputs from the five operational divisions of
the Authority, the General Manager has formulated an annual planning process primarily linked to
budget requests and general indicative planning. However, this is not the same as an operational
output-driven plan undertaken by most FDI promotion agencies. The EIA should gradually
transform its planning approach and purpose to mirror the same business attitudes and perspectives
of private sector companies that form its FDI client base.
In addition, there is a clear case for Government, through the BOI, to bring all key ministries,
agencies and appropriate private sector organizations, together to discuss and agree a long-term
international investment strategy to provide an integrated operational framework for FDI promotion.
The review team's assessment of national strategy documents that have been prepared and were in
process of being finalized suggests that there is little integration between various actors directly or
indirectly responsible for investment promotion. Consequently, there was (mid-1999) no agreed and
integrated investment promotion strategy to drive and influence the efforts of the individual
ministries, agencies or the EIA.
Such a strategy is an urgent priority, and must address issues such as Ethiopia's promotional
strengths; target sectors, products and technologies; FDI promotion processes and participant roles;
incentive packages and investor support; case promotion processes; essential infrastructure
investment priorities; and costs of investment promotion. This must be a priority for the BOI.
Designing an integrated strategy is not too difficult a task, but once created will help build cohesion,
mutual understanding and enable a more efficient use of scarce promotional resources. It is expected
that the new strategy designed by Foreign Investment Advisory Services (FIAS) will assist in this
respect.
31
(b) Organization and management
The current organizational structure of the EIA shows five core operational departments each
of which contain a varying number of team leaders or heads of divisions, three supporting units for
legal services, administration and finance, and the planning and foreign assistance coordination
service. These departments all report through the deputy general manager to the general manager of
EIA and through him to BOI, of which the general manager is a member. The organizational
structure of EIA reflects the political environment in which it was created. Both EIA managers and
Government officials believe that they have served the Authority well since it was established.
All EIA executive, management and support staff consulted during the review team's visit to
Ethiopia have a clear understanding of their responsibilities and roles within the organization. All
develop work programmes and priorities in relation to their core responsibilities and most
understand the present mandate and purpose of the organization. However, only few have
knowledge and experience of their competitor FDI promotion agencies in other countries.
Furthermore, in the absence of a coherent national promotional strategy, there has not been a
requirement to shape EIA's organization in relation to its strategic and operational goals and
objectives.
In considering the effectiveness of the present organizational structure and management of

EIA, the following three important observations that emerged from the discussions with EIA
managers and staff during the field mission to Ethiopia are worth noting:
♦ The present notion of EIA's organizational structure is that it is primarily process

driven and that much of the activities undertaken by its staff have to do with
regulatory aspects of FDI such as permits, reports and registration. It is interesting to
note from the organigram present in diagram II.1, that the only three sectoral groups
are in the Licence Registration and Coordination Department. Much of their daily
work is on ensuring potential FDIs meet regulatory requirements;
♦ The present occupational structure and skills base is shaped by the nature of the tasks
that are done in each Department and Division, which over the longer-term will
constrain the emergence of multi-skilled teams and (from the experience of similar
organizations elsewhere) encourage the strengthening of divisional walls and
identities;
♦ At present, the organization is not FDI client centred, nor does it appear to have a
customer-driven skills base or promotional process. It is difficult for public agencies
like EIA to have a set client focus, especially when clients operate in the private
sector and in foreign national cultures.
These organizational issues are important to EIA's future evolution and its competitiveness in
an increasingly tough FDI environment.
(c) Activities and influence
Over the last five years, EIA has developed the basic portfolio of promotional activities,
materials, procedures and systems required to attract FDI. The latest addition is an Investment
32
Guide for Ethiopia prepared with the assistance of the United Nations Conference on Trade and
Development (UNCTAD) and the International Chamber of Commerce (ICC). Vital information
about Ethiopia and its potential as an attractive investment location is being disseminated to
potential investors across the world through various communication channels, including the internet.
All these promotional activities have raised the profile of Ethiopia as a plausible investment location.
However, as Ethiopia wishes to attract additional targeted foreign investment (e.g. new investment
in sectors singled out by the Government as priority investment areas) there is a need to re-assess the
existing investment promotion approach and activities.
The most important and immediate activities for EIA are the corporate research and project
development functions, both essential requirements for the FDI targeting and client-focused
innovations that already lie at the centre of best practice investment promotion. The skills needed to
perform these functions should be acquired or developed within EIA. The Internet makes corporate
profiling and analysis a much easier task than previously and thus, should be used more effectively
by EIA. But, this must also be supported by training and assistance that enables enquiries and
interest in opportunities to be assessed for FDI targets. The need for enhanced project development
skills and capabilities is a second area to be given priority for the reasons set-out in the overview of
FDI targeting presented in the next section. At present, the EIA does not have a basic capability in
these areas.
The influence of EIA's activities in term of shaping the investment supporting role of other
Government and regional agencies was briefly explored with partner organizations during the field
mission to Ethiopia. The general perception of EIA's impact on their investment-related activities is
that it has been limited.
(d) Capability and resources
The overall assessment of the review team regarding EIA is that there is a mismatch between
its mandate as the spearhead of Ethiopia's critically important investment promotion efforts and the
resources available to it (budget and manpower), which are limited and inadequate to perform the
promotional functions effectively. Whilst it is always necessary to guard against self-aggrandisement
by public sector agencies (budget size is power), it is absolutely impossible for EIA to plan, deliver
and manage an effective investment promotion programme on the basis of, for example, its 1998-
1999 budget level of around $260,000. Even allowing for the impact of purchasing power parity
(PPP) price adjustments in relation to internal expenditure by the Authority within Ethiopia. It is
difficult to say at this stage exactly what additional resources would be adequate for EIA to perform
its functions effectively. This will be determined taking into account all the promotional activities
and training carried out by EIA in order to attract more investment into the country. At the current
level of resource allocation, it is clearly unrealistic to expect a coordinated and successful marketing
of Ethiopia as a potential investment location to be carried out by EIA.
An enhanced financial base for EIA is not required to increase staff numbers but rather to
enable more effective training of existing staff. Training should consist of travel overseas to meet
with potential clients; to attend appropriate promotional conventions; and (more importantly) to
establish essential industry contacts and knowledge in the prime target sectors. The EIA will require
a budget to commission independent advisors from within the country for key case support through
33
research and the development of project opportunities and to support the promotional activities of
the regional promotion agencies. There is an urgent need to reassess the level of resources made
available to EIA.
With regard to the development of an integrated approach to investment promotion, one

possibility is for the Government to consider the option of secondment to EIA of younger
professional staff from other Government, State and private sector organizations for limited periods
of time. This is common practice in investment promotion agencies in other countries, where
secondments are seen as producing real benefits in terms of sharing professional knowledge and
skills; building effective personal-based linkages between agencies; extending the understanding of
FDI promotion to a wider group of organizations; and widening the inputs into policy formulations
and implementation.
(e) Promotional Integration
An effective investment promotion strategy requires that there is a high level of cohesion
between the policy priorities and measures across the national economic development effort. The
discussions with EIA managers and senior officials in relevant government departments and
agencies indicate that FDI is not yet fully integrated into the emerging national and sectoral policies
on exports, education, tourism and agriculture. This is understandable given that national strategies
for these areas have only just been completed or are still in their development stages and that EIA
had not (by the end of 1999) prepared its own strategic development priorities. The major
contribution and role of FDI in the growth of Ethiopia's private sector is recognized and accepted by
the Government. However, there appears now to be a need for the BOI to convene a working group
from the appropriate federal ministries and agencies (once EIA has its own initial strategy
completed) to ensure mutual coherence and consistency between the various sectoral strategies and
the national investment promotion effort. This is a further priority policy issue.
(f) Future development priorities
The EIA, on the basis of evidence gathered during visits to Ethiopia, has at the senior
executive level, a relatively clear understanding of its future strategic development priorities; but has
not yet translated these into an operational business plan for the organization where expenditure and
costs are related to target outcomes and benefits. Some of the broad development priorities for EIA
identified during the Mission and outlined above will be brought together in the strategic and
operational recommendations set out in the final section.
(ii) Investment promotion by other Government agencies
In addition to EIA, a range of other government ministries and federal and regional agencies
have an involvement in the attraction of inward investment to Ethiopia or in the subsequent
expansion of FDI businesses once established. At present, the investment promotion processes are
relatively self-standing and uncoordinated, although all of the contacted agencies acknowledge that
coordination will be required to raise the effectiveness of the present national effort to attract FDI.
34
(a) Ethiopian Privatization Agency (EPA)
The EPA was formally established in 1994 and began its strategic role of reversing the post-
1975 wholesale nationalization of Ethiopia's private sector. The EPA's board of directors report
direct to the Prime Minister. The EPA is located in the same building as EIA which should make for
effective liaison between the two agencies, although at present tends to operate in isolation. The
first phase of EPA's privatization (achieved through tender sales) focused on SMEs in retail, tourism
and similar sectors. It is now focussing its attention on the sale of the 115 bigger enterprises.
The EPA managers envisage that many of the larger State-owned companies will be sold to
foreign investors, partly because only they will be capable of raising funding and partly because it is
believed that foreign investors will provide the necessary transfer of technology into the companies.
For the major companies, project profiles and fliers have been prepared and a series of EPA
promotional brochures have and are being prepared. Information on opportunities is also shared with
EIA, although as of early 2000 active research to target appropriate foreign investors had not begun,
even though potential interest was emerging, especially in the food and beverage sector. The point
is, for privatization to form an important mechanism for attracting international investment into
closer collaboration between EIA and EPA, especially in relation to project profiling and investor
targeting, which is vital.
(b) Ethiopian Tourism Commission (ETC)
The ETC was established to capitalize on the country's combination of history and wildlife
by attracting international tour operators to bring free-spending. Currently, Ethiopia lags well
behind Egypt and Kenya as a tourist destination. Operators and those who do visit often find that
hotels, guest houses and restaurants (especially those outside Addis Ababa) require inputs of
investment and modern management. The potential for attracting the more affluent tourists (both
leisure and business) has been proved with the opening in 1998 of the luxury Sheraton Hotel in
Addis which is in league with other quality hotels in developed countries.
The ETC’s goal is to increase international visitors to Ethiopia from around 115,000 in 1997
to 180,000 by 2000 and to 500,000 by 2005, predominantly in higher-value tourists. Priority is
being given by ETC to attracting FDI into Ethiopia's existing hotels. The Hilton in Addis Ababa
was the first to be actively promoted to overseas visitors, initially from the Middle East. Other hotel
chains in key tourism areas are also being promoted for inward investment, predominantly through
the ETC, but also in cooperation with the EPA as some of the hotels are among the public companies
being privatized. There is an on-going promotional relationship with the EIA, although tourism does
not appear to be in the EIA's priority sector list. It also lacks the financial resources or skills to make
the necessary efforts required to attract FDI into the tourism sector.
(c) Ministry of Foreign Affairs (MFA)
In the immediate future, it is probable that EIA will not have the funds or the skilled
personnel needed to open up representative offices in targeted FDI home countries. Consequently,
the prime overseas investment promotion presence will be the Ethiopian Embassies under the direct
control of the Ministry of Foreign Affairs (MFA). MFA thus has a key role to play in attracting
35
inward investment, which is slowly being developed with an appropriate initial focus on the Middle
East and Asia. All ambassadors have been instructed to give priority to promoting Ethiopia as a
suitable investment location, find markets for Ethiopian exports and encourage tourism to Ethiopia.
The commercial attaches are occasionally briefed by EIA on emerging FDI opportunities and
are required to report activities and progress in investment promotion to MFA on a quarterly basis.
However, in reality, this arrangement has not worked as initially planned. As investment promotion
is envisaged to be part of activities performed by MFA, it is important that all ambassadors and
diplomatic staff clearly understand this policy and strive to attract FDI. Closer links of MFA with
EIA is essential. The MFA is considering the merits of occasional EIA presence in key target
country embassies and of providing specialist training for staff.
(d) Ministry of Trade & Industry (MOTI)
MOTI has the prime responsibility for the formulation and implementation of industrial
policies for export promotion. An export strategy was completed in mid-1998 which sought to
encourage increased penetration of Ethiopia's agricultural goods into global markets with the initial
focus on cotton, coffee, fruit and vegetables. Priority was also being given to promoting exports of
textile and leather garments as well as other manufactured goods for regional markets. This
promotion is the responsibility of a new export promotion agency, which also reports direct to the
Prime Minister.
There is a potentially important role for MOTI and its specialist agencies to ensure an
increasingly competitive base of local private sector enterprise which can supply goods and services
to inward investors and thus reduce the import bill and balance of trade effects that often accompany
FDI. This important role is recognized by MOTI and EIA and, in fact, the two public agencies have
begun to consider how to help local suppliers link with FDI in all sectors. One critical precondition
of this process is a better understanding of the pre-location assessment of supplier requirements and
a capability to begin to create these whilst new FDI facilities are being constructed. These supply
side linkages are critical in maximizing the technology transfer and multiplier impacts on the
indigenous sector which are crucial to the future export promotion strategy.
(e) The Development Bank of Ethiopia (DBE)
The State-owned DBE is charged with the task of supporting national economic policy by
extending higher-risk medium and long-term loans to large- and medium-sized enterprises. Priority
is being given to growing companies in the resource, export and import-substitution sectors through
loans negotiated by DBE's 300 staff and 32 branch network. Its current loan book reflects its policy-
based focus and loans are often syndicated with other local financial institutions such as the State-
owned Commercial Bank and the Construction and Business Bank. There are no concessionary
loans as all are made at the prevailing market rate. Lending is directed at new and expanded private
sector companies, whereas the Commercial Bank has a responsibility to support EPA and EIA
activities. There are a number of ways in which DBE takes risks, including taking capital equipment
and personal assets as collateral and repayment holidays.
36
The DBE managers recognize that there may be a role for the Bank in attracting FDI to
Ethiopia. It could help strengthen the incentives package through providing project-based loans at
concessionary rates, especially in support of re-investment expansions of FDI operations. This is
likely to be restricted (as least initially) to agricultural exports, as this sector generates over 80 per
cent of public revenues. A total of EB 300 million has been set aside to pilot this (supported by loan
guarantees from the National Bank) through lending for post-shipment export costs up to 8 per cent
of the capital value of shipments. DBE will also co-finance loans with the International Finance
Corporation (IFC - the World Bank affiliate) and the African Development Bank with DBE
providing collateral and managing the loans. The principal ways in which DBE managers envisage
the Bank supporting investment promotion is through providing co-financing of FDIs and joint-
ventures and to local businesses that are major FDI suppliers. In addition, DBE’s support is
envisaged through its in-house technical advisory staff helping their client companies serving FDIs
to add value to DBE loans and thus improve their competitiveness.
(f) The Ethiopian Media Agencies (EMA)
The EMA review team, met with senior managers in the Ethiopian News Agency (ENA) and
Ethiopia Television (ET) to explore potential roles in investment promotion. The principal priorities
for both organizations are to pursue improvements in Ethiopia's image abroad and the early and
radical improvement in the national telecommunications infrastructure which is widely perceived,
both internally and externally, as a major operational constraint for the local and FDI business
community. On the domestic font, both ENA and ET are making efforts to give coverage to
business issues (including FDI) and there is the beginning of a specialist business press such as The
Entrepreneur published in Addis Ababa. ET often picks up on new FDI projects, especially when
located in rural areas. It copies these to Ethiopian Embassies abroad. Both agencies recognize that
they have an obligation to function as development-orient-media, but are presently reactive in their
roles. This opportunity requires further consideration in partnership with EIA.
(g) Ethiopian Airlines (EA)
As Ethiopia's most visibly successful commercial company, EA is playing a leading role in

Africa's emerging air-transport sector. It is building an internationally successful businesses in
training aircrew and maintenance mechanics, in flight simulator training and in assembling light
aircraft for use in rural areas and agriculture. In overseas promotion of the country the company
does more than any other single organization in the State or in private sectors. With an annual
turnover in excess of $280 million it is the largest State-owned corporation and one that has been
continuously profitable over the last 18 years. The EA Board is aware that the company is in a
unique position to play a lead role in investment promotion abroad and sees FDI and tourism as
being critical sectors for Ethiopia's future. EA can and should play an important FDI support role
for EIA through making its overseas offices available for investment promotion activities and
providing information about investment opportunities within its own in-flight magazines and
entertainment services. The relationship between EA and EIA is still weak and unstructured.
Therefore, and priority must be given to building a strong partnership in FDI promotion.
37
(h) Regional Investment Offices (RIO)
The final group of public sector organizations which could play an important role in national
FDI strategy and policy are the RIOs established throughout Ethiopia in 1992. RIOs have been given
the responsibility to identify, develop and promote specific investment projects in their regions.
Most RIOs work within the framework of the national investment code although some have
their own incentive schemes. Their priority functions are to licence domestic investors; research,
identify and prepare local investment opportunities; help domestic and foreign investors acquire land
or property required for their businesses; and host visits by potential investors. The precise nature
and portfolio of investment promotion activities vary between regions and reflect the policy
priorities of regional Governments.
The Oromia Investment Office (OIO) which is located in Addis Ababa and employs 45
persons is one of the largest RIOs in the country. Normally, 80 per cent of its work is in licensing
and land issues, with only 20 per cent in investment promotion. Although in 1997/1998, 50 per cent
of OIO's budget went to promotion as it undertook the basic investment opportunity research and
prepared documentation, promotion brochures and videos. OIO staff have prepared (1999) 155
project profiles for promotion, most of which are relatively short and have few financial statements
with the expectation that opportunities will primarily be of interest to domestic investors. Indeed, to
date, 95 per cent of their case workload has been with domestic investors, with only a small number
of meetings and contacts taking place with potential foreign investors.
The RIOs are generally under-resourced both in terms of skilled human resources and funds,
and in most cases, staff have received little training, assistance or advice in essential investment
promotion skills. It is also clear that many RIO’s have yet to develop a strategy or action plan to
guide their activities.
Relationships between RIOs and EIA are perceived to be generally good, although peripheral
regions feel they are at a disadvantage as most FDIs want to locate in or near Addis Ababa. There is
a need for EIA (and the EPA) to arrange an FDI Development Accord with the RIOs and for the
DBE and the Government to consider special financial and tax incentives for the peripheral regions.
In addition, it is recommended EIA take a lead role in planning and managing training provision in
investment promotion for RIOs to ensure consistency throughout the country.
(iii) Private sector FDI promotion
In addition to specialized government agencies, there is an important role to be played in

attracting inward investment by private sector organizations, and more importantly, by existing
foreign companies operating in the country. At present, neither of these groups is fully involved in
the FDI promotion process and there have only been limited attempts by EIA and the Government to
understand and build upon their potentially influential contribution. The review team made only a
brief assessment of this element of FDI promotion through meetings with the Addis Ababa Chamber
of Commerce and two existing FDI companies in Ethiopia, namely MIDROC and Shell Ethiopia.
38
(a) The Addis Ababa Chamber of Commerce (AACC)
There is one National Chamber of Commerce and eleven city Chambers in Ethiopia. The
AACC is the largest, oldest and most influential of the city chambers, with 20 professional staff and
45 support staff serving over 7,000 active members. The Chamber undertakes functions covering
business and market information; trade affairs and overseas trade missions; business advisory
services, especially to start-up businesses; business skills training; publication of business directories
and advisory leaflets; and the operation of a small library, Internet service and web site. It also
undertakes specific studies on the obstacles to doing business in Ethiopia and proposes new policies
and/or adjustments to existing policies; promotes entrepreneurship, sectoral trade associations and
the culture of democracy and free market system; and serves as a bridge between the Government
and the the business community in Addis Ababa. The Chamber disseminates information on
business developments within Addis and the economy as a whole through its two bimonthly
newspapers namely, “Nigdina Limat” (Trade and Development), in Amharic language, and “Addis
Business” in English.
The Chamber has an informal role in FDI promotion. The EIA introduces potential investors
to AACC who offer their support in helping investors meet appropriate local suppliers of goods and
services. This has evidently proved helpful to the relatively smaller FDI companies that have come
to Ethiopia from other countries in the region and the Chamber sees itself as having the potential
lead role in providing the essential aftercare support to foreign investors once they have established
themselves. This is a key FDI development role normally undertaken by specialist divisions or
regional agencies in advanced host countries which should be addressed by EIA in the future.
The Chamber wishes to have a more formal and planned involvement in the FDI system and
process. The review team believes that EIA and the Government should identify the appropriate
roles and activities for the national and city Chambers as an early priority. The Chambers, as the
principal representative body for the private sector, do have concerns about broad economic policy
aspects and investment policies and should, therefore, be used as a channel for transmitting these
concerns into the policy formulation and implementation processes undertaken by EIA.
(b) Existing foreign investors in Ethiopia
It is now accepted that the international word-of-mouth promotion of a country by FDIs

already in that country is a very important but little recognized part of the inward investment
process. Senior executives in FDIs play a lead role in building the external image and corporate
perception of the commercial profitability and attractiveness of a host country, within their parent
corporations (perhaps determining follow-on investment) and in their contacts with their
international suppliers of goods and services. In addition, it is clear that bad news and impressions
of an operational location spreads faster and further than satisfaction. The role of existing FDIs in
Ethiopia, many recovering from a period of State ownership following nationalization under the
previous regime, is thus a critical current issue in FDI promotion policy, and one where
improvements are policy priorities.
Discussions with existing FDI executives in Ethiopia suggest that they are not actively
involved in FDI promotion activities and that contact with EIA and other appropriate economic
39
agencies are irregular and normally problem-driven. There are no regular and planned business
development meetings with relevant agencies to review and evaluate progress of their plans and
proposals. There appear to be common concerns about land acquisition; the continuing Government
role in the reserved sectors (including the importing of oil for refining); the lingering issue of
dividend payments; and especially the continuing closure of the economy to foreign commercial and
retail banks which can make both intra- and inter-company trading difficult and expensive.
Banks are seen as having an especially important promotional role overseas and will not have
a positive view of a nation that excludes their presence. This is a critical issue in the context of both
the current globalization of banking and financial services and the rapid move toward electronic
banking and funds transfer that is at the heart of the growth of e-commerce.
FDI promotion and encouragement must not stop or be curtailed, once a positive location
decision has been made by a foreign investor. It is equally important to ensure the success and
profitability of the initial capital investment and to help the locally-based FDI managers to win
corporate HQ approval for further expansion and re-investment of profits and to strengthen their
linkages with local suppliers and services as a means of reducing the national import bill. This
aftercare support, increasingly called corporate development support, will become important in
Ethiopia during the next decade The management and resource implications of this should be built
into future FDI promotion budgets.
D. Current and Future Challenges in Investment Policy and Promotion
In evaluating the effectiveness of Ethiopia's investment promotion activities and the

challenges ahead, it is important to briefly consider the domestic and global economic and business
environment in which EIA and associated ministries and agencies must operate. It will be especially
important to see Ethiopia's investment challenges and potential through the perceptions, expectations
and knowledge of foreign investors from, particularly those outside the region. To that end, this
section addresses the internal and external investment challenges facing Ethiopia and identifies the
areas of potential investment opportunities.
(i) Ethiopia's international investment challenges
(a) Internal economic challenges
Among the specific economic challenges and constraints that were identified by private
investors during the field mission to Ethiopia, the following five require highlighting:
1) The comparatively poor infrastructure in many parts of the country, especially in

relation to transportation, power and telecommunications;
2) The perceived over-regulation of the economy which diverts scarce management
resources from more productive activities; and a continuing ethos of state sector
bureaucracy;
3) The perpetuation of State control over important aspects of international business
operations (e.g. imports of equipment and fuels), together with a myriad of regulatory
procedures and approval processes associated with business activities;
40
4) A shortage of modern management skills and culture in the local private and public
sectors, making it difficult to benefit from existing and potential international
investment; although this is again an area where local business executives see a rapid
pace of improvement;
5) The absence of an experienced business development framework that can assist local
SMEs to improve competitiveness as suppliers to incoming TNCs. There is also lack
of provision of efficiently serviced sites to host new FDI facilities and gaps in other
essential economic development services to both local and international investors.
In addition to these five issues, there is the continuing challenge posed by instability in the
region. In particular, the recent conflict with Eritrea, which has had adverse effects on the external
perceptions of both countries. This is a serious concern given the relative nervousness of
international investors in considering countries as potential investment locations. The Government
must not underestimate the importance of an active public relations exercise in influencing the
external perception of a country. As noted above, the perception of local FDI executives (both
expatriate and Ethiopian) is also an important determinant of future inward investment flows. As
negative images spread rapidly within corporate networks, they tend (unless actively combated) to
persist long after the events have declined or disappeared.
(b) External economic challenges
The prospective global FDI environment which is currently facing major structural and
qualitative changes, will also have impact on both the level and location of capital flows. There is
little Ethiopia can do to influence such shifts, but awareness of them will enable future investment
promotion activity to be carefully targeted to appropriate areas of opportunity and potential. The
most important structural FDI trends likely to dominant the next decade are:
♦ Increasing concentration of corporate organizations through mergers and acquisitions

(now including multi-nation mergers) resulting in globalization of corporate
structures and activities and a consequent rationalization and contraction of
production and support facilities into big units serving wide regions;
♦ The parallel move by global corporations into single sourcing of materials,
components and the supply of manufacturing services, thus making it difficult for
local suppliers to benefit from FDI purchasing linkages which, in turn, can encourage
FDI enclaves though, generally, this is less important in the agriculture and raw
material sectors;
♦ Globalization of manufacturing production and the lowering of costs of transport will
open up opportunities for emerging nations to effectively bid for the next generation
of manufacturing and production plants through lower labour costs, as TNCs close
old vintage plants and replace them with vintage units in cost competitive countries;
♦ The trend toward a post-manufacturing international economy also means
proportionately fewer mobile large-scale industrial plants to bring technology and
skilled employment benefits to host nations. New technologies, in particular
information and telecommunications technologies, are enabling future services-
driven FDI to be operated from virtually anywhere on the globe provided skilled
people are available;
41
♦ The competition between national and regional Governments throughout the world to
pursue, attract and secure mobile international investment is now so strong that it has
become a “buyers market” where MNCs obtain levels of financial and other support
beyond what was seen as possible only a decade ago.
In the next decade, Ethiopia will be competing not only with countries in the African region
but also countries in Latin America and South Asia to attract FDI from the major industrial nations
in Europe, North America and the Far East. This will require an investment promotion strategy that
identifies potential sources of international investment through a careful targeting approach that
gives appropriate promotional priority to these areas.
(ii) FDI targeting and project development
The Government has identified a number of economic sectors as priority FDI areas for the
creation of new enterprises capable of generating exports, domestic employment and for the building
inter-sectoral linkages. The agricultural-led industrial development focus of economic strategy is
reflected through promotion priority that highlights the major investment opportunities available in
agriculture (food & beverages, cotton, horticulture, livestock, fisheries and forestry), manufacturing
industries, mining and tourism. In all these sectors short project profiles have been prepared by
Federal and Regional Government agencies summarizing specific investment opportunities,
sometimes including more detailed market research information. These have been presented to the
review team as inward investment targeting, as have similar project profiles prepared within the
privatization programme.
In terms of current best-practice FDI promotion, the preparation of investment opportunity

profiles by promoting agencies is not proper targeting for several reasons, including the fact that the
focus is on the supply side. The market and financial benefits for potential investors are not actively
considered and specific potential investors are not identified, assessed on positively encouraged to
explore demonstrated financial benefits that meet their corporate investment criteria and priorities. In
addition, the number and variety of investment opportunity profiles that had been prepared by early
1999 suggests that no considered prioritization of commercial project opportunities has been
undertaken. This suggests that very little active promotion of investment opportunities has been
undertaken to date beyond simple passive mailings.
There is a need for a better understanding of the concept of FDI targeting within the
Government of Ethiopia and its operational agencies. More importantly, it should be recognized that
EIA, as lead FDI promotion agency, currently does not have the financial, human and technical
resources to introduce active FDI targeting even in a small number of priority sectors. Targeting
requires careful professional planning, determination and imagination in delivery, adequate
resources, an appreciation of current corporate concerns and priorities and patience.
(iii) Targeting FDI opportunities
Effective FDI targeting is a difficult task and one where intense competition from specialist
agencies in an increasing number of host countries is raising best-practice benchmarks as well as the
cost of taking part. A growing number of international companies are receiving investment offers
42
from potential host countries, in many cases supported by offers of financial and in-kind assistance
to reduce the costs and risks of investing. Corporate executives in MNCs rarely respond to these
generalized offers of “opportunities”, but are more likely to consider a detailed costed project that
displays business and market realism, an informed understanding of the investor company interests
and Government commitment at the highest level.
A detailed explanation of FDI targeting in operational terms is beyond the scope of this
report. At this stage, what needs emphasizing is simply that if Ethiopia's objective is to promote
specific investment projects that show significant and sustainable real financial gains for both the
FDI company and the Government, assistance may be required from external consulting firms or
individuals specializing in investment targeting. FDI targeting is now widely practiced by
investment promotion agencies in many developed and developing countries. In this respect,
UNCTAD has assisted countries to better understand the different approaches to investment
targeting as well as the method of operationalizing effective FDI targeting through workshops
designed to encourage exchange of experience on best practices in FDI targeting. The broad steps in
project targeting can be summarized as follows:
♦ Assess the domestic economy carefully to identify a small number of priority

economic sectors that have sustainable growth and competitive potential in market
terms;
♦ Within the priority sectors the same screening must be undertaken to identify specific
investment projects that can surmount market, technical, management and financial
hurdles, each set at best-practice levels. For the best potential projects that survive
the screening process, detailed business plans and financial forecasts must then be
prepared showing clearly the assumptions and goals involved;
♦ The specific industrial and market segments for each project must be researched and
examined to identify the individual relevant FDI companies operating in these
markets; their current corporate strategies, investment priorities and corporate
decision-making structures; their recent experience in emerging countries; and the
rationale for considering an investment of the type identified;
♦ Prepare a confidential project investment prospectus at the level of detail that FDI
corporate executives now expect and require, including a full consideration of all risk
factors; submit this to an independent due diligence assessment to ensure accuracy
and realism in financial forecasts and in areas of essential support; and prepare a final
project business plan for submission to specific potential international investors;
♦ Carefully identify the key corporate executives within the target FDIs to whom new
investment projects will be referred for consideration; plan for an initial exploration
meeting to make preliminary contact and to raise their interest; and reflecting the
feedback and ethos of this meeting, the specific proposal can then be introduced.
These steps will only take an investment promotion agency through the first stage of making
the corporate contact. The hardest promotion and negotiation tasks are still to follow. Meetings will
multiply should there be genuine investor interest. Senior Government officials will become
involved and project specifications (and costing) will need to be regularly revised. In addition,
active promotion to bankers, legal teams, consultants and a range of FDI corporate executives will
be required. Patience and persistence are essential as well as the capability to cease promotion
43
efforts should the target company lose interest, in which case attention should immediately be
shifted to the next appropriate FDI. Continuity of personal contact is always essential, and
promotion agencies and the Government must bear this in mind in instituting active targeting.
(iv) Ethiopia's FDI Targeting Capability
As of early 2000, Ethiopia did not have the capacity to undertake targeting of FDIs,
principally because the EIA lacked the necessary resources to move into an active promotional
stance. At present, EIA has a “scatter-gun” approach to the attraction of foreign investment,
undertaking general promotion of Ethiopia as a potential investment location in the hope that some
investment will be attracted into the country. This approach partly reflects the EIAs funding
constraints; its inability to prioritize opportunities and transform these into operational projects; and
the present lack of a clear corporate strategy. The EIA management understands the need for
investment targeting but accepts that it has little operational experience or knowledge in the key
areas and tasks outlined above. Given the intense global competition in attracting inward
investment, effective FDI promotion based upon a carefully planned target portfolio is a strategic
policy priority for EIA.
It is also worth noting that there is virtually no FDI targeting undertaken by other
government departments or agencies in Ethiopia. Moreover, the project profiles prepared by
institutions such as the Addis Ababa Chamber of Commerce are mostly simple technical
specifications and/or listings of potential projects that can be of no possible interest to foreign
investors who will have far greater technical expertise in house.
(v) The FDI policy challenges to 2010
The investment promotion challenges Ethiopia is likely to be faced with in the immediate
future can be summarized as follows:
♦ The policy framework and operational requirements in Ethiopia facing international

investors still have aspects that are bureaucratic and unnecessary, including sectors
that remain closed to private investors; irrational minimum capital investment
requirements; and a dispersal of investment promotion efforts between the EIA and
other Government agencies;
♦ To date, there is, little direct involvement of existing international investors in the
international promotion process, thus missing an important opportunity to tap into a
wide range of international corporate contacts and also to draw upon the management
skills and experience of such investors to support national promotion activities;
♦ The present international investment promotion effort has (as of mid-2000) no clear
promotion strategy; no operating business plan; or agreed project development
priorities to guide deployment of its scarce resources either within EIA or more
generally at the national level. These, in themselves, may not guarantee greater
success in promotion, but they are requirements for resource planning;
♦ The present EIA organization is seriously under-resourced in terms of the necessary
scale and content of its investment promotion activities; its staffing, equipment and
information resources; and its access to and status with other relevant government
44
departments and agencies. Continuation of the present level of activity will ensure
only a reactive approach to promotion.
Some of these investment promotion challenges are recognized by the senior managers and
staff in EIA, but effective response will require a coordinated effort involving all the key actors in
investment promotion process, including the Government at the highest level, the EIA, other public
sector agencies, especially those identified above, regional investment offices, local private sector
organizations, and foreign investors already operating in the country.
It should be noted that, improving the effectiveness, efficiency and economic development
impact of Ethiopia's international investment promotion activities will take time, resources and
policy commitment. Preparation of an implementation plan to pursue such improvements will be a
major advisory project in itself.
E. Investment policy and promotion strategy for Ethiopia to 2010
Consideration of future investment policy and promotion priorities and activities for Ethiopia
should be seen in the context of a medium-to long-term strategy. Building an effective FDI
promotion capability takes time and requires resources to create momentum and critical mass. The
most successful investment promotion agencies in the world are those, which have developed over a
period of time and through more focused policy measures and strategies, the capability to market the
host country and to attract and accommodate FDI. How can Ethiopia acquire such a capability?
What are the medium- and longer-term measures that need to be taken in order to make Ethiopia an
attractive location for FDI?
(i) Ethiopia's international investment opportunities
This section will briefly examine the range of international investment opportunities open to
Ethiopia. There are four inter-related types of international investment, each of which requires a
distinct promotion and management approach:
♦ Investment in privatization;
♦ Corporate greenfield investments;
♦ Expansions of existing FDI;
♦ Joint ventures
The EIA and other public sector agencies are active on projects in all of these groups of
international investment, although without the benefit of either a strategy or a fully planned
management response. A comment on each of these groups will be helpful as background to the
policy conclusions and proposals at the end of this report.
(a) Investments in privatization
As indicated above, although the privatization process in Ethiopia appears to be gathering

momentum, it suffers from lack of adequate resources for financial and skilled personnel to drive the
programme ahead, in a strategic manner. The brief review of the privatization programme suggests
45
that there are State corporations and enterprises in a wide range of economic sectors that could be
actively targeted to foreign investors.
Experience elsewhere with privatization of State-owned enterprises and industries show that,
in some cases, such programmes are not successful. This is especially true where short-term policy
objectives of giving priority to maximizing Government capital receipts have obscured the longer-
term need to evolve a sustainable business that maintains employment, exports and tax revenues.
The key requirements for an effective privatization investment programme are to:
♦ Institute in-company commercialization strategies and programmes in advance of

privatization to begin the process of corporate change that will inevitably be required
by international investors;
♦ Promote the most attractive investment opportunities first and then work through the
portfolio of privatization candidates leaving the more difficult enterprises until
agency experience has been created;
♦ Identify and research appropriate target investors in advance of approaching them to
build an understanding of their current activities and priorities and to establish how
investment in Ethiopia will support these corporate goals;
♦ Develop appropriate privatization deals in advance, including possible on-going
support packages, and outline of financial proforma that demonstrate the viability and
financial returns to the investor.
The staff in the Privatization agency are well aware of some of these promotion
requirements, but currently do not have the resources or practical experience required to implement
them successfully. However, in an attempt to deal with this problem, the Government has initiated a
review of the overall privatization programme in Ethiopia. External consultants are in the process of
evaluating nearly 140 enterprises with a view to recommending detailed privatization modalities.
International investment promotion through privatization programme is especially important as it
incorporates visible, real assets often with established market positions. It is an integral part of
international investment promotion and should be managed as such where the candidate companies
are unlikely to attract Ethiopian investors.
(b) Corporate greenfield investments
The arrival of a new international investor with the capital and commitment to create a new
greenfield business venture tends to be given priority by national inward investment promotion
agencies and is often regarded as the most desirable of FDI ventures. Within this group are a range
of greenfield investment situations, including first time investments and investments in new types of
economic activity by investors already established in the country, the latter being perhaps the most
productive form of investment. In the majority of cases, potential investors will already have
researched and confirmed the market, infrastructure and financial aspects and will in all probability
serve an established customer base served by imports.
There is still a need for an active promotion approach to corporate greenfield investments.
This will have to be tailored to the requirements and potential of each situation, and should focus on
the provision of infrastructure; developing local supplier linkages; training staff and employees; and
46
reducing the administrative delays in processing customs duties, capital grants, import licences and
operational permits. Effective promotion would have all of these issues planned in advance and
would also make an effort to understand the investor's business, the markets involved and the
associated strategic development issues. EIA has begun to evolve a capability to deliver this
support, but the present organizational and management framework may not be fully appropriate to
the requirements of such greenfield investors.
(c) Expansion of existing FDI
The in-situ expansion of existing and corporate operations and facilities is recognized as the
most valuable and cost-efficient form of international investment promotion. This is the case for it
confirms the success of the initial capital commitments and is a visible signal of success to other
potential investors. It is important to actively promote and support existing investors, especially in
the present globalization environment where plant directors will have to bid against directors of the
company's other plants for projects. This requires investment promotion staff to maintain regular
contact with local plant directors; provide support to local plants to promote their competitiveness;
help such plants maintain and enhance their intra-corporate performance; and build mutually
profitable linkages within the economy.
An important part of Ethiopia's international investment strategy must be the development of

a client development capability to support existing foreign investors on a continuing basis. This
should not be seen as aftercare, which implies a one-off capital investment and has a tone of
“afterthought”, but as an on-going partnership to strengthen, extend and improve the continuing
stream of investments required by companies.
(d) Joint-venture investments
This category of international investment can be a complex one, especially in joint-ventures

between a State agency and a private investor, having different strategic objectives, investment
priorities, management ethos and operating experience. Increasingly such joint-ventures are limited
to start-up situations with a subsequent sale of the State's share to the private partner, but they may
(in Ethiopia's situation) also have a role in the privatization process. Promoting joint-ventures is
very difficult, especially for greenfield projects; requires additional skills and experience; and will
often be legally and financially complex. Joint-ventures can play a role in international investment
promotion, provided the skills are available and that enhanced financial support (including in-kind)
is available.
Overall Assessment
The review team's main recommendations on investment policy and promotion are presented
in the last Chapter of this report. In concluding this Chapter, however, two points need to be
highlighted.
47
(i) Investment policy and promotion trends and commitment
The existing statutory policy framework for international investment in Ethiopia and the
promotion of opportunities through EIA requires only minor revision. Moreover, judging by recent
adjustments to the investment code and Government policy statements, it would appear that
additional reforms to further open-up the economy to FDI are underway. However, in order to
ensure that these reforms lead to effective promotion, it is essential to undertake periodic
assessments of the inward investment achievements, through case-based evaluations of the economic
impact of international investment. It is also essential to appraise the efficiency of FDI management
process at all stages of investment from enquiring to post-location development. The outcome of
such reviews will inform EIA and the Government on necessary adjustments in the investment
policy framework.
(ii) The need for medium- to long-term strategy and vision
There is an evident need to evolve an operational long-term strategy for inward investment to
Ethiopia for delivery by EIA and its partner agencies through a rolling three-year action plan. It is
suggested that this strategy will have a 10-year focus, with quantitative targets and qualitative goals
being set for overall FDI performance by 2010. This must be supported by a clear business plan for
EIA that explains the nature, level, focus and schedule of its FDI activities over the next years in
detail; defines its activities and resources for the next 3 years in outline; and for the next decade, in
strategic terms. The strategic issues for FDI promotion to be addressed include the following:
♦ International investment objectives, goals and performance targets;

♦ Balance between proactive and reactive promotion;
♦ Sectoral, regional and enterprise priorities;
♦ Priority sectors and regions to be targeted;
♦ Infrastructure needs and priorities for investors;
♦ Incentive packages and regional comparisons;
♦ The role of other Ethiopian agencies and organizations in promotion;
♦ Resource and management requirements, including external funding;
♦ Means for managing and driving investor enquiries and interests.
Such an operational strategy will enable public and private sector organizations to better
understand and coordinate their roles in the international investment process; enable executives and
managers to more effectively manage promotion and thus improve effectiveness of resource use; and
ensure consistency in approach and purpose throughout all stages of the investment promotion
process. The investment promotion strategy and business plan should both be formulated and
produced by the executive and management staff in EIA with appropriate external advisory support
and with involvement of the main partner organizations in Ethiopia including EPA, the Ministry of
Trade and Industry, the Addis Ababa Chamber of Commerce (representing the private sector) and
the Ministry of Foreign Affairs. Both the strategy and plan must be operationally focused; fully
costed and resourced; task-driven to ensure delivery by specific management and supported by
performance monitoring, covering quantitative and qualitative measures.
48
Table II.1
Number and Investment Capital (Million Birr) of Domestic and Foreign Investment Projects
(New and Expansion) which have commenced operation by Year, 1992/1993-1997/1998(1)
Current Prices
Operation start Domestic Foreign(2) Total FDI as percent of Total

Year # Capital # Capital # Capital # Capital
1992/1993 23 60,40 2 67,65 25 148,06 8.0 59.2
1993/1994 79 480,78 - - 73 480.78 - -
1994/1995 233 1,557.22 1 3.56 234 1560.77 0.4 0.2
1995/1996 310 772.49 2 99.33 312 881.82 0.6 10.4
1996/1997 237 1,233.91 4 1,194.35 241 2428.26 1.7 49.2
1997/1998 281 990.85,103.45 12 1,722.56 293 2713.21 4.1 63.5
Total 1992-1998 1,163 21 3087.45 1178 8212.90 1.8 37.6
Source: Ethiopian Investment Authority, Statistics on Investments in Ethiopia: No.1 (EIA Addis Ababa,
September 1998); tables 2.12 & 2.14
Notes: (1) 6 months only (2) including Joint Ventures.
Table II.2
Number and Investment Capital (Million Birr) of Domestic and Foreign Investment Projects
(New and Expansion) which have commenced operation by Region and Broad Sectors,
1992/1993-1997/1998(1)
Current Prices
Investment Domestic Foreign(2) Total FDI as percent of

Sector Total
# Capital # Capital # Capital # Capital
Regions
Amhara 109 401 2 1,349 111 1,750 1.6 77.1
Oromia 329 1,164 3 30 332 1,194 0.9 2.5
Addis Ababa 193 1,063 15 1,674 208 2,757 7.2 60.7
Tigrey 256 1,870 - - 256 1,870 - -
SNNP 226 340 - - 226 340 - -
Others 50 247 1 44 51 291 2.0 15.1
Sector
Primary 514 1385 3 1,210 517 2,596 0.6 46.6
Secondary 497 1266 11 452 508 1738 2.2 26.0
Tertiary 152 2,434 7 1,435 159 3,889 4.4 37.1
Total 1992-1998 1,163 5,105 21 3,097 1,184 8,262 1.6 37.8
Source: Ethiopian Investment Authority, Statistics on Investments in Ethiopia: No.1 (EIA Addis Ababa,
September 19…): tables 2.12,2.13,2.14 & 2.15
Notes: (1) 6 months only (2) including Joint Ventures.
49
Table II.3:
Number and Investment Capital (Million Birr) of Wholly Foreign-Owned and Joint-Venture
Investment Projects Approved (New and Expansion) by Country of Origin 1992/1993-
1997/1998(1), Current Prices
Region of Wholly-Owned Joint Ventures Total Share
Origin
# Value # Value # Value # Value
Middle East 22 2481.74 27 2960.45 49 5442.19 32 66
Africa 23 898.08 3 40.73 26 938.81 17 11
European 19 494.42 23 708.85 42 1203.27 28 15
Union
Asia 8 128.54 5 42.53 13 171.07 9 2
North 7 81.19 7 297.03 14 378.22 9 4
America
Caribbean 2 70.40 - - 2 70.40 1 1
Other Europe 4 36.24 2 53.44 6 89.63 4 1
Total 85 4,190.61 67 4,103.03 152 8,293.64 100 100
Source: Ethiopian Investment Authority, Statistics on Investments in Ethiopia: No 1 (EIA, Addis
Ababa, September 1998); tables 2.5 and 2.6. Note (1) 1997/98 is first six months only.
50
Chapter III
Agricultural Sector
Introduction
This chapter focuses on two aspects of the Ethiopian agriculture sector: the potential for
technological change with emphasis on the management of research and extension services and the
policy changes or adjustments required; and the potential for investment in the sector. Agriculture is
the mainstay of the Ethiopian economy. Currently it contributes over 55 per cent of GDP, accounts
for 80 per cent of aggregate merchandise exports and employs an estimated 80 per cent of the labour
force. The Government has made agriculture its primary priority, as demonstrated by the increasing
share of capital expenditure it has devoted. However, the sector is still confronted with immense
problems, although its performance has improved greatly in recent years due largely to
improvements in domestic input supply capacity and growing participation of the private sector in
the production and marketing of agricultural goods. The Government also wishes to strengthen
linkages between agriculture and the manufacturing sector and to that end, has introduced incentive
measures that encourage such linkages. This chapter will examine how effective those linkages are
and the ways in which technological and innovation systems in Ethiopia could be strengthened to
support the development of agri-business.
A. Agricultural Development in Ethiopia
Ethiopia's agricultural development has reflected its more general economic and political
history since the Second World War. During the 1960s, foreign trade and exchange regimes were
relatively open and export-led (mainly agricultural) development involved the expansion of surplus
land under cultivation. There was little need to improve productivity and export-led growth was
based on exports of coffee, hides and skins, sugar and cotton. There was little diversification of any
kind. After 1960, import substitution industrialization (ISI) was gradually super-imposed on the
prevailing pattern and this combined with the radical re-structuring of the economic system
associated with the military regime, adversely affected development. Import substitution policies
placed strains on the balance of payments, local industrialization stagnated, that by the late 1980s
“the manufacturing sector (had become) unable even to meet the limited domestic demand”.9 It was
also increasingly unable to absorb surplus labour from the rural areas as population grew from 18 to
51 million between 1960 and 1990. All this placed growing strain on an agricultural sector that had
become even less competitive as time went by. Private capital formation in agriculture had begun to
fall in the 1970s and deteriorated even further in the 1980s. By the early 1990s average agricultural
incomes had also fallen substantially and poverty had increased.
The situation with exports has fared no better. Exports (the vast majority of which are
agricultural) reached their peak in 1973-1974. By 1996 their absolute purchasing power had fallen
by nearly one-half with little improvement in recent years. Indeed the 1997 World Development
Report indicated that exports per person in Ethiopia for 1995 were the lowest of 12 comparable
9
See Ministry of Agriculture (1994), p 3.
51
developing countries by a considerable margin. Moreover, export composition is also a problem. In

1997 coffee still accounted for nearly two-thirds of total exports; on other natural resource based
products, such as hides and skins are low; and manufactured exports are negligible. Though recent
data is not available, informal discussions indicate that exports have not reached the target estimate
for 1998/1999 by a considerable margin. In short, despite the concerted efforts by the current
Government to boost agricultural production and attract private investors into agriculture, the sector
has remained fragmented, inefficient and in great need of technological improvement.
It is this combination of inefficiency in both industry and agriculture that has produced the
present Government’s strategy of agricultural-development-led industrialization (ADLI). According
to the Ministry of Agriculture, this strategy “visualizes export-led growth which feeds into an
interdependent agricultural and industrial development. Exports, be it agricultural or mineral, initiate
growth thereby creating the space for ADLI which becomes self-generating. Hence the strategy has
two layers, an outer crust of export-led growth and an inner core of ADLI”.10 The export (outer
crust) contribution will come through the supply of commodities for direct export and through
industrial value added, with the emphasis increasingly on the latter. The inner crust will come in two
ways. First, by establishing a deliberate reliance of industry on domestic agriculture as inputs to
agri-business of various types. Second, it is intended to improve smallholder productivity thus
reducing employment pressures and acting as an increased source of demand for local industrial
goods.
It is clear therefore, that improved technology is seen as a necessary adjunct of the wider
strategy. To begin with, emphasis was placed on labour-augmenting technical change, that is
through better cultivation practices allowing for greater use of family labour. It was then anticipated
that as improvements took place, attention would be placed on better seed application, fertilizer use
and minor mechanization, all brought about by an improved extension system. At the same time
ancillary inputs of credit (rural banks), rural infrastructure (feeder roads) and water supply would
ensure that change would not be stifled by wider systemic shortages.
This broad strategy has received wide support in the country and has been endorsed by donor
agencies, including the World Bank, which has placed emphasis on the urgent need for
manufactured exports suggesting that much of this will involve agri-business. In terms of export
strategy, the aim is to focus on a few selected agricultural commodities - coffee, cotton, fruits and
vegetables, livestock and livestock products. It is also suggested that the export strategy should
explicitly target sectors such as leather and garments/textiles, which are likely to realize profits
immediately. However, at the same time it is important to ensure the rapid transition to low tariff
structures is not too difficult for the “fledgling” sectors to cope with. It shall be seen that in the case
of two such sectors (hides/skins & garments/textiles) there is still a case for protection, albeit
transitional. After all as a least developed country, Ethiopia still has five years before adopting WTO
rules on international trade. As this is the case, it may be wise for it to take advantage of this 5-year
period.
The review team made an assessment of how effectively the science, technology and
innovation system in the country can be brought to bear on the broad strategy of the Government. A
series of interviews were held with staff in various Government departments, donor bodies,
10
See Ibid., p 5.
52
industrial organizations and education/research centres to try and get a more accurate picture of the
current situation. These included a regional research centre (Adet), a national research centre
(Holetta), the Ethiopian Science and Technology Commission (ESTC), the Ethiopian Agricultural
Research Organization (EARO), the Extension Service in the Ministry of Agriculture, the Public
Enterprises Supervising Authority, the National Fertilizer Industry Agency (NFIA), the Ministry of
Economic Development and Cooperation (MEDAC), the National Seed Industry Agency (NSIA),
the Akaki Spare Parts & Hand Tools Factory, the Investment Office of the Amhara National
Regional State and the World Bank. The results of this analysis are presented below.
B. The Organization and Management of Technological Change in Ethiopian

Agriculture: Review and Assessment of Recent Reforms
(i) Strategic and organizational changes
The Ethiopian National Agricultural Research System (NARS) is now undergoing a radical
re-structuring under a World Bank programme called the Agricultural Research and Training Project
(ARTP). The main organization now in charge of agricultural research is EARO. The old Institute
of Agricultural Research (IAR) that funded research proposals on a traditional hierarchical mode no
longer exists. EARO was established as part of a move to rationalize science and technology
governance that had become increasingly dispersed and unproductive. It was the result of a series of
deliberations of a task force set up by the National Science and Technology Council in 1994. Its
major role is to act as a national coordinator of an autonomous, decentralized research system, is
based upon a geographical (agro-ecological) rationale. R&D centres have programmes that deal with
local problems and are correspondingly funded by regional Governments.11
The funding basis appears to be a traditional scientific one although emphasis is given to the
intellectual coherence of proposals. The argument given by the ESTC is that the system had become
so bureaucratic under the old regime that very little of scientific value was being done. Initially, it is
hoped to raise the general quality of the Research and development (R&D) and eventually a greater
degree of decentralized funding will be permitted. At a higher level there are various sectoral
councils that advise senior ministers on science and technology policy. These councils are reflected
in ESTC departments that act as secretariat for policy implementation.
In rather more detail, the proposed key objectives of the ARTP are as follows:
♦ Making the newly created apex national organization for research (EARO) fully
functional with appropriate working procedures and systems;
♦ Building participatory approaches in a decentralized agricultural research system;
♦ Establishing a management information system and networking of information
systems;
♦ Fostering effective linkages between research, extension and farmers on the one
hand, and research centres, domestically and internationally on the other;
11
As we shall see below superimposed on this framework is an orthogonal scheme focused on commodity-based
research. The main issue then becomes one of how coherent the overall strategy will be.
53
♦ Rehabilitating and strengthening the existing research infrastructure and extending it

to hitherto uncovered and harsh agro-ecological areas characterized by extreme
poverty;
♦ Building human resource capacity for agricultural research through technical
assistance and training;
♦ Strengthening the Alemaya University of Agriculture (AUA).
Funding of $90 million for ARTP is provided by the International Fund for Agricultural
Development (IFAD), the World Bank (e.g. through the IDA), and the Government of Ethiopia.
Primary expenditures will go toward the creation of 6 new regional research centres for agro-
ecological zones that are poorly served at present, upgrading of existing centres, human resource
development (largely through assistance to the AUA) and assistance in technology transfer
(extension). The process will take five years to complete.
EARO itself is currently in the middle of a detailed strategic planning exercise that is as
interesting for its “process” nature as it is for the final document that should emerge. The new
strategy is one based on 18 agro-ecological zones and 7 main focal areas. These are:
(i) Crops;
(ii) Animal science;
(iii) Forestry;
(iv) Soil and water;
(v) Dry-land agriculture;
(vi) Socio-economics;
(vii) Regional extension farmer linkages.
The strategy has gone through several stages. All field directors were asked to prepare an
initial 3 to 4 page draft summarizing their views about the future directions of agricultural R&D in
Ethiopia. When the review team visited Ethiopia, the planning process was about to move onto the
next stage, which was to conduct a series of empirical studies for each region to enable a more
quantitative basis for the final EARO strategy. The outcome is expected to be a ten-year strategic
plan that will guide agricultural research policy. Perhaps more important, however, is that the
process itself is certainly an ambitious attempt to achieve genuine acceptance of the proposed new
research direction amongst NARS stakeholders since it is doubtful if operational budget decisions
will be guided by such a generic text.
(ii) Agricultural research and extension in the smallholder sector
It is probably in the smallholder sector that most development work still needs to be done. In
the words of a recent Government communication with the International Fund for Agricultural
Development (IFAD).
"Despite the importance of agriculture to the economy, the country is faced with low levels
of agricultural productivity and degradation of the natural resource base which are mainly
attributed to the inefficient technology that has been practised by the peasant sector which
accounts for over 90 per cent of agricultural production. ...Smallholder agriculture is
54
therefore, and will remain, the most important sector for the diffusion of improved
technology; it needs to be backed up by a strong agricultural research system.12
Indeed, in Ethiopia, the importance of science and technology as a means of raising

agricultural productivity was realized as early as the 1940s when the first agricultural schools were
established at Ambo and Jimma. These were followed by the founding of the College of Agriculture
and Mechanical Arts at Alemaya (now the Alemaya University of Agriculture) in the mid-1950s and
the Institute of Agricultural Research (IAR) in 1966. The IAR became the focal institution for
managing agriculture related research in Ethiopia that has developed extensively since helped by
substantial donor support. But as the World Bank (1998) argues, the national agricultural research
system development has not been that successful.
Some progress was made in terms of building-up research credibility through the
development of research centres, training manpower and generating improved technologies for
crops, livestock and natural resource management. Progress has been affected by many constraints,
including a lack of clear agricultural research policy, poor institutional relationships, inadequate
coverage of some agro-ecologies, such as the moisture stress areas, and poor emphasis on livestock
and natural resources research.13
(iii) Revised strategy
Central to the changes currently underway is the reorganization of research and extension
governance. It is on this point that the Review Team concentrated its attention. Under the old IAR
system funds were provided on the basis of a conventional peer review procedure that did not
consider farmer needs with little regard to any measurable outputs, even of a scientific character.
There were five federal R&D centres and a number of regional ones. The new system is based upon
the twin notions of agro-ecological zones and commodity focus with EARO seeing its role as a
facilitator rather than a major research funder. Agro-ecological research is carried out in the
regional centres and funded by regional fiscal resources. Commodities (of which there are some 18
“priorities”) are each assigned “coordination centres” that act as R&D leaders assisted by a number
of satellite “cooperation centres” that specialize in the R&D relevant to agro-ecology. The former
and the latter can in principle be any R&D institutes in Ethiopia whose work is most appropriate
although the ultimate allocation decision rests with EARO.
However, there is a belief on the part of some interviewees that, in practice, the lion's share
of commodity research is likely to continue to go to the central region of Oromia.14 The main reason
is that four of the five old federal centres (funded directly by EARO) are sited in that region. In fact
the Review Team was informed that at present the federal centres we responsible for practically all
coordination. Moreover it is not clear how genuinely “agro-ecological” the commodity R&D is? To
the extent that is so, there could still be, in addition to the regional biases outlined above, a strong
bias toward science and away from farmer needs. This is a fundamental point since it is a major
12
See World Bank (1998) p 2.
13
Ibid. p 2.
14
In fact in one regional centre visited the Review Team found that less than 20 per cent of its funding came from central
“commodity focused” research resources.
55
current issue in discussions on international agricultural research,15 particularly with reference to the
large international agricultural research centres (the so-called IARCs) managed under the auspices of
the Consultative Group for Agricultural Research (CGIAR).
Increasingly, it is argued that using individual commodities as the primary R&D focus is an
inefficient generic procedure for most developing countries. Not only does it tend to underplay the
complex nature of typical subsistence farming but it is also inherently expensive, science driven and
unduly centralized. At the level of the NARS, research centres have often tended to become isolated
from economic production, with research scientists seeing their role and function in professional
rather than production terms. Research projects are often pursued as much for scientific interest
(with the goal of publishing results) as for relevance to the needs of poor farmers. There are
difficulties in establishing organizational structures that can focus on the broad (interdisciplinary)
problems faced by farmers.
This then becomes reflected in funding patterns, since resources get allocated according to
scientific criteria by funding bodies advised by professional scientists whose criteria of excellence
are "scientific" rather than developmental. Finally, publicly financed extension systems have
difficulty coping with the demands made on them for a variety of reasons. These range from
shortages of adequately trained human resources to the sheer operational difficulties of organizing
and managing the complexities of new technological packages in such a way that they can reach a
receptive audience of a reasonable proportion of the relevant farm population.
The key question is, therefore, how genuinely agro-ecological the new system in Ethiopia is
likely to become in view of the continued support for commodity-based research. The indications are
that the Government of Ethiopia is genuine in its desire to change the approach to agricultural
research. For example, EARO is on record as stating that technology generation will henceforth be at
least as important as scientific merit and a good deal of regional centre funding will not of course
come from EARO itself. Moreover, EARO now has a mandate to provide support to commercial
farmers, exporters and other forms of agri-business.
Another reservation about the current broad "science-led" approach is that little consideration
seems to have been made of imaginative private sector involvement.
The private sector may act as a new and better avenue for providing technology (and related)
needs of farmers. The relative failure of public sector technology sources also indicate the need for
associated policy reforms that see technology transfer in a much more holistic light than is
conventionally understood. Two examples of effective private sector involvement in developing
countries are presented in box 1. The point here is not to imply these experiences are immediately
applicable to Ethiopian conditions but to highlight that Ethiopian science and technology policy
should place much greater emphasis on initiatives like this if long-term economic success is to be
achieved, especially in agriculture. It will also be necessary for policy makers to give much more
attention to institutional reform than has been the case in the past.
(iv) Agricultural extension

15
See, for example, Presley 1998.
56
In addition to research, there appears to have been significant improvements to extension

procedures over the past few years. According to a senior official in the Ministry of Agriculture,
there was practically no extension to speak of in the period 1974-1983. In 1983, the Government
introduced a food self-sufficiency programme based on the training and visit (T&V) type of
extension system, which this also met with limited success. Accordingly, upon the advent of the
new regime in 1991, the Government instituted a new system based on farmer participation. This
was prompted by the “Sasakawa Global 2000” initiative although initially there was little response
on the part of the farmers. A participatory demonstration and training extension scheme
(PADETES) has been established to help with familiarization of the scheme. Since then, the number
of farmers reached has increased rapidly. In 1994, there were only 1,600 farmers reached. In 1995,
the number increased to 32,047. But by 1996, the scheme had reached around 350,000 farmers and
dry land zones were included. A year later, a range of new packages had been developed and some
632,852 farmers had been reached. It was estimated that the figure had reached 2,986,271 by 1998.
Essentially, the new system is oriented mainly toward assessing farmer needs and hence
advising on R&D priorities, with a strong participatory and human resource development dimension.
For example, in one regional research centre visited, there was a dedicated research and extension
(R&E) section mainly concerned with fulfilling the ALID strategy of setting up on-farm
demonstrations. In addition, the primary role of the agricultural economics section is to render
advice on R&E priorities on the basis of assessing farmer needs.16 A selected farmer only supplies
labour for cultivation of the demonstration plot and is allowed to keep the proceeds, which often
amount to yields 50 per cent greater than normal. According to the general manager of the research
centre, the results have been successful with significant rates of adoption of the recommended
technologies.
v) Human resource development plan (HRDP)
There is no doubt that presently the country suffers from a shortage of the technical skills
needed for agricultural development. With regard to agricultural research, the ARTP and the donors
(after some negotiation) have agreed to a HRDP that is designed to radically upgrade the numbers
and qualifications of scientific and technical staff working in agriculture-related research and
development. This will be accomplished mainly through improving education facilities at the AUA
(Alemaya). Under the scheme, 10 AUA staff will be given opportunity to acquire Ph.D. degrees
through overseas training, MSc degree programmes will be shortened to two years (from the existing
3-5 years) by eliminating the research components of the existing programmes. There will also be
increased hiring of foreign expatriate staff. In addition, research staff throughout the NARS will be
offered a series of incentives including a 50 per cent raise in salary (compared to their counterparts
in the civil service), improved sabbatical facilities, better living conditions and better laboratory
facilities.
While these developments are perhaps understandable, the Review Team remains sceptical
about whether this is really the right way to improve capacity-building for technological
development in Ethiopian agriculture. The main worry is that the programme still smacks at
16
This contrasts with arguably the more commonly observed practice whereby agricultural economists spend the bulk of
their time researching for publishable material.
57
centralized science-driven orientation. For example, the World Bank plans to focus MSc degree
programme training solely on course work would appear to run counter to the diagnostic skills
needed to understand the complexities of agro-ecological production requirements.17 Moreover,
there is a real danger that once again the regions may lose-out in terms of training opportunities
because of a built-in bias toward the centre. In one of the regional center, visited by the Review
Team, for example, out of 30 or so professional staff none had a Ph.D. and only 7 had MSc degrees.
Often, the problem is really one of communication and information flows. By the time the regional
centre is made aware of available training opportunity-slots, most would have been filled up by
those living in, or having close contact with, groups based in Addis Ababa. Finally, little mention is
made of modern methods of decentralized training based on distance-learning techniques. These are
often specially designed to promote in situ research-based learning, monitored and assisted by
generic courses provided by central institutions. They are also a useful method of encouraging
decentralized technological development. The fact that recent advances in educational technology of
this type have not been addressed, even in principle, by the ARTP is one of the Review Team’s
concerns.
(vi) Seed multiplication and fertilizer facilities
In order to have a better understanding of the pattern of production and distribution essential
agricultural inputs, the Review Team paid visits to the National Seed Industry Agency (NSIA) and
the National Fertilizer Industry Agency (NFIA). Both are relatively recent establishments. The
NSIA has been operational since 1995 and was established to propagate improved germplasm in
Ethiopia. At present, however, its aims are mainly regulatory and is currently building laboratories
for quality control of locally produced improved seed. About $40 million [$22 million IDA, $6.6
million IFAD, $11.4 million national Government] is being invested to finance the current upgrading
activity and the World Bank hopes to seed 10 new companies by 2001. At present the Ethiopia Seed
Enterprise (ESE), a parastatal, dominates production with around 20 per cent of the market while
Pioneer, a small private firm, produces around 2 per cent (only maize). The remainder of the demand
for seed is met through farmer (unimproved) seed production.
At present ESE operates by sub-contracting to local farmers to produce seeds. It then uses the
regional bureaus to pass knowledge and seeds to farmers. There is clearly a possibility for greater
local production but evidence from the field suggests that at present very little real capacity exists. In
addition, there are marketing and transport problems. Finally the relatively low share of ESE is not
so much a quality problem, as a lack of responsiveness to market demand. A final practical problem
is the virtual absence of seed multiplication centres, an area where private enterprise could certainly
play a role. NSIA, however, has been very helpful in the supply of equipment such as cold storage
facilities to the regions.
17
This is now recognized as a fundamental issue of research policy although one that many international agencies have
difficulty coming to terms with since they have been conditioned to think in terms of disciplinary agricultural science. The
point is that so great are the complexities involved, that analysts need to have detailed field experience built directly into
their diagnoses of agro-economic systems. It has been discovered that the World Bank plan to elide the research
component has been rejected by the Government, a move the Review Team supports. However, there are also indications
that key components such as agricultural economics and engineering may be at risk under the new system. This would not
be supported by the Review Team. For a good introduction to this literature see, for example, Clark and Clay(1986), Hall
and Clark (1995) and Hall and Nahdy (1999).
58
Similar conditions exist for fertilizers. The NFIA sees its current role very much in terms of
regulation and administration of scarce foreign exchange for imports. Presently, indigenous
production capacity does not exist although with hoped for FDI assistance there is no reason why
indigenous production could not result.
(vii) Research and development management
The Review Team also investigated two broad aspects of science and technology governance
with direct implications for agriculture. They first investigated how research and development
activities in the agricultural sector will be managed over the ensuing period. Secondly, they
investigated how effective the prevailing mechanisms to integrate technological factors into
investment promotion are.
As far as the generic R&D system is concerned the position of EARO is pivotal. Since
EARO has taken over from the now defunct IAR (March 1998), the arrangements are still evolving
although clear trends are emerging. As has been seen, the old discipline-based funding policy
[increasingly non-productive in every way] is being replaced with a new policy designed to create
greater linkages with farmers and other stakeholders in the NARS. However, as with other sectoral
arrangements [e.g. health, industry etc.] research management is mirrored by a corresponding
specialization within the ESTC itself, where the latter plays a coordinating role. In the case of EARO
slightly more control than normal appears to be exercised in the sense that the ESTC commissioner
is himself the chair of the EARO Board although EARO was established by proclamation in 1998,
stating EARO reports to the Prime Ministers Office.
The Review Team’s impression from interview with the ESTC was that it still thinks of
EARO as having primarily a science-driven mandate, the novelty being that before re-organization
there was very little good science being produced by the NARS. Thus, although the system is to be
de-centralized/regionalized, funding decisions will still be taken by EARO on the basis of good
research proposals. The great danger here, of course, is that greater linkage moves may be a paper
exercise without any changes from conventional NARS behaviour in reality. The reason for this are
two-fold. First, EARO is under the direct control of the ESTC which takes an apparently traditional
science driven view of R&D management. Secondly, however, the relatively strong focus on
commodity research combined with the continued strong support being given to federal institutes
and universities, will help create a science and technology system that is still conditioned in the old
mode.
EARO, on the other hand, maintains that in practice it will have complete autonomy to
manage its own operations, subject to overall guidelines emanating from the ESTC. However, given
the prevailing “top down” monitoring and control procedures traditional to Ethiopia, there is
scepticism on the part of the Review Team about how far in practice things will change. A second
factor that may complicate the situation is that EARO funding will come from MEDAC, the body
responsible for managing much of the economic reform programme in Ethiopia, including more
importantly, the approval for and monitoring of foreign aid. Presently, EARO maintains that
although its annual funding will come from MEDAC as part of normal operations, once the broad
parameters have been approved, EARO will have considerable powers to vary budgets to reflect
evolving situations on the ground. Hence EARO will provide a budget for higher approval and after
59
modifications this will be mainly a parametric budget. Moreover, since EARO is committed to the
changes, it will ensure that they will indeed take place as planned. Past experience of similar
situations again suggests, however, that this may be an optimistic expectation.
However, despite EAROs autonomous aspirations, in practice, the net result may well be a
science and technology agricultural infrastructure, which continues to operate in ways that suit the
ambitions of its scientists rather than the needs of small farmers. EARO, itself a coordinating body,
is to be managed by other coordinating bodies namely, ESTC, from a science and technology
standpoint and MEDAC, from a financial and foreign aid standpoint. Hence it may well not be
autonomous enough to fulfil its declared mandate in the face of powerful inertial forces. As a
counterweight, there is of course the centrifugal thrust of regional control plus the apparent success
of the new extension regime. However, this is an issue that needs to be carefully monitored over the
next few years. Indeed, it may well be wise to build additional safeguards at this stage rather than
risk the real possibility of a sensible strategy being compromised by institutional inertia.
More generally, the Review Team is concerned about the possibility of confusion arising
from having different organs of governance involved in sectoral activity. It believes, as far as
possible, the sectoral management body (e.g. EARO) should play the major role with other bodies
(e.g. ESTC and MEDAC) playing a more strategic and advisory role. Indeed ESTC should consider
emulating science councils in other parts of the world by moving toward a much more strategic level
institutionally. It would therefore cease to get involved with sectoral considerations directly and
instead deal with major cross-cutting themes bearing on science and technology development in
Ethiopia.
C. Case Studies in Agricultural Development
Another important thrust of current policy is to diversify agriculture into higher value
commodities (a position echoed by the World Bank 1997) in areas of great potential, especially in
tea, coffee, cotton, sugar and horticulture. The Review Team carried out three case studies in order
to give greater empirical content to these general points. Firstly it reviewed some recent
developments in the textile sector through an investigation of a textile factory at Bahir Dar (see, Box
2), a town situated at the Southern end of Lake Tana some 450 kilometres north west of Addis
Ababa. Bahir Dar was chosen as a place to visit for several reasons. It is the capital city of the
Amhara State, one of the more advanced regional states in Ethiopia. In addition the region has
apparently been designated as an important agro-business centre for future development . The textile
plant at Bahir Dar is an old Government-owned and managed factory that was started in 1961 and is
currently in the course of being privatized in collaboration with an overseas firm. Secondly, while
the Review Team was in Bahir Dar it took the opportunity to review the activities of the local
technical college. Thirdly a visit was made to the country's first “cut flower” business situated in
Zewai, Oromo region. The cut-flower business has been operational over the past few years and was
started by a local entrepreneur.
Each case study helps to illustrate potential, strengths, weaknesses, as well as opportunities
that exist in Ethiopia for agri-business led industrialization, growth through export diversification,
technological development and for attracting FDI into the agro-business sector, especially textile and
horticulture.
60
(i) Textile
As part of its Integrated Programme for Ethiopia, UNIDO has proposed to assess the
strengths and weaknesses of the textile sub-sector and the policy and incentive measures necessary
to restructure and rehabilitate enterprises in the sector.18 It is envisaged that the review will identify
ways in which the productivity of existing textile enterprises can be improved to make them
competitive at national and international markets.
The production of textile goods is the largest formal sector manufacturing activity in
Ethiopia. The textile sub-sector accounts for about 36 per cent of total manufacture in the country.
Foreign capital played an important role in the establishment of most of the existing large-scale
textile enterprises, which were subsequently nationalized following the socialist revolution in 1975.
The main products manufactured in the Ethiopian textile and fiber industry are cotton fabrics, nylon
fabrics, acrylic yarn, cotton yarn, woolen and waste cotton blankets, and sewing threads. The major
inputs of the textile industry are cotton, nylon yarn, wool, acrylic yarn, jute fiber and chemical
dyestuff. With the exception of some cotton and jute grown and supplied locally, a large portion of
the major inputs required by the textile sector are imported. However, with liberalization and the
growth of the private sector, an increasing proportion of the chemicals used by the sector is being
produced and supplied by local enterprises.
The potential for growth and expansion of the sector is enormous. For instance, currently the
capacity for cotton production is, by far, in excess of spinning capacity. This excess production
capacity coupled with the availability of cheap labour in the country makes the textile sector of
critical importance for export diversification, employment generation, attracting FDI and the growth
of the manufacturing sector. But, before this potential is realized, efforts are required in easing the
constraints faced by major enterprises in the sector. The efforts, to date, to privatize State owned
textile enterprises have not been successful. Concerted and more targeted promotion efforts – for
example, through fiscal incentives - are required to generate interest among domestic and foreign
investors. Another potential incentive for the private sector investment is the preferential market
access commitments made by bilateral and multilateral trading partners. The recent Everything But
Arms (EBA) initiative of the European Union and the Africa Growth and Opportunity Act (AGOA)
are important initiatives worth highlighting in this context. The immediate impact of these market
access commitments is to remove trade and non-trade barriers facing exports from poorer countries
such as Ethiopia and improve the export revenue earning capacities of these countries. One of the
objectives of the proposed UNIDO assessment of the textile sector in Ethiopia should be to explore
how the productive capacity of the sector can be enhanced to take advantage of the market
opportunities offered by the EBA and AGOA initiatives.
The existing textile enterprises in Ethiopia face numerous constraints including outdated
technologies and production capabilities, competition from imports, lack of experience in operating
in competitive markets and skill shortages. The Bahir Dar Textile Factory, one of the largest and
oldest textile plants in the country, symbolizes both the potentials and weaknesses of the textile
18 Hence, less attention is paid to textile in this review to avoid duplication. In addition, during the field mission to
Ethiopia, the Review Team was requested to focus on the leather sub-sector as an example of agro-industries, which is
included in chapter iv.
61
sector in Ethiopia. Information gathered during the field mission to the Bahir Dar textile factory (for
details see Box 2) indicates the following:
♦ Lack of enterprise-level technological learning. The fact that, after nearly 40 years of
operations, the enterprise still relies on imports for 90 per cent of its inputs such as
chemicals and spare parts, clearly indicates a lack of technological learning. If this
experience is repeated in the other Ethiopian large-scale textile enterprises, which all
indications suggest it is, then the sector as a whole must be suffering from
technological stagnation;
♦ Weak linkages. There are a number of private and public sector metal working
enterprises and workshops that are capable of manufacturing many of the spare parts
needed by the Bahir Dar plant. However, only on few occasions were these local
enterprises used as suppliers (see box 2). The general tendency has remained to rely
on imported inputs, thereby reducing the potential for stimulating technological
learning in local enterprises through backward linkages;
♦ Low level of re-investment. The enterprise has invested very little in technological
upgrading as demonstrated by the age of the machinery and equipment used. In fact,
as noted in box 2, some of the machinery, in particular for dyeing and finishing, dates
back to 1961, the year the plant was established;
♦ Low quality of products. Although the enterprise produces grey fabrics for export in
regional markets, the bulk of its product (75 per cent) is geared toward the domestic
market and is not export quality. In this respect, the enterprise seems to have
remained locked into types of products and quality it was initially established to
produce. This is another indicator of low-level of enterprise-learning;
♦ The difficulty of building competitive enterprises. The case of the Bahir Dar textile
plant elucidates the challenge that Ethiopia faces in attempting to diversify exports,
attract FDI and attain growth relying on enterprises that were set up under conditions
of import substitution which have remained technologically stagnant. The current
attempt to establish a partnership with a foreign enterprise, MCM of Italy (see box 2)
is to be encouraged since such collaboration may help to improve quality and
management style and upgrade the technology applied. But, ultimately, the
technological development and competitiveness of such enterprises are determined
by the linkages generated with other enterprises in the region, in particular, with
component suppliers and with the Bahir Dar Technical College, the regional
investment bureau at Bahir Dar and suppliers and consumers of raw materials in the
region.
(ii) Learning institutions
Learning institutions are among the key actors in the effort to build national technological
and innovative capability. In this connection, the case of the Bahir Dar Polytechnic is of interest
since it elucidates the role that such an institute can play in strengthening the innovation system in
one of the more advanced regions of Ethiopia. A brief summary of the institutional structure and
pattern of development of polytechnics is presented in box 3. The key points arising can be
summarized as follows:
62
♦ At present, the Government of Ethiopia is engaged in a thorough revision of higher

education institutions, including the upgrading of technical colleges to the university
level and their expansion to the regions. Moreover, as the case of the Bahir Dar
Technical College shows, there is concerted effort to develop tertiary level training
programmes that meet the technical skills requirements of local/regional industries.
The establishment of a department on textiles and the focus of the technical college
on engineering-related training programmes are compatible with the intention of the
Government to turn the city and surrounding regions into a centre for agro-business-
related activities. However, stronger links must be established between the technical
college (to be upgraded to university level soon), and local/regional enterprises,
especially those engaged in agro-business activities such as the textile plant at Bahir
Dar;
♦ The culture of research, especially in areas in which the region has comparative
advantages, and the student placement system should be strengthened and supported
by both the regional and federal aims of Governments. As shown in box 3, these
trends are emerging but require a systemic approach linked to policies for the
development of the national and regional innovation systems;
♦ The Government has not implemented plans to introduce business education in Bahir
Dar because, it argues, facilities for business-related education are already available
in other regions. While regional specialization may have some merit in planning an
education system, the Review Team believes that the absence of business education
at the Bahir Dar Technical College is not productive. This absence goes against
established evidence showing the integration of technical with business-related
education such as management, accounting, marketing and finance is an essential
requirement for the development of industrial management skills and capability. It
increases the chance of promoting an entrepreneurial culture and is, therefore, more
in keeping with the needs of a healthy national and regional innovation system. In
Bahir Dar, the logical home for business management and related complementary
subjects is in the department of industrial engineering, which at present focuses
almost exclusively on standard engineering subjects like production scheduling and
stock control.
(iii) Horticulture
The third case study - Meskel Flower Incorporated - is a successful cut flower
exporting enterprise and demonstrates that a focus on horticulture business is indeed a
realistic option for the country both in terms of attracting FDI and increasing domestic
private sector involvement in this sector. The pattern of development of the enterprise is
described in box 4. The lessons for export potential, increased FDI and the strengthening of
the national innovation system arising from this case study can be summarized as follows:
♦ The key factors behind the establishment, survival and success of the enterprise
seems to be the availability of relevant resources, especially land which was
apparently obtained with little difficulty and without size restrictions, easy access to
credit and some shrewd management innovations by the owner. These factors are
encouraging since they signal that entry into horticulture business is a realistic and a
63
relatively easy option, especially for FDI. However, for other types of business,
especially those located in larger cities such as Addis Ababa, access to land, both in
terms of availability and cost, has proven to be difficult. Some local investors
interviewed for this study indicated that it is one of the greatest obstacles to
investment. It is clear that private sector concern about urban land needs to be given
greater attention by the Government;
♦ The success of Meskel Flower Incorporated aside, the case study also demonstrates
the constraints that new entrants into cut flower business are likely to face and in
general, the obstacles that export-oriented enterprises face in Ethiopia. The main
constraints are poor physical infrastructure, energy, transportation, the unavailability
of a skilled labour force and the remaining bureaucratic procedures in acquiring
essential inputs such as fertilizers, pesticides and herbicides;
♦ The role of technology also appears to have been significant in the following stages
of development of the enterprise. First, the feasibility and technology choice stages
required detailed work by the entrepreneur, including the availability and access to
necessary technical data. National supporting institutions do not exist and
consequently there is a lack of assistance in these areas. Therefore, the entrepreneur
relies on technical assistance provided by a Kenya based organization, Agricultural
Production Development Fund (APDF) and a foreign expert consultant. Second,
continued technical assistance has been necessary to ensure a swift build up of design
capacity. Third, technical training of the local labour force has been a necessary
feature in the development of the business. However, local capacity for training in
this area is limited and consequently, the enterprise was forced to hire a Kenyan
horticulture expert. Finally, there seems to have been significant learning-by-doing
on the part of the entrepreneur himself. In summing up, the success and experience
of Meskel Flower Incorporated indicates that: (a) there is significant potential for
investment in high value horticulture in Ethiopia; and (b) if the sector is to expand
further (indeed since 1999 it has attracted additional local and foreign investment)
then there is an urgent need for strengthening the national technological and
innovation system and improving the support structure, especially physical
infrastructure.
D. Investment Potential in the Agricultural Sector
Only 40 per cent of FDI inflows since liberalization has gone to the agricultural sector,
although, as previously noted , agriculture contributes to over 50 per cent of GDP and accounts for
over 80 per cent of aggregate merchandise exports. In formulating an investment promotion
strategy, the potential role of agriculture needs to be given special attention. Equally important is
the attention given to the Regional Investment Bureaus (RIBs) as they are likely to play a critical
role in servicing inward investment in the agricultural sector and ensuring that investment continues.
The strengthening of RIBs should, therefore, be an urgent priority in future investment policy and
promotion plans.
While the Review Team was in Bahir Dar, it visited the Amhara Region Investment Bureau
and conducted detailed discussions with high-level officials. Given that this region is one of the
64
most advanced of the ten regions in Ethiopia, a review of the Amhara RIB will help illustrate the
potential and challenges facing similar bureaux in other regions.
The Amhara Region Investment Bureau began operations in 1992. It has approved over 350
projects, most of which are in agriculture and agro-business areas. However, the Amhara RIB
currently faces a number of constraints, which require immediate attention in order to stimulate
additional investment. The main constraints are:
♦ Shortage of trained staff. To provide the technical expertise and assistance required
by potential entrepreneurs and to assess investment opportunities in the region. At
present the office only has 21 technical staff, none of whom are engineers. This is a
big gap especially in view of the technical support that the Bureau wishes to provide;
♦ Laboratory facilities. To conduct research needed by potential entrepreneurs (e.g.
soil testing, water quality monitoring etc.). When asked if the Bahir Dar Polytechnic
could assist in these areas, the interviewee expressed reservation as the Polytechnic is
funded centrally; 19
♦ The need for better computer and IT facilities;
♦ Although, in general, relations with the EIA (to whom the Bureau reports quarterly)
are good, there are some problems nevertheless. For example it was claimed that
there was no consultation on the last (June 1998) amendments to Investment
Proclamation. Moreover, regional staff are overlooked for international trips for
training or to make contact with prospectful FDI business. Apparently, these tend to
be open only to centre staff at Addis. There is also lack of opportunity to discuss at
regular forums with other national stakeholders in Ethiopia.
More generally and despite the great potential that exists in the region for agriculture and
agro-business, there are a number of pressing regional constraints. These are:
♦ Power shortages. It is estimated that the additional 75 megawatts at Tiss Abbay will
not be on stream for another 3 - 5 years. Current capacity is 12 megawatts);
♦ Road transportation is poor;
♦ There is a significant market problem for agri-business (e.g. lack better information
support);
♦ There should be greater technical capacity in EIA to help attract more FDI to the
region.
19
The interviewee was not aware of the imminent cost-sharing policy of the Government. See Ministry Of Education
(1998), p. 9-10.
65
Overall Assessment
Regarding agricultural reform, the Review Team believes that the shift toward
regionalization and privatization have been the right decisions. The former should clearly lead to
improved resource and technological management across the board if only because it will help to
bring chains of command and control into more horizontal relationships. Evidence from regional
research and development centres shows that this strategy already appears to be working though it is
still early days. The great advantage of privatization is that it liberates entrepreneurs (and potential
entrepreneurs) from the heavy hand of bureaucracy. More importantly perhaps, it creates
possibilities for greater degrees of foreign direct investment (FDI) which in turn provides potential
access to two necessary ingredients, namely international markets and best practice technology. FDI
is not of course the only route to these ingredients but its importance has been recognized by the
Government and steps are being taken to promote it. Equally important, is the determination to bring
poor farmers into direct contact with the agricultural research system. Already, there are some
indications of its practical success.
Therefore, at a general level, the Review Team believes that the right strategy for agricultural
R&D is being followed. The problem is that such a strategy also requires corresponding institutional
changes if it is to be effective. Here much remains to be done. The Review Team came across many
examples gleamed from interviews as well as from independent observation of lack of
communication and interaction between the different institutions dealing with technical change.20
This indicates that chains of command are still very much "top down" with corresponding reluctance
to link across hierarchies. Moreover, there may still be a tendency to regulate rather than facilitate
while funding structures within the public services still depend upon central control in many aspects.
A second major reservation is that while there are many statements about making the
agricultural research system, NARS, more user friendly and less science driven than is perhaps
common in many developing countries, the reality of what could happen may well be less positive.
Thus, the continued existence of the commodity R&D focus, combined with vague statements about
“orchestration”, the disproportionate focus on the central region and the rather traditional orientation
of the Human Resource Development elements of the ARTP package, all suggest that NARS
behaviour may not vary much in practice from the conventional (and discredited) stereotype.
However, because so much of what is happening in Ethiopia has only recently been put in place (and
therefore probably needs time to work itself out) the policy recommendations that follow at the end
of this report are more in the nature of general suggestions (to help achieve stated goals) than
specific injunctions.
20
For example, there appears to be little interaction between education/research bodies and those responsible for foreign
investment. Even among departments connected with investment, there was sometimes lack of awareness.
66
Box III.1: The Role of the Private Sector in Agricultural Development:

Examples from Colombia and India
The first example examines the role of trade associations in integrating technological
resources with other inputs needed to bring about change in a sector or sub-sector. The Colombian
experience explains this very well. In three sectors of direct relevance to agriculture (coffee, sugar
and cut flowers) a recent UNCTAD report shows that a major role has been played by the relevant
trade associations (or gremios). Acting on behalf of and financed by the growers, these organizations
provided infrastructure, extension advice, training, R&D, legal and other services. Not only are such
inputs superior to conventional public sector variety (often the latter do not exist), but they are also
responsive to immediate perceived needs which are facilitated by close linkages. In this case they
have clearly been effective and paradoxically appear to take pressure off the public sector, that
allows the main R&D institutions to take a more strategic position in technological development.*
The second example draws on the role of cooperative institutions. Here recent developments
in the mango sub-sector of the Indian economy involving an institutional marketing innovation, the
Vijaya Association of Fruit and Vegetable Growers’ Cooperative Societies of Andhra Pradesh
(Vijaya) are equally illustrative. What Vijaya has done is to act as a means of integrating small
farmers into a wider economic market (including the high value export market) through a
cooperative purchase scheme that eliminate the middlemen. However, it has also, improved access
to other inputs, in particular potential source of technology. Historically, organized agricultural
science has found small farmers notoriously difficult to service in terms of their technology needs
due to the often highly specific nature of their production problems and complexity of the factors
which condition their technology adoption behaviour.** This problem has been heightened in the
case of Indian horticulture due to the almost total lack of a dedicated extension system. At the same
time it seems likely that private firms will still need to rely on small farmers for produce due to
current land tenure arrangements. In turn this may provide an incentive for corporate enterprises to
act as “technology brokers” for their producers, with all the up-stream implications that this has for
horticultural science.***
* See UNCTAD (1999)

** See for example Biggs and Clay (1981)
*** See Hall et al. (1998).
67
Box III. 2: The Bahir Dar Textile Factory
The Bahir Dar Textile Factory is one of 6 large national Ethiopian textile factories. It
was established in 1961 as part of an import substitution industrialization programme. It
produces grey fabrics for export (25 per cent) and bed sheets for the local market (75 per cent)
and employs around 2,500 people. Its overall production capacity is around 19 million square
meters of cloth. It buys ginned cotton medium grade from local sources and then carries out
the complete range of operations from cleaning, carding, roving, spinning, weaving through to
dyeing and finishing. There is no shortage of local cotton of the necessary quality. It is of a
medium-fibre variety from the northern part of the country.
Currently the plant operates at around 60 per cent capacity, which is an improvement
from the pre-liberalization period. Since 1992 Ethiopian textile factories have been in
competition with each other as well as imported textile products. However, a new trend of
cooperative agreement among them is emerging designed to keep down the price of ginned
cotton (50 per cent of total costs) and other inputs (chemicals and spare parts). The latter are
mostly imported (90 per cent) since local capacity is insufficient because of poor design,
product quality and time delays. The Akaki Spare Parts & Hand Tools Factory and another
small plastics factory in Addis Ababa are used to manufacture components but only to a very
small extent. Labour costs are very low running at around $2 per day. The plant is old and
gives the appearance of needing upgrading. Indeed some of the equipment (dyeing and
finishing machinery mainly) dates back to the factory's foundation in 1961. There has been
some re-investment (and expansion) in spinning and weaving in 1982 and 1988, funded by the
European Investment Bank (EIB), but much needs to be done if the plant is to compete
internationally. There is no meaningful R&D.
As part of the Government's privatization policy the Bahir Dar Textile Factory, one of
the oldest in Ethiopia, was put out to private tender in 1992. There were no offers (as with the
other factories) and it was decided that a process of partial rehabilitation would be necessary
for the whole textile sector. This would include a search for foreign investors which could
provide technical and managerial know-how. An Italian company, MCM, was approached but
it has only been willing to enter into a management contract in the first instance to produce
denim cloth. In the meantime there have been a series of consultants from the EIB to the Bahir
Dar Textile Factory leading to a plan to upgrade the finishing sections with financial support
from the EIB worth $15 milllion.
The MCM joint-venture plan was to convert the plant to manufacture denim fabrics
(and eventually garments as well) for export to the United States and European markets [an
unspecified tie-up with Levi's was mentioned]. Production of bed sheets for the local market
could still continue (20 per cent of total output by value). A team from MCM recently visited
and final agreement should be concluded quite soon. The Government hopes that MCM will
take out some equity participation soon and so enable a debt-equity swap.
68
Box III.3: The Bahir Dar Polytechnic Institute
The Bahir Dar Polytechnic Institute is in the process of being upgraded from a technical
college to technological university status as part of a more general restructuring of the Ethiopian
educational programme (6 colleges altogether) to produce more and better technological manpower
in the country.
The Bahir Dar Polytechnic Institute now has the following 6 major departments: Textiles
(the only one in Ethiopia); Civil; Mechanical; Chemical; Electrical; Industrial.
There are also a number of ancillary departments such as Continuing Education and the
Ethiopia Management Development Centre (EMDC) discussed below. The new regime is three
years old and the first cohort of students is now in the third year of a 5-year degree programme.
Special attention is being paid to industrial placements. At the end of this semester, for example, all
third year textiles students will be sent for project placement to a textiles factory, whether in Bahir
Dar or in the many others around the country. Other departments will place students in sugar,
foundry, beer, cotton ginning, food processing and soft drinks factories.
At present, the college faces a number of constraints. Staff recruitment is difficult, especially
at senior levels where consultancy possibilities in Addis Ababa act as a disincentive. This is being
met partially by recruitment from other developing countries but experience here has been mixed.
Also, the establishment of an academic research culture is difficult to instill since there is no
research tradition at the institution. However, this is being pursued through a number of "link"
programmes with overseas universities, combined with a series of project proposals to donors. These
are intended to focus on Lake Tana as key resource that is environmentally vulnerable and designed
to combine inputs from a number of the polytechnic departments. In the Review Team's view this is
a positive development and already there are encouraging signs that research funding could well be
forthcoming.
A major weakness of the Bahir Dar polytechnic, especially in view of its upgrading to a
university level, is the shortage of relevant social science skills such as economics, business studies,
accounting and industrial management which are relevant for developing and promoting an
entrepreneurial culture. These are courses that would normally be expected in a fully fledged
university. However, one remedial feature is the presence on campus of the Ethiopia Management
Development Centre [EMDC]. This programme is one designed by the Open University [OU] in the
United Kingdom and operates on a cascading distance learning basis. It started around 4 years ago
with the OU training around 40 tutors for 5 regions in Ethiopia. These now operate from 5 regional
centres training people from a variety of areas (e.g. industry and local government) on a part-time
basis in management development to certificate and diploma level.
69
A final point worth mentioning concerns financial control. At present this conforms to a
centralized system with resources coming in from Government and being managed under a system
that requires central polytechnic authority for the sanctioning of even the smallest expenditures. It is
unlikely that a modern university can continue to operate under this sort of procedure. Indeed in
most northern countries knowledge-based institutions now use budgetary control procedures that are
much more decentralized (and much more efficient). Researchers not only formulate their budgets as
part of their research proposals, they also manage these same budgets subject to generic rules laid
down by the institution as a whole.
70
Box 4:
Meskel Flower Incorporated
The Review Team visited this plant as an example of domestic private sector participation in
an area of agribusiness that could prove promising in years to come. Already this industry has made
great economic strides in Kenya. Following an interview with the firm's managing director in Addis
Ababa the Team travelled some 140 kilometres south to visit production operations at Lake Zewai.
The origin of the enterprise was a decision by the entrepreneur, a former airline pilot, in 1992. He
had been planning to enter some business activity for a considerable period of time dating back to
his days as an undergraduate in California. While in the United States he had visited farmers,
discussed possibilities with appropriate personnel in the World Bank, Washington DC and also
visited facilities in The Netherlands.
Having made a decision to enter cut flower production his next task was to search for a
suitable location in terms of soil, climate and ground water availability. He was assisted in this by
having access to a detailed soil map of Ethiopia developed by the technical assistance of the
Democratic People's Republic Korea. Finally he approached the organization sponsored by the
World Bank based in Nairobi, Agricultural Production Development Facility (APDF). This body
assists potential African entrepreneurs by securing technical assistance and helping to conduct
feasibility studies. In this case he was put in touch with a consultant [John Wright] who is a well-
known expert in the African cut flower business and travels all over the region offering technical
advice. The consultant not only helped in the start-up phase but continues to visit on a monthly basis
to help monitor production operations.
The entrepreneur was successful in leasing land and indeed claims that land availability for
expansion in the Oromo region is not a problem. This was confirmed visually by the Review Team.
The capital required to start the business was obtained from local banks. Production started with
summer flowers for the Dutch market. However, he was, apparently in direct competition with a
large Dutch company and was driven out when they lowered their prices. Nevertheless the
entrepreneur asserts the experience was invaluable because by then he had acquired a great deal of
commercial know-how and had discovered that there was/is a good market for high value roses in
Germany. Germany was also suitable because Frankfurt is only some 7 hours flying time from Addis
Ababa [Lufthansa] and he was able to tie up with a German marketing organization that was willing
to take as many roses as he could send. Accordingly he abandoned the Dutch market, raised some
extra money from a local bank and expanded the area of cultivation to 3 hectares and is now in the
second year of the new operation.
71
The plant uses drip irrigation technology supported by fertilizer (and where necessary
herbicide and pesticide) application, with regular monitoring of humidity and temperature to help
optimize growing conditions. These are not computerized but could be if it were felt necessary.
There are cold storage facilities both at the plant and in Addis. Energy at the plant is provided by
two diesel generators that operate on a shared rota basis. The firm has two bulk carriers (more than
enough for transport needs) and approximately 3 to 4 deliveries are made to Germany each week,
with a stop-off in Addis where necessary. Quality control, packing and transportation scheduling are
managed in a large open plan hanger-like shed abutted by the cold store. Packing staffs are
organized into teams with performance chalked up on a large blackboard in full view of everyone.
Relative performance is thus openly available and financial rewards are given to the more successful
teams. Quality control procedures are strict because of marketing needs and rejected flowers are sold
at a lower price in the Addis market.
Employment runs at around 70 labouring staff controlled by a production manager who is

himself supervised by a consultant brought in from Kenya on a two year training contract. It was
difficult to obtain accurate data on output and sales partly because the plant is still building up to full
capacity. However, the Review Team estimates that at full capacity the plant will produce some
500,000 stems per annum at an average wholesale price of around 1DM for every three stems. This
price varies widely depending on market conditions in Germany but it is clear that the plant makes a
healthy profit whatever the estimate. As a sideline the plant produces a small range of summer
flowers and some high value vegetables for local markets.
As mentioned above it is clear that there could be considerable expansion in this sector,
mainly for the export market. The constraints faced are really threefold. First there is a relative
shortage of aircraft freight space. The managing director estimates that existing freight capacity
could probably cope with another Ethiopian grower but not with a third. A second problem is
availability of fertilizers, pesticides and herbicides where the regulatory procedures, he believes, are
bureaucratic both with regard to the acquisition of foreign exchange (there is no local production)
and with plant protection regulations. In the case of the latter, licenses are subject to vetting by a
national research laboratory but the managing director doubts the scientific expertise of the staff
involved. Luckily there has been no significant disease problem so far but when the time comes to
re-order chemicals he anticipates long delays. Finally road transportation is a problem because of
poor road surfaces between the plant and the main Addis Ababa road and on the feeder road between
the plant and the main road. In the latter case the distance is only a few kilometres but the time taken
is nearly half an hour. Plans have been made to improve matters but these may take some time to
reach fruition.
72
Chapter IV
The Leather Sector
Introduction
Ethiopia’s leather industry is in the forefront of the leather sector development within the
Eastern and Southern African region. As a predominantly agricultural economy with the largest
cattle population in Africa, Ethiopia has a strong base for semi-processed leather, finished leather
and leather products. It is no surprise, therefore, that the recent export development strategy
introduced by the Government recently has singled out this sector as a priority area and incentive
schemes have been designed accordingly. However, the challenge is how to make best use of the
country’s revealed comparative advantage to build a dynamic and competitive sector that contributes
to Ethiopia's economic growth and the efforts to promote technological capability building through
increased investment including FDI.
Ethiopia has great potential for rapid development of its leather sector and has focussed its
short-term strategy on moving all leather production from the wet-blue stage to crust and eventually
to finished leather. The strategy for the long-term is to gradually convert all available hides and
skins to finished leather products – shoe uppers, shoes, jackets, bags, etc.
The rapid development of any sector depends on similar growth in all related sub-sectors and
the infrastructure necessary in order to sustain the momentum of expansion. The recent
development in Ethiopia, both in terms of political and policy environment is conducive to the
development of the sector. However, its success depends on the ability of sector enterprises to have
access to good quality raw hides and skins and to favourable export market conditions. This is
especially important in light of the radical changes in the political and market environment in
Eastern Europe, which was traditionally the main source of demand for Ethiopian leather products.
The success of the sector also depends, to a certain degree, on the strength and competitive
position of the leather and leather products sector in other African countries, which are also endowed
with the resources necessary to build a dynamic leather-based industry. Some Eastern and Southern
African countries have the potential to emerge as major suppliers of semi-processed leather to export
markets, and to produce finished leather products for domestic and gradually export markets.
Therefore, in designing policies to promote the leather sector, policy-makers in Ethiopia

should take full account of the various factors that affect the competitiveness of products in the
sector, including competition from other countries in the region. Markets for leather goods have
increasingly become more fragmented because of more variety and unique lifestyle-related products
which are in demand. Each product, such as various sports, leisure and safety products, requires
design skills, knowledge and technology and special distribution channels. In fact, increasingly
flexible specialization modes of production are necessary to cope with rapidly changing market
requirements. The fashion and business cycle in most market segments is now shorter. Greater use
of leather substitutes is also becoming common. In addition, tighter delivery schedules and shorter
production runs are the order of the day, because of the need to reduce costs and risks of maintaining
73
inventory. These mentioned factors should be reflected in the strategy for building a dynamic
leathersector.
A. The Value Chain in the Leather Goods Industry of Ethiopia
Three main stages in the chain of production of finished leather goods can be identified: (i)
the supply of raw materials (livestock); (ii) tanning and finishing; and (iii) leather products
manufacture.
(i) The Ethiopian livestock base
Ethiopia has the largest livestock population in Africa and therefore, has a strong base upon
which its leather industry is founded. Estimates of the domestic livestock population is shown in
table IV.1.
Ethiopian highland sheepskins, estimated to comprise about 70 per cent of the total sheepskin
production, have an international reputation for their unique natural substance of thickness, fineness,
flexibility, strength and compactness of texture. They are suitable for the production of high quality
leather dress gowns, sport gloves and garments and are in great demand in the world market.21
Goat skins, classified as Bati-genuine (the international name given for high quality goat
skins) and Bati type, are characterized by thick, highly flexible and clean inner surfaces and are in
high demand for the production of fashion leathers.
(a) Marketing of sheep and goat skins
The existing hides and skins marketing system in Ethiopia, with its extensive network of
traders and sub-agents, has worked well and has largely been unaffected by Government
intervention over the years. It is estimated that the system recovers over 90 per cent of the
sheepskins and about 60-70 per cent of the goatskins produced in the country.
Although, hides and skins are a by-product of the meat industry, they are a major export
commodity, ranking second only to coffee and contributing about 14-16 per cent of the total foreign
exchange earning.
The establishment of the Livestock and Meat Board in 1964, and the introduction of an array
of legislation since 1973, relating to standards for raw hides and skins and procedures on licensing of
hides and skins production and trade, inspection of premises, and product grading has considerably
improved the volume and quality of hides and skins. There are now 60 municipal slaughterhouses
and associated hide drying sheds. With the assistance of multilateral agencies,22 local skills and
capabilities have been improved through training, educational study tours, seminars and workshops,
construction of demonstration slaughter slabs and drying sheds, introduction of quality grading and
grade-marking system, distribution of demonstration equipment and tools including appropriate
21
Eastern and Southern Africa Leather Industries Association (ESALIA, 1996).
22
The agencies that contributed to human resource development included UNIDO and FAO/TCP.
74
types of knives and enhancement of staff mobility through the provision of motorcycles and
vehicles. 23
(b) Hides and skins pricing and quality grades
In Ethiopia, the prices of hides and skins are determined by the market. Moreover, although
large-scale and more organized distributors have began to emerge, the bulk of the hides and skins
originate from rural farmers/primary producers. The latter supply about 70 per cent of the hides, and
90 per cent of sheep and goat skins to the industry. This has important policy implications. It
implies, for example, that policies to improve quality at this stage must be directed at small rural
farmers who are the predominant source of raw hides and skins.
The marketing chain for the hides and skins trade is principally from the primary producer
(rural farmer and pastoralist) to rural markets; to small dealers and agents/collectors; to town traders
and shed owners (where the hides and skins are frame-dried and/or wet-salted), to the big traders in
Addis Ababa (the central market) and finally to the tanneries. The hides and skins produced in
slaughterhouses and abattoirs are auctioned to big traders and tanneries, both public and private.
The lack of price incentives for the primary producer, illegal cross-border trade and
competition from rural tanners are some impediments to the improvement of hides and skins in the
collection and quality. In addition, defects like flay-cuts, putrefaction, improper shape, branding,
scratches, diseases and parasites, as well as storage and transport conditions, down-grade the quality
of the raw material supplied.
The low quality "Caravan" grade hides and skins, which was the standard before the
establishment of the Livestock and Meat Board, was upgraded to "Butchery" type frame-dried hides,
wet-salted sheep skins and wire-dried goat skins. The common practice in the hides and skins trade
and in the issuance of movement permits from production centres to the central market has been to
accord the product the traditional 40:50:10 grade mix of grades 1:2 and 3 respectively. In recent
years, especially during the full operation of the Second Livestock Development Project, the quality
grades reached 70:20:20 mix. Moreover, a large number of slaughterhouses and drying sheds were
established and the participation of Farmers Producers Cooperatives in the production and marketing
of hides and skins from the rural areas was increased. These measures have contributed to the
general improvement in the quality of hides and skins.
To sum up, upgrading the quality of hides and skins in Ethiopia will require concrete
measures aimed at specific problems currently facing the industry. Problems include: (i) lack of an
effective programme to promote improved animal husbandry practices ( which will reduce animal
diseases such as "Ekek"; (ii) lack of proper slaughtering facilities (which will reduce defects and
poor handling and poor preservation); (iii) lack of a proper collection system based on quality
(introduction of a grading system) and incentive schemes for the primary producers, for example, the
23
The assistance provided such as “A Procurement System for Ethiopian Hides and Skins Based on Quality” (Moriaty
1996) and “Improvement in the Quality of Ethiopian Rawstock” (Stosic, 1996), included the funding of studies dealing
with the identification of the causal agent of the sheep skins disease (“Ekek”) affecting the quality of Ethiopian
sheepskins.
75
introduction of a proper pricing structure aimed at encouraging producers; and (iv) lack of reliable
information on livestock upon which reliable sector policy guidelines and investment decisions can
be made.
(ii) The tanning sector
The tanning industry in Ethiopia was started by an Armenian entrepreneur in 1926. For
approximately 60 years, there were just six tanneries. After nationalizing of existing private
tanneries in 1975, expansion took place, although at the same time, the export of raw hides and skins
was banned. This led to the processing of hides and skins pickle and wet blue for export followed
by, inevitably, processing to crust.
There are now some 16 tanneries in operation, four of which are state-controlled and the
remaining under private ownership. In addition to these 16, there are six more tanneries at the
project level or complete but not yet in operation. Four of the state-controlled tanneries namely,
Ethiopia Tannery, Modjo Tannery, Kombolcha Tannery and Addis Ababa Tannery, are currently for
offer under privatization and have a capacity between them of approximately 4,000 hides and 30,000
skins per day. Ethiopia Tannery is one of the largest tanning plants in the country with a total daily
capacity of around 1,200 hides and 12,000 skins.
Two tanneries previously under state control, Awash Tannery and Ethiopian Pickling, are
now part of the Ethiopian Leather Industries Corporation (ELICO) group which comprises the two
ex-state tanneries and the new, but not yet operating, Akaki Modern Tannery in Addis Ababa.
ELICO also controls the Universal Leather Articles Factory which produces bags, cases, garments
and stitched upholstery.
The ELICO group has a current capacity of approximately 20,000 skins and 700 hides a day.
This capacity will easily be doubled when Akaki Modern Tannery becomes operational. The other
privately owned tanneries include Dire Tannery with a capacity of 6,000 skins and 600 hides daily
and production of finished leather; Wallia Tannery with similar capacity as well as crust and some
finishing; Blue Nile Tannery, established in 1992, produces approximately 30,000 pickled
sheepskins and 1,000 wet blue goats a day, mainly for export. There are also other small- to
medium-size private tanneries such as Showa in Modjo, Dessie Tannery, HAFDE in Sebeta,
Davimpex and Abbay Tannery in Bahir Dar, Hora Tannery in Debre Zeit and Mersa Tannery in
Mersa/Wollo. In addition, there are several projects for new tanneries at Debre Zeit, Debre Berhane,
Kaliti and Sheba Tannery in Tigray. In line with the objective of moving toward production of
finished leather, the treatment of effluent is being addressed seriously by most tanneries. Tanneries
are now obligated to have a permit stating that a fully equipped treatment plant is in use.
(iii) The footwear and leather products sub-sector
Until recently, state-owned leather products enterprises were largely controlled by the
National Leather and Shoe Corporation (NLSC), which administered six shoe manufacturing
enterprises and one leather goods producing enterprise. In addition, there were several private sector
workshops manufacturing leather products. The leather product lines produced include leather
76
shoes, shoe uppers, leather garments, bags and stitched upholstery. Through joint ventures and other
contractual arrangements, further rapid progress is expected.
The Ethiopian leather industry initially developed in the context of an import-substitution

programme and was highly protected from import competition, particularly in the leather footwear
products for the domestic market. This policy has enabled the sub-sector to expand rapidly although
at the expense of paying scant attention to quality considerations. The sector has diversified into the
production of shoe components and auxiliaries. At present, for example, there are five sole and four
lace manufacturing enterprises in the country, at least two of them capable of competing in the
regional and international markets. Currently, only a small proportion of the leather products
manufactured in Ethiopia is exported. In the past, leather products were exported to East European
countries under special trade pacts arranged by the former socialist Government of Ethiopia.
This report has identified, albeit briefly, the value chain in the production process of leather
products in Ethiopia. Such an approach may assist in mapping out the key stages in the production
process, identify possible constrains or bottlenecks and policy and incentive measures as well as the
institutional support system necessary to build a dynamic, highly integrated and competitive sector.
From the analysis, it is clear that policies to promote the sector must start at the raw materials (hides
and skins) stage and with small rural households who supply the bulk of these products to small
traders. Policies dealing with product standards and grades, prices, the prevention of livestock
disease (such as "Ekek") and other damage to hides and skins, and training in appropriate methods of
slaughtering and drying hides and skins must be formulated and implemented effectively. At present,
policy interventions have tended to focus on the second stage of the process, particularly tanning and
the production of finished goods. Although, commendable it should be noted that the efficiency,
competitiveness and growth of the sector as a whole will be assured only if measures are taken to
deal with problems across the various stages of the value chain.
B. Strengths, Challenges, Opportunities and Constraints.
From field visits to five tanneries, ten leather goods/garments manufacturers and two
footwear manufacturers, the following constraints have been identified:
♦ Most enterprises, especially State-owned enterprises, are currently faced with

profitability, cash-flow and indebtedness problems, partly due to high interest rates;
♦ Major innovation related problems are linked to production, process control and lay-
out and excess production capacity, particularly among tanneries. The existence of
over capacity creates fierce competition for raw material with implications for price
and the quality of raw materials demanded;
♦ Firms using local raw materials have difficulty exporting owing to poor
manufacturing capability;
♦ There is little sign of formal R&D within enterprises, however, there are clear signs
of innovative activities in some firms, notably with respect to product development;
♦ None of the enterprises visited had been ISO 9000 certified and in some cases, did
not even know of its existence. In addition very few enterprises were aware of the
existence of the Quality and Standards Authority of Ethiopia. In light of this,
creating awareness of existing support structure is an urgent task.
77
C. Support Systems for Investment and Innovation
As noted in the introduction to this report, learning and improvement in technical capability
by firms does not take place in isolation but in interaction with support institutions and other firms.
This section identifies the major national actors that influence the development of the leather and
leather products industry. Coordination of support services provided by these entities and continuos
interaction between them and enterprises are prerequisites for the development of the sector and
acquisition of innovative capabilities.
(i) The Ministry of Agriculture (MOA)
Until 1999, the MOA coordinated all hides and skins improvement activities and the
implementation of the Ethiopian standards for raw hides and skins. Subsequently, the task of quality
control and standards was transferred to the Ethiopian Livestock Marketing Authority (ELMA),
which is an independent body established by the Government to oversee the marketing aspects of
livestock and livestock products except quarantine services. Under the new decentralized forms of
Government, hides and skins improvement activities have been delegated to the regions.
One of the most important activities is the implementation of the standards through
certification carried out using an Ethiopian Standards Mark which indicates conformity with
standards requirements. Any complaints against standards requirements needs to be submitted to the
Quality and Standards Authority of Ethiopia (QSAE). Another important activity which was carried
out by MOA was the provision of licensing rawhides and skins collectors through technical
evaluation in conformity with the Ethiopian Standards. During field visits, it was observed that the
Ethiopian Standards Authority (ESA) was not fully aware of how this activity was carried out.
In light of this confusion and lack of interactions and also in order to investigate the causes
for the decline in the quality of raw hides and skins, a technical committee composed of tanners
associations, MOA, Export Promotion Agency (EPA), ESA and 14 regional agriculture bureaus was
established by the Prime Minister’s Office. Subsequently, a report including a proposal for possible
implementation of a control system for hides and skins quality was prepared in 1998. It was this
committee which proposed the establishment of an authority for the development of raw hides and
skins. The main objectives of this authority is to ensure that the purchasing of raw hides and skins is
based on quality/grade, to promote the expansion of infrastructure, to train extension officers as well
as collectors, traders and others who are directly or indirectly involved in the distribution of raw
hides and skins.
The establishment of the new Authority may help improve the interaction between public
sector agencies, responsible for ensuring high quality standards in the production of hides and skins.
Horizontal linkages between MOA and ELMA, and QSAE and MOA and ESA is essential in order
to inform policy makers of constraints that hinder the supply of high standard raw materials,
essential for the production of finished leather products with higher value and export potential.
78
(ii) The Ministry of Trade and Industry (MOTI)
MOTI is responsible for the formulation of policies and incentive schemes aimed at
enterprises in the productive sector. For example, it was responsible for the establishment of the
Leather and Leather Products Training Development Institute (LLPTDI), demonstrating its
sensitivity toward one of the major problems, namely, the lack of qualified manpower which
continues to hinders the development of this sector.
It seems that interaction among the various actors dealing with implementation of incentive
measures and investment promotion in the sector, namely, MOTI, EIA and ETA, is very strong and
well coordinated. The most important role is played by MOTI in the privatization process of State-
owned tanneries and leather products factories. EIA has also supported MOTI in the implementation
of major investment incentives, such as customs import duties; exemptions from payment of export
custom duties; income tax holidays; R&D Incentives; losses carried forward; and depreciation. All
of the visited enterprises acknowledged the essential services produced by the EIA. Nevertheless,
EIAs activities need be further strengthened in order to ensure benefits are widely shared among all
enterprises in the sector.
(iii) The Ethiopian Tanners Association (ETA)
ETA was established in 1993 as a centre for leather quality, standards, environment, training,
trade and to represent the interests of tanneries. Currently, the association has fourteen members. In
practice, ETA essentially acts as a lobbying organization rather than a provider of real services.
Moreover, small- and medium-sized enterprises (SMEs) feel that ETA mainly represents the
interests of tanneries and large leather products manufacturers (footwear, leather goods and leather
garments). However, the idea of an association to defend the interests of producers and establish
links with external producers is a move in the right direction as it is likely to benefit all producers in
the sector. ETA is already developing closer relations with overseas tanners. It has signed a
memorandum of understanding on a project entitled the Implementation of the Hides and Skins
Grading and Pricing Project with ESALIA. The project aims to overcome problems of quality of
raw hides and skins. ETA will take a leading role in the implementation of this project. During
1997-1999, ETA played an active role in the organization of three international leather trade fair
events held in Africa during 1997-1999. ETA is currently developing skins processing capacity in
collaboration with Pittards PLC.
The establishment of ETA is a natural evolution of interactions already existing among the
members of the dissolved NLSC. The greatest challenge facing ETA is represent the interests of the
whole industry. The leather products manufacturers feel ETA is more oriented toward the support of
tanneries. They therefore propose the establishment of an additional association that articulates their
concerns. Cooperation with other international associations should be encouraged in order to obtain
experience through interaction.
79
(iv) The Quality and Standards Authority of Ethiopia (QSAE):
The QSAE is the sole Government institute responsible for the formulation of national
standards. This authority elaborates, monitors, supervises and controls the implementation of
national standards. However, because the MOA has better infrastructure, skilled labour force and
facilities for implementing national standards on raw hides and skins, the implementation of these
standards tend to be delegated to the MOA. Presently, a mechanism for the follow-up of the
implementation of the standards on raw hides and skins does not exist. Standards are basic
requirements for quality control and certification activities. There are only two mandatory standards
for leather products. They are: the raw hides and skins standards and the leather standards.
The Ethiopian Authority for Standardization (EAS) has a relatively well organized quality
control laboratory with better facilities than the tanneries. In principle, samples are collected
quarterly from licensed tanneries by the authority and tested as to whether they meet the
requirements of the Ethiopian Standard with respect to leather products. However, in practice, due
to the lack of skilled manpower, maintenance, transportation, follow up and periodic inspections,
sample collection and testing are not performed regularly. Currently, measures are being taken by
the authority to alleviate these problems. The types of laboratory services offered by the authority to
tanneries are mainly in the areas of physical and chemical analysis.
In addition to QSAE, four tanneries, namely Awash, Modjo, Ethiopia and Addis Ababa have
chemical and physical laboratories for testing semi-finished and finished leather products. In these
laboratories, chemical tests such as sulphide content for liming liquor, moisture, ash and fat contents
for tanned and finished leathers are determined. In the physical laboratory tests such as tensile
strength, elongation at break, shrinkage temperature, thickness, double hole stitch tear strength (hole
burst), flexible endurance, colour fastness, adhesive power for semi-finished and finished leather
products are conducted. The rest of the tanneries are mainly engaged in the production of semi-
finished leather mainly pickle sheep and wet blue goat skins and have lab instrument including pH
meter, pH indicators, thermometers, and barko meters. Wallia Tannery and the recently established
Mersa Tannery plan to produce finished leather products and to introduce chemical and physical
testing laboratories.
It should be noted that the set standards are not always utilized effectively. The main reasons
for the lack of adherence to standards are: (i) limited skill and experience of selectors; (ii) absence
of forum to attain uniformity among selectors working in different tanneries; (iii) market influence;
(iv) absence of strict follow-up and supervision; (v) absence or limited supporting facilities. It is of
paramount importance to apply the standards if the Government strategy for the sector is to result in
export growth. However, the standards for raw hides and skins and finished leather products need
revision compatible with the current level of development on leather technology and quality
demanded in the international market.
(v) The Productivity Improvement Centre (PIC)
There is a leather processing technology workshop as well as a footwear and leather goods
training workshop at the Productivity Improvement Centre (PIC) of the Ethiopian Management
Institute (EMI) in Addis Ababa. Both workshops at the centre are poorly equipped. The leather
80
processing workshop has been primarily engaged in training activities of raw hides and skins, quality
improvement and leather processing technology. Training activities in the footwear section is limited
to short-term operational training such as sewing. Due to the poor system of preventive maintenance
and lack of spare parts, many of the machines and equipment at the centre are not functional or
worn-out. There is a lack of R&D activity in the centre partly due to the fact that modern scientific
testing and R&D facilities are non-existent. Very little effort has been made to modernize the
training workshops, resulting in present standards falling below the initial stage. The centre has
strong links with some enterprises in the sector and the MOA. Courses are mostly designed based
on the needs of the client organizations.
As a self-sustaining enterprise, the centre has to cover all its costs from charges for the
training service it provides. It is not subsidized by the Government as a promotional centre. As the
prices charged tend to be expensive for some clients, there is a lack of demand for the training
services of the centre from SMEs. With the establishment of the LLPTDI, it is strongly
recommended that in the interest of the sector, the leather and leather products sections of PIC be
integrated within the LLPTDI, in order to optimize the facilities and services offered by both
institutes.
(vi) The Leather and Leather Products Training Development Institute (LLPTDI):
The main objective of the envisaged institute is to enhance the development of the leather
industry through provision of training on various aspects of leather production in order to alleviate
the problem of skill shortages in the leather sector. This will include theoretical and practical
training in all aspects of leather manufacture, raw materials, chemical processes, mechanical
operations, and quality control methods. Some of its more specific activities to be included are:
♦ Provision of training at various levels in leather technology to augment the supply of

leather technologists;
♦ Undertaking applied research and development activities on the leather sub-sector in
order to improve the quantity and quality of leather products;
♦ Provision of physical testing services to tanneries and shoe factories to strengthen the
development of such enterprises;
♦ Provision of information services to facilitate the development of the sector.
The success of this institute will depend on the extent to which it interacts with enterprises in
the sector in generating a training programme and other services required by the enterprise.
Assessing and monitoring the needs of enterprises is essential if the centre is to provide relevant
services. In addition, if the centre is to be self-sustained, initial support from the State may be
required in order to ensure that service fees, at least in the initial stages of the centre’s development,
are not prohibitive and discouraging. Paying for training or other productivity enhancing services is
not common among Ethiopian enterprises, especially small-scale enterprises. Therefore, a grace
period, until clients begin to appreciate the services, may be required before the institute begins to
sustain itself.
81
Overall Assessment
From the above discussion, it is clear that concerted efforts are being made by the
Government to promote leather and leather products related activities and to ensure that the sector
plays a leading role in the Ethiopian economy. Some of the institutions that directly affect the
development of the sector in Ethiopia have been identified above. This list is an indicative rather
than exhaustive list. There are other private and public sector institutions, some of which have been
discussed in other chapters of this report, that also affect the development and competitiveness of the
sector. The overall findings of the institutional support system for the leather sector can be
summarized as follows:
(i) Some of the key institutions and support structures needed to foster a dynamic and
competitive leather and leather products sector already exist;
(ii) However, there are still gaps in the availability of certain specific services – due to
poor equipment, lack of specific skills and knowledge about best practices;
(iii) Some of these gaps could be resolved by existing support structures, but interaction
between producers and support institutions is poor. There is little attempt to
coordinate support services;
(iv) In this respect, the establishment of a centralized authority for the development of
hides and skins is timely, as it will help improve the problems associated with weak
horizontal linkages. The supply of high quality hides and skins is still a problem and
one of the weakest links in the industry's value chain. This constraint must be
addressed urgently if the sector as a whole is to grow and contribute to the economy;
(v) Ethiopia has been following a two-pronged strategy in revitalizing its leather sector.
In the short-term it aims to move all leather production from the wet-blue stage to
crust and finally to finished leather. In the long-term, it aims to convert gradually all
available hides and skins to finished leather products. Effective implementation of
these objectives will require that: (i) policies and support systems treat the sector in
an integrated manner and ensure that improvements in quality and productivity take
place across the industry’s value chain. There is a tendency, at present, for policies
and incentive structures to focus on leather products manufacturing in the hope that
this will improve export performance. It should be noted, however, that higher value
products can be manufactured only if the raw material used is also of higher quality;
(ii) enterprises in the sector must be encouraged to build innovative capability which
is now essential for competitiveness. The more innovative and dynamic the sector,
the more likely it is to attract FDI and potential foreign partners.
82
Chart 1. Leather Sector: Value Chain and Existing Linkages to Support Institutions
Livestock
Farmers Producers Rural farmers/ Slaughterhouses
Associations pastoralists (informal) (formal)
(supply 70% of hides and
90% of goat/sheepskins)
Ministry of Health
(veterinary)
ELMA
Regional Traders/Dealers/Agents
MOA Agricultural rural, urban; small, big
Bureaus Animal and
Animals
Ethiopian Tanners
QSAE EAS TANNERIES Association (ETA)
Environmental
Agency
MOTI ELA
Export
Market
(semi-
finished)
Effluent Treatment
Plants (ETPS) Export Promotion
Authority
Manufacturers of
PIC
Leather Products
(footwear, leather Leather Manufacturers
garments and other Association
LLPTDI products)
External Linkages
Domestic • International Trade Fairs
Export
Market
Market • Foreign Tanners
(semi-finished) • Foreign Manufacturers
Legend: • FDI
Value chain
Weak linkage Emerging
Strong linkage No linkages (without arrows)
83
Box IV. 1
Strengths, weaknesses, opportunities and challenges of the leather sector in Ethiopia
Sub-Sector Strengths Major Weakness Opportunities/Challenges

Raw The largest livestock Poor quality: The majority of hides, although Hides and skins improvement is a long-term
Material: population in Africa characterized by good grain and fibre structure, and continuous process. Now, with the
hides and come from older draft animals and therefore decentralization of the extension services to
skins suffer from diseases, branding and scratches. regions it is hoped that these activities will
Almost all hides are suspension dried. prove to be more efficient.
Availability: irregular supply of raw materials International organizations should continue to

pose a problem to the sub-sector, partly assist especially in the creation of awareness
attributed to inaccessibility of some parts of the for this important commodity.
country during the recent conflict, livestock,
smuggling to neighbouring countries and the In the egion a new project is launched entitled
retention of hides and skins in rural areas; "Raw Hides and Skins Grading and Pricing
Systems in Eastern and Southern African
Countries", in which Ethiopia is included.
Tanning/ Fully-mechanized Machinery equipment: old and obsolete The privatization programme is underway and
equipment and lack of spare parts; lack of is starting to show positive results.
Finishing Tanning capacities learning over the years; little new investment.
exists. With assistance from international
Lack of sufficient production capacity for organizations increasingly strong process
finished leather. control and factory rehabilitation’s are in
Exports of semi-
place.
finished leather (wet- Pollution control: insufficient environmental
blue/crust) already awareness and technologies for in-plant and The establishment of LLPTDI will assist the
well established; some end-of-pipe waste reduction and treatment industry in training activities.
large tanneries solutions; monitoring and analysis capabilities
(ELICO Group) The activities of EIA will possibly increase
and facilities; occupational health and safety
already privatized. the number of potential foreign investors.
practices knowledge.
International technical assistance in the area of
Development plan for Lack of skilled man-power in the various stages pollution control. Intalling awareness on
expansion of the of processing. tannery pollution and the necessity of
finished leather sector Support services: Lack of adequate quality installing cleaner technologies is a must.
management to ensure competitiveness,
inefficient domestic and foreign investment sub-
sector; indicating weak linkages.
Finance: lack of sufficient capital to carry out

factory extensions and rehabilitation. In the
case of the private sector, tannery production is
constrained by chemical shortages as foreign
exchange allocations have tended to favour
parastatal tanneries.
Leather Fully-mechanized Lack of good quality finished leathers, The privatization programme is underway and
Products components and other accessories. is starting to show positive results.
Capacities exist.
Machinery equipments,: old and obsolete and The establishment of LLPTDI will assist the
there is a lack of spare parts. industry in training activities.
Experience in exports
of footwear/leather Lack of skilled labour force. The activities of the EIA will possibly give a
goods and garments. boost for potential foreign investors.
84
Finance: lack of sufficient capital. boost for potential foreign investors.

Large ELICO Group
Marketing: poor design capabilities and Under a new UNIDO increase the integrated
privatized.
international exposure. (absence of joint- programme, it is expected that assistance will
ventures, other international linkages) be provided for product development and
Product development marketing including participation in trade
plan used. fairs.
Source: UNIDO: Field work result
Table IV.1: Livestock in Ethiopia, 1998
Raw Population Off-take Raw Production: Weight %

Material 000 heads Rate (kill material 000 sq. ft.
rate) 000
heads/skins
Cattle 29.450 6.5% 1.900 49.400 40.3%
Sheep 21.700 33.2% 7.200 46.800 38.2%
Goat 16.700 37.1% 6.200 26.350 21.5%
Source: (FAL, World Statistical Compendium for Raw Hides and Skins Leather and Footwear
1998).
85
CHAPTER V
Small- and Medium-sized Enterprises (SMEs)

Introduction
This chapter assesses the investment potential (domestic and foreign) and the capacity for
technological learning and innovation in SMEs.24 The focus is on the productive sectors, in
particular SMEs in the manufacturing sector. Manufacturing SMEs make up the largest and the
most important segment of the industrial sector in Ethiopia. In 1998, for example, SMEs contributed
to 68 per cent of gross value of production and over 80 per cent of employment in the manufacturing
sector. As will be shown below, SMEs, especially the latter, are among the most dynamic and
innovative enterprises in the country. In reviewing the investment and technology policies of
Ethiopia, therefore, it is pertinent that special attention is paid to the pattern of development and the
strengths and weaknesses of SMEs in Ethiopia.
A. The Evolution of Manufacturing Activities in Ethiopia
Although Ethiopia has a long history of artisan manufacturing activity, the development of
modern manufacturing enterprises took place mainly in the post World War II period. The evolution
of the sector falls into three broad phases: the import-substitution period which lasted from the early
1950s to 1974: the centrally planned economic system from 1974/1975 to 1991; and liberalization
and market-orientation since 1991. During the second period, private sector industrial activities,
consisting mainly of SMEs, were openly discouraged through restrictive policies, including
regulations and direct controls that prevented access to credit and imported inputs by private
enterprises. Not surprisingly, therefore, during this phase, the number of officially registered small-
scale manufacturing enterprises was reduced.
Since 1991, there has been significant improvement in the incentive system and the macro
economic environment with positive implications for manufacturing activities. A liberal investment
code has been introduced. Domestic price controls have been removed. The financial system has
been partially liberalized. Tariffs have been reduced and non-tariff barriers have been removed. A
public sector reform programme has also been introduced and one of its main objectives being to
privatize SMEs that were nationalized in the 1970s.
All these reforms have immensely improved the domestic policy environment for SMEs. In
fact, the Government has gone a step further in its support for small enterprises by formulating a
National Micro and Small Enterprises (MSEs) Development and Promotion Strategy. This is an
important beginning and should be followed by refinements of micro-policies and incentive schemes
24
There is no universally accepted definition of small- and medium-sized enterprises. Usually, the turnover of the
enterprise, number of persons employed or capital invested are used alternatively or in combination. In Ethiopia, there are
not yet any legal definitions of SMEs. For example, the Development Bank of Ethiopia defines SMEs in terms of capital
invested while the Ministry of Trade and Industry (MOTI) uses number of persons employed as the main criterion. For
the purpose of this report, the employment criterion is used. Thus, small enterprises include those employing up to 20
persons and medium-scale between 20 and 100 persons.
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aimed at promoting learning and technical change at the enterprise level. Some of these policies are
identified below.
In the long run, the possibility for investment expansion and industrial growth in Ethiopia
depends heavily on the country's ability to provide SMEs with the appropriate supporting institutions
and an environment that fosters innovative activities. In many other developing countries, large
enterprises are the outcome of the orderly development of SMEs. An example of this phenomenon
is the shoe manufacturers in the Sinos Valley of Brazil.25 Most of these manufacturers started as
small-scale operators, clustering around a specific area to supply the local market. Currently, the
Sinos Valley shoe manufacturers are leading players in shoe production and able to compete in
international markets and respond to global challenges. The point here, is not to understate the real
problems that SMEs frequently face in a developing country environment, but to highlight that while
obstacles are many, there are possibilities for fostering dynamic and innovative SMEs that are
competitive and attractive to domestic and foreign investment.
B. Method of Analysis
The analysis in this chapter is based on a survey of a sample of enterprises undertaken

specifically for the purposes of this study. An illustration of some of the key features of the sample
enterprises is presented in table V.1. A survey approach was preferred for two reasons. First, the
data available on SMEs in Ethiopia is highly aggregated at the industrial or sectoral levels and
limited both in terms of coverage and categorization of enterprises by size. Policy advice based on
evidence derived from statistical generalizations and aggregated data tends to be, in most cases,
misleading or irrelevant for the needs of targeted enterprises. Many of the nuances about SMEs and
all the factors that induce path dependent types of behaviour will be missed. Second, information
gathered at the firm level provides the opportunity to assess the perceptions of enterprise owners
about their national investment climate and their attitude toward technological upgrading, innovation
and competitiveness.
The survey included 20 enterprises engaged in the manufacture of chemical and plastics-
related products, 15 in metal-working, 10 in textile and clothing, 13 in food processing and another
13 in leather and leather products. The majority (88 per cent) are private sector enterprises owned
by domestic investors. The rest (12 per cent) are State owned. Small- and medium-scale businesses,
especially in the manufacturing sector, have attracted very little of the FDI inflows Ethiopia in recent
years. The tendency has been to concentrate on larger and more capital-intensive productive
activities. This trend must not be allowed to continue given the critical role of SMEs in Ethiopia and
the potential that exists for attracting FDI from foreign SMEs that target other SMEs in the host
countries. The advantages of attracting FDI by multinational SMEs and how they can be targeted
and attracted is discussed below.
Firms of all sizes are represented in the survey although, naturally, the main focus has been
on the SMEs. The sample includes 27 small- and 35 medium-sized enterprises. In addition, for
comparison purposes, 9 large-scale enterprises have been included. There is a high level of
25
For a detailed analysis of the pattern of development of shoe manufacturing enterprises in Sinos Valley, Brazil, see
Shmitz, H (1995).
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geographic concentration of manufacturing activity in Ethiopia. Over 70 per cent of modern sector
manufacturing activity is concentrated in the Capital city, Addis Ababa and the surrounding region,
in particular along a 100 kilometre stretch between Addis Ababa and the town of Nazareth. The
sample of enterprises selected for this study are located in this geographic region.
Table V.1
KEY FEATURES OF SAMPLE ENTERPRISES
Chemicals Food Leather Metal Textiles

processing working
Sectoral distribution 20 13 13 15 10
Size Distribution %
Small 18.5 26 26 18.5 11.1
Medium 40 8.5 11.4 28.5 11.4
Large 11.1 33.3 22.2 ----- 33.3
Mean size 48 49 50 38 163

Mean age (years) 12 13 7 15 21
Ownership %
Private 90 77 92 100 70
Public 10 23 8 ----- 30
Market Orientation (No.

of Enterprises) Domestic
Market All 12 10 All 9
Export ----- 1 3 ---- 1
Source: Survey results
C. Investment and Innovation Potential and Constraints
The majority of SMEs in Ethiopia are now in private hands, mainly domestic private capital.
Since the beginning of the privatization programme, a number of State-owned manufacturing SMEs
have been privatized thereby reducing the involvement of the State in small- and medium-scale
manufacturing activities. In terms of ownership structure, a high proportion of the private
enterprises are sole proprietorships or family owned. This pattern of enterprise ownership has
implications for investment, innovative capability-building and the implementation of industrial
policy in general. In this connection two points should be noted.
First, sole proprietorship or family owned enterprises tend to be risk-averse. This aversion is
understandable because business failure for owners of such enterprises is likely to have direct
ramifications, such as losing their homes or other assets put forward as collateral. Therefore, taking
a risk tends to be a big step for such enterprises. In fact, in this report, taking risks by investing in
"new" management systems, or attracting foreign investment through partnership arrangements or
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introducing production processes that are "new" to the firms themselves and their environment is
regarded as innovative activity. Unfortunately, the number of SMEs in Ethiopia that qualify these
criteria is not large, though sufficient enough to believe that with carefully designed policies and
incentive measures and well-focused and coordinated support system, the number can be increased.
In effect, therefore, the message for policy makers in Ethiopia is that more innovative and direct
policies and approaches are needed in designing and implementing policies to stimulate investment
and innovation in SMEs.
Second, typically, decision-making power in sole proprietorship and family owned

enterprises tends to be highly centralized, usually in the hands of a single owner. The owners
perceptions of policy intentions and market conditions determine the nature of response to policy.
This has important implications for policy implementation, especially investment and innovation-
related policies. Their effectiveness will depend among other things on how forcefully these policies
are explained and transmitted to enterprise owners.
As noted above, FDI in small- or medium-scale activities are limited. However, there is
great potential for FDI involvement in existing SMEs through partnership or subcontracting
arrangements. Some of the enterprises interviewed stated, for example, that they were searching
actively for potential partners in East Africa, the Middle East, Asia and Europe, to establish a
partnerships allowing them to gain market access abroad and to learn from the partner through
client-supplier relationships. A detailed interview was conducted with a manufacturer of machinery
and equipment who was, at the time, in the process of negotiating with another enterprise in Greece
to form a marketing and technology partnership. This case study illustrates the type of policy and
attitude changes needed in Ethiopia in order to attract foreign investment and encourage innovation
through external linkages.
The case in point involved a proposal for a partnership agreement between a small-scale
Ethiopian enterprise and a Greek firm. The plan was for the Ethiopian firm to process and supply
sesame seed as an input for the manufacture and marketing of biscuits in Greece. Eventually, in the
long-run, the biscuits would be prepared in Ethiopia, where labour costs are much lower, with
technical assistance from the Greek partner. The product would then be packaged and marketed by
the Greek firm. This is a classic example of the type of external partnerships that Ethiopian SMEs
can arrange and learn from by interacting with other SMEs or larger firms in other countries.
Inter-firm partnerships can be effective mechanisms for investment flows, technological

learning, knowledge sharing, technology transfer, market access and the development of innovative
capabilities.26 However, the process of identifying and establishing contact with a potential foreign
partner and then negotiating an appropriate partnership agreement is not an easy task, especially for
small enterprises. In fact, at the time of the interview with the Ethiopian firm, the owner was
preparing for his second trip to Greece to follow-up on his earlier visit which resulted in little
progress. His negotiating plan was based on intuition and the determination to succeed in acquiring
26
The role of inter-firm partnerships in technological capability-building and the general policy and economic
environment conducive to inter-firm cooperations are examined in, UNCTAD, (1995), “Technological capability-building
and technology partnership: field findings, country experience and programmes”, (UNCTAD/DST/6), Geneva,
Switzerland.
90
a partner abroad rather than a well prepared business plan backed by negotiating skills. Such efforts
require public sector support because the cost of searching and following-up on potential foreign
partners, be it for joint-venture investment, subcontracting arrangements or technology partnership,
is prohibitive for most SMEs in general and small enterprises in particular. Associated problems
include the whole process of finding information about potential partners, establishing contact,
preparing and undertaking trips abroad, which can be difficult if, for example, access to visa permits
are restrictive and finally approaching the potential partner and initiating negotiations. At present, in
Ethiopia a mechanism for supporting enterprises seeking to establish inter-firm cooperation with a
potential foreign partner does not exist.
The case of the firm trying to penetrate the Greek market and eventually the European
market helps illustrate the strengths and weaknesses of the current policy environment and its impact
on the private sector. It would have been unimaginable barely ten years ago for an owner of a small
business in Ethiopia to initiate, without State involvement, discussions with a foreign enterprise in
order to establish a partnership agreement. In this respect, the policy environment is now much
more favourable to the private sector. The case also demonstrates, however, the lack of an Ethiopian
support system for enterprises wishing to establish partnership arrangements with foreign
enterprises, a development the Government encourages. Currently, Government support to firms
searching for partners abroad is limited to listing the names and activities of local companies seeking
partners and disseminating this information at trade fairs abroad, through Ethiopian Embassies, or
during visits by Government officials to developed countries. This process is not sufficient. There
is a need to develop a clearly defined partnership support programme and implement it through an
agency which works closely with the private sector.
A useful starting point in examining what Ethiopia can do to promote and facilitate
partnership arrangements between domestic enterprises, especially SMEs and foreign companies is
to first understand the processes involved in establishing and consolidating partnerships. Effective
partnerships at the enterprise level need time and effort to develop. In some cases, they are the
outcome of a long interaction and strenuous negotiations, often characterized by a process of trial
and error and gradual building of trust. For example, it took over two years and nineteen trips to the
Republic of Korea for managers/owners of a medium-sized enterprise in Ethiopia prior to start
assembling televisions (TVs) locally in cooperation with a Korean company, Samsung. Prior to
entering the TV assembly business, the enterprise was for many years engaged in trading, including
the distribution of imported electronic products in the domestic market.
Several factors influenced the decision to shift from distributing imported Korean TVs to
assembling them in Ethiopia. The first is simply that the managers/owners of the Ethiopian
enterprise wished to diversify their business activities from distribution to manufacturing. Second, it
was believed that assembling the product locally would reduce the cost of production and the final
selling price, thereby making it competitive in the local market. Third, it was assumed that
assembling TVs under license from an internationally recognized company would accelerate export
market opportunities in the region.
Having decided to assemble Samsung brand TVs locally, the Ethiopian enterprise
approached Samsung with a proposal to assemble their brand, Trihorn, under license. Not
surprisingly, this proposal was rejected outright partly because of Korean skepticism about the
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technical capacity of the Ethiopian enterprise and partly because the proposal did not contain
detailed a business plan, assessment of local technological capabilities and knowledge of the
industry. After the initial contact, it took nearly two years and several detailed negotiations to
finalize an agreement with Samsung. In brief, the main factors that helped to bring about final
agreement included: the determination of the managers/owners of the Ethiopian enterprise;
numerous visits to the Republic of Korea for negotiations; two field trips to Ethiopia by two
Samsung engineers, (one field trip lasted for two months) to study the level of technological
capability and to help set up the assembly plant; training in the Republic of Korea for four Ethiopian
technical staff, paid for by the Ethiopian enterprise; and the acquisition of machinery and equipment
from the Republic of Korea.
This process and especially the tedious and time consuming negotiating process that
followed, to an extent, demonstrates the general lack of experience in Ethiopia in arranging
partnership agreements with foreign companies. More importantly, it shows the total lack of an
Ethiopian support system for guiding domestic enterprises wishing to find foreign partners for
purposes of attracting foreign investment, marketing arrangements or technology cooperation.
If the Government’s objective of stimulating foreign investment and technology transfer

through among other things joint-venture activities and/or inter-firm technology and marketing
partnership is to succeed, then direct Government support through a specific "partnership promotion
programme" is a necessity. This programme should deal with the various stages of arranging a
partnership agreement. These include: (i) increasing awareness, among SMEs, of the potential and
the advantages of partnering with foreign enterprises; (ii) assisting them in preparing the
background work necessary before approaching a potential partner, such as defining the goals as
well as the terms and conditions of agreement sought and specifying the medium- and the long-term
objectives; (iii) helping with the search for an appropriate partner. Once the decision to form a
partnership with a foreign enterprise has been taken, the next task is finding the right partner which
is often a costly and arduous exercise for SMEs. The information needed to make decisions on all
these factors is not always easily accessible to SMEs. Moreover, in Ethiopia, the private
consultancy services available do not have the capacity to conduct a search and to advise local
enterprises of potential foreign partners. The Government is in a unique position to play an
important role in this respect.
Some measures that could be taken include, for example, keeping a catalogue of domestic
enterprises wishing to enter into partnership arrangements and ensuring they prepare a proper
business plan, assessing their technical and other capabilities. Search for potential foreign partners
for co-financing, for example, assisting enterprises through Ethiopian Embassies abroad, subsidizing
travel costs and even approaching foreign enterprises on their behalf, thereby playing the role of
matchmaker and broker. The eventual success of partnership depends, to an extent, on the
negotiation and communication skills of the partners. These skills are not easily developed,
especially in SMEs, and support will be essential in these areas. Potential foreign partner
perceptions will also be positive if it is known the Government supports it and wishes it to succeed.
Finally, the partnership must be consolidated through regular exchange of information and by
reviewing objectives and strategies. This can also be difficult for the partners since the arrangement
has to show success to justify continuation. Incentive measures and adjustment of rules and
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regulations governing partnership agreements can assist in easing the strains associated with
partnering.
D. Market Orientation
The bulk of products and services from SMEs is aimed at the domestic market. The export-
orientation of enterprises in the manufacturing sector in general and the small- and medium-scale
enterprises, in particular is very low. Only two of the enterprises included in the survey produce
solely for export markets. Both produce semi-processed leather products for international markets.
Five other enterprises claimed that they export a small proportion of their outputs.
What is striking, however, is that some of the enterprises reported they export less now than
they did prior to policy reforms. Two main reasons were given for this apparent regression in export
capacity. First, the domestic market has improved greatly since 1992 creating the opportunity for
enterprises to increase supply to the local market including by switching from export markets. It
seems, therefore, for these types of enterprises, there is little difference between supplying the
domestic and external markets. Indeed, interestingly, many SMEs in Ethiopia produce or are
capable of producing manufactured goods that can compete in export markets, especially in regional
markets, although they do not operate in export markets because they are satisfied supplying the
local market. For some of them, it is “less hassle” to supply the domestic market. This story applies,
for example, to one enterprise, which exported, for a period of seven years until 1994, leather
jackets, leather belts and bags to markets in the region and Eastern Europe.
The second reason for deterioration in export capacity is linked to the elimination of State
subsidies in the post reform period. Two of the enterprises in the sample, both state-owned and in
the leather sector, claimed that their export volume has declined in recent years due to difficulties in
importing inputs needed to produce export quality products. This problem was partly attributed to
management reforms, which included, among other things, financial accountability and elimination
of cross-subsidies.
There are now concerted efforts to improve the country's export capacity in general and the
export of manufacturing products in particular. The establishment of an Export Promoting Agency
in 1998 is a clear manifestation of this determination. The first step in boosting exports should be to
ensure enterprises that have exported in the past, but have subsequently lost their export market
share are able to regain it. It should prove relatively less difficult to support enterprises that have
exporting experience with established contacts in export markets, than new beginners.
There is an urgent need to develop specific and targeted measures to induce SMEs into
export markets. Nevertheless, the success of such measures depends, to a large extent, on their
implementation through a specialized agency having direct contact with potential exporters.
Moreover, this agency must monitor their progress through continuos interaction and by providing
support, especially in areas where serious constraints exist such as transport, availability of
information and quality control. Among the lessons that countries such as Ethiopia can learn from
the experiences of successful exporters in East and South East Asia are, that in the earlier stages of
industrialization, the most effective way of attracting foreign investment and generating export-
oriented dynamic enterprises is through specific and targeted policies and hands-on approach to
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export promotion. The role of the Government in this process is critical. The rationale for the
hands-on approach and active Government involvement in export promotion and the reasons why
domestic enterprises, including small businesses content supplying local markets, should be
encouraged to export are two-fold.
First, apart from generating additional foreign exchange that is badly needed to meet import
requirements and to ease the debt burden, the competitive pressure that export markets impose often
induces learning and the drive to upgrade product quality through additional investment, product
innovation and the acquisition of new technologies. The learning aspect of exporting manufacturing
goods must not be underestimated and this by itself would justify providing direct support to SMEs
that have the potential to export manufactured products. As confirmed during interviews with some
enterprises, SMEs in Ethiopia are not always aware of their own weaknesses compared to "best
practice levels". Exposure to competitive export markets and the experience of interacting with
clients having diverse choice of supply intensifies the learning process.
Second, even if the potential to enter export markets already exists, initiating entry may not
always be easy for some enterprises, especially SMEs. The cost of entering export markets are high
and help may be needed in terms of information support, market intelligence, contract with foreign
buyers, visits to trade fairs, design and packaging and so on. Even a modest injection of resources
can help such enterprises greatly, if used judiciously to overcome the main market deficiencies.
E. Innovative Activities in SMEs
The survey results indicate there are many SMEs in Ethiopia that have invested in
technological upgrading and innovative capability since the introduction of policy reforms in 1991.
By the same token, however, there are also SMEs that are struggling to adjust to an environment
characterized by heightened import competition and a withdrawal of many earlier forms of State
support.
The following two challenges face policy makers in Ethiopia: (i) how to ensure that dynamic
enterprises continue to invest in new technologies, improve their competitiveness, attract foreign
investment and build export capacity; (ii) how to stimulate investment and technological change in
less competitive enterprises. A two-pronged approach is necessary - one dealing with the more
successful enterprises and the other with the laggards. At present, the view among Government
officials is that policy and other forms of support should be directed primarily at enterprises in need
of assistance rather than those that are doing fine by themselves. The Review Team believes that in
the long-run, if this approached is followed it will have a detrimental effect on the development of
the industrial sector as a whole. There are two reasons for this. First, in economic management, it is
not only failures but also successes that need to be managed through appropriate policy and support
systems. Second, visits to the more dynamic enterprises show that they are not devoid of problems
and in fact, face many obstacles that block their future growth. The nature of innovative activities
observed in Ethiopia as well as constraints will be identified and discussed. It is essential to identify
and nurture such activities and use them as the basis for attracting foreign investment and enhancing
foreign capacity.
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The innovative activities observed within Ethiopian SMEs in Ethiopia can be grouped into
two broad categories. The first involves improvements to "existing" products or the manufacture of
copied products with minor adjustments. In some cases, it involves the introduction of new design,
often copied from abroad, or slight modifications to production processes. Most of these activities
are technological changes based on imitation with minor improvements or adaptations rather than
innovation proper - as defined in chapter one of this report. Nevertheless, they indicate enterprises
engaged in these activities are active in trying to adjust to changing demand conditions by investing
in skills and technology to meet changing market needs.
More importantly, for the enterprises concerned, the technological changes introduced were
economically important and enabled them to remain competitive and profitable. The survey results
show that 44 per cent (12 out of 27) small-scale enterprises and 51 per cent (18 out of 35) medium-
scale enterprises introduced minor technological changes in products and/or processes in the last
three years. Interestingly, only 22 per cent (2 out of 9) of the large-scale enterprises included in the
survey introduced technological changes in the same period.
The response of enterprises to questions regarding the sources of information and where the
pressure for technical change originated from and whether learning is involved in these activities
reveals that: (a) copying existing design or products is the primary source of knowledge; (b) most of
the changes were introduced as a response to client needs and in an attempt to maintain market
share; and (c) some of the enterprises claimed that new techniques were learned and also new skills
were introduced as the result of technological changes. However, in all cases, interactions with
R&D centres or technology support institutions in the country were absent.
A second feature of innovative activities observed, that enterprises have introduced, through
large scale investment and in-house R&D efforts, are new products or a new production processes or
management technique. Other factors were that, in most cases, these new additions have contributed
to radical changes in the market position of the innovating enterprises either by improving the
quality of goods produced or reducing the cost of production. The survey found that in the last three
years, 20 per cent (or 7 out of 35) of medium-scale enterprises and 18 per cent (or 5 out of 27) of
small-scale enterprises have introduced new products or have acquired new production processes
which are, in many cases new to the country. In contrast, none of the large-scale enterprises
included in the survey have undertaken product, process or management-related innovations.
In addition to those included in the survey, however, other even more dynamic and
innovative enterprises were identified. Indeed, these include a number of well-known local firms
with widely publicized innovative successes. For example, an enterprise developed local capability
to manufacture elevators through reverse engineering and adaptations. It took the firm nearly three
years to acquire the skills and technical know-how required to manufacture elevators which compete
with imported products. The enterprise started out by repairing, overhauling and installing existing
elevators. It gradually moved to manufacturing of components within its workshop. This period
provided an opportunity to learn and acquire information of the tacit knowledge necessary for
manufacturing capability. Interestingly, this particular enterprise had previously developed, through
reverse engineering and gradual development of skills and know-how, local capability in the
manufacture of traffic signals.
95
In order to build these import-substituting type innovative capabilities, the enterprise had to
undertake various measures, including: investment in the transfer of new and specialized skills from
a developed country (one of the firm’s engineers was sent to Italy for advanced training); investment
in new machines and equipment; establishing pilot projects and conducting R&D using tacit
knowledge accumulated at the enterprise level. What is striking about this enterprise is how it was
able to enter the business. Technological knowledge accumulated within the enterprise was
important, but the critical factors contributing to the firm’s success were good management and
marketing know-how. The owner and managing director of the enterprise, an engineer by
background, managed a furniture business for over twenty years, in Ethiopia and Kenya. Searching
for a new design or a new product to maintain market share and to ensure competitiveness is part of
the furniture business culture. It was partly this background and the manager's determination to
contribute to the development of local innovative capabilities that dictated the choice of new product
lines. According to the owner/manager, he wished to initiate the production of products that: utilize
existing technological capabilities within the enterprise; involve innovative activities; contribute to
an import-substituting process; provide his enterprise a competitive advantage in the domestic
market; and open export opportunities. He has achieved most of these objectives and is currently
working on the last objective - diversifying into regional export markets.
Another equally successful case of innovation involves a medium-scale truck body and
trailer manufacturing enterprise. This enterprise, since 1994, was transformed from a standard truck
body assembly plant into an export-oriented, innovative and one of the most dynamic and highly
competitive enterprises in the country. How was this achieved? The turning point in the enterprises
drive toward innovation came with the decision of the owner/manager to hire a highly skilled
engineer from Germany with over thirty years experience in the truck manufacturing business
The owner/manager was imaginative and innovative for two reasons. First, due to the high
cost, in local currency terms, of hiring an expatriate, especially from developed countries, it is
unusual to find small- or medium-scale enterprises in Ethiopia taking the bold decision to hire
skilled personnel from abroad. Second, the choice of the German engineer by the enterprise was
strategic. With the engineers extensive experience in "best practice" production of truck bodies and
trailers; his specialization and expertise in design and quality control; his experience of living and
working in Saudi Arabia for 16 years; his first hand knowledge of the types of trailers demanded in
the region; and finally, his extensive contacts in Germany and the Middle Eastern region, the
Ehiopian enterprise gained all these elements and the tacit knowledge acquired from his past work
experience.
The engineers' most important contribution was to introduce a new working culture and to
convince the owner/manager that the enterprise had to develop a culture of innovation and quality if
it was to prosper and become competitive in the domestic and international markets. In practice this
meant:
♦ Encouraging specialization and providing enterprise level training to all staff,

especially technical staff;
♦ Acquiring high precision machinery and equipment. The enterprise now has digital
cutting machines computerized metal forming and universal machines, and
computerized rolling machines. Most of these are new to the country. Another
96
unique addition is the installation of computerized painting capacity, the only one in
the country;
♦ Introducing a "powder welding system" which is a method used in developed
countries and involves using the same material as the product, but in powder form,
for welding. This makes joints stronger and more difficult to crack. Specialized
machinery and training was required to carry out this process;
♦ Developing in-house computer designing capacity. Training is given by the
expatriate engineer;
♦ Setting up quality control procedures at every stage of the production process and
strict enforcement for the rejection of sub-standard quality work. Technical staff
have received training on the required standard. However, the expatriate engineer
has retained overall responsibility of quality control;
♦ Introducing new products through in-house design. The variety of manufactured
trailers include, petrol tankers and tankers for transporting chemical or dangerous
substances. The latter types of products would not have been possible to
manufacture if the various new introduced capabilities were not acquired by the
enterprise. At present, over 70 per cent of the demand for the enterprise's output
comes from export markets, mainly the Middle East. At the time of the interview,
the enterprise had orders to keep it operating at full capacity for eighteen months.
Similar innovative activities have also been observed in other SMEs, including, for example,
a manufacturer of plastic products which designed and built a water based machine cooling system
as a substitute to the application of CFC, thereby reducing the cost of production, saving the country
foreign exchange and contributing to environmental safety. These examples as well as many other
innovative activities help to illustrate the types of innovative activities that SMEs in Ethiopia are, or
are capable of, undertaking. The question is, what were the key factors influencing these innovative
trends? Two types of influences can be identified: the pull and push factors. For the first set of
innovative activities identified above, enterprise response suggests mainly the pull factors, more
specifically the need to meet market or customer needs, were the principal catalysts for innovation.
Although the market influence was also important for the second group of innovative
enterprises, it seems that the push factors were the dominant forces behind the innovative drive in
these enterprises. The inspiration of the owner/manager, investment in in-house R&D activities and
as noted above, external linkages in the form of skill/knowledge transfer, were some of the push
factors influencing technological learning and innovation. However, in all of the innovative
activities observed, none were influenced or inspired by specific Government incentives or
technology support institutions in the country. Linkages between innovative enterprises and the
scarce support institutions in the country are either non-existent or, in a few cases where linkages
were detected, were ad hoc and ineffective. Even more distressing is the fact that the majority of the
innovative enterprises were not even aware of the existence of some of the technology support
institutions in Ethiopia.
What are the major obstacles to innovation within SMEs in Ethiopia? The responses of
enterprises reveal the following:
97
♦ Lack of information support systems, especially on design, technology, best

practices, market potential and partnership opportunities, be it for the purpose of
investment, technology transfer or market access. The cost of searching and
accessing relevant information is high for small enterprises in Ethiopia;
♦ Shortage of technical skills, in particular designing and precision machining. As
observed above, some enterprises have training programmes but for the majority of
SMEs, especially small-enterprises, training their own workers is not an option
because of the high costs involved and the high turnover of technical staff. In a
skilled labour shortage economy, training at the firm level involves a high level of
risk;
♦ Relatively weak intellectual property rights protection system, although some
improvements have been registered since mid-1990s following the enactment of a bill
providing protection of patent right on creative works. The Ethiopian Science and
Technology Commission has made great efforts to acquire the capacity to provide
information on patented products as well as on international research centres. Since
the enactment of the bill for the protection of intellectual property, the number of
creative works registered increased rapidly. Be that as it may, during the Review
Mission to Ethiopia, a number of enterprises indicated that in general the intellectual
protection system in Ethiopia, particularly the legal procedure, is still weak and
cumbersome. However, some of the enterprises that complained about the lack of a
proper patent rights enforcement system were in many instances themselves abusers
of such rights. Two of the more dynamic and innovative enterprises (furniture and
plastic products manufacturers respectively), for example, claimed that they are
discouraged from introducing new products because of rampant copying/imitation by
other enterprises and the lengthy process of bringing abusers of intellectual property
rights to justice. Curiously, however, the accusers themselves proudly claimed they
had obtained designs illegally from abroad during visits to trade fairs or business
trips and have copied and supplied final products in Ethiopia without the knowledge
of the original designers. The rational for demanding a stronger protection system is
based on the argument that copying from abroad involves investment ─ the trips
overseas, the cost of searching and developing copying capability, etc. – and
therefore, firms must be allowed to recoup their investment. The Government is
currently re-examining the whole issue of intellectual property rights. In this context,
it is vital to ensure that the balance between protecting the rights of intellectual
property holders on the one hand and competition and the diffusion of knowledge on
the other is maintained;
♦ Absence of proper and effective standard setting and quality control mechanism. The
existing quality control system is in dire need of upgrading to be brought in-line with
the standards in competitor countries. Some of the innovative enterprises visited by
the Review Team had to rely on foreign expertise for quality control, which is a
costly and time consuming process. One enterprise had to delay production because
a customer - a building contractor - demanded British standard PVC and no one in
the country, including the Quality and Standards Authority, had knowledge of the
required standard. In order to build local capability for innovation, diverse forms of
collaboration and networks will be necessary. This will enable SMEs to share risks
and costs. One form of institutional response to this approach is UNCTAD's Centre
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for Innovation and Enterprise Development (CIEDs). CIEDs is a sort of network

broker, which promotes synergies and creates linkages between enterprises and
support institutions such as standards office and R&D centres. Operational in several
African countries, CIEDs has developed its own methodology in terms of diagnostic
tools. The specific features of this model of an innovation support system is
described in Box V.1.
♦ Interestingly, neither financial constraints nor the size or quality of the local market
were identified as major obstacles to innovation. However, lack of appreciation, by
Government authorities, of enterprise efforts to innovate and introduce technological
changes through learning and investment was highlighted as a discouraging factor.
Among the enterprises interviewed by the Review Team, some were recognized
through the UNIDO award for innovation. For some of them, this recognition has
been most important factor inspiring them to continue building their innovative
capability.
Box V.1
Centres for Innovation and Enterprise Development (CIEDs)
CIEDs represent a novel institutional response to the challenge of promoting innovation in

manufacturing firms of developing countries. CIEDs constitute an emerging network of change-
generating agencies designed to promote technological innovation in manufacturing SMEs and to
stimulate the development of networks for innovation among firms and between firms and local
knowledge-producing institutions (universities, R&D institutes, engineering consultancy firms, etc.)
In Africa, CIEDs are now operational in Cote d'Ivoire, Ghana, United Republic of Tanzania and
Zimbabwe.
The main focuses of CIEDs are: a) building and sustaining awareness of the need for
innovation; b) strengthening the ability of firms to identify weaknesses in strategy and operations as
well as bottlenecks in production; and c) serving as the link between firms and a network of support
structures and suppliers who can help firms overcome their problems.
Indigenous small and medium enterprises form the primary clientele of the CIEDs. In some
cases work with larger firms could also be undertaken, especially where such work holds the
potential to promote innovation at the small and medium enterprise level. CIEDs help client
enterprises locate appropriate sources of expertise and provide assistance in negotiations and project
preparation. Typical projects include: industrial and management audits; work studies and process
re-engineering; maintenance management; materials management/sourcing of raw materials,
equipment and spare parts; technical training; market analysis for existing or new products; and
upgrading product quality to meet local and external market requirements.
The nature of the innovation process ─ even at firm-on level ─ necessitates very close
cooperation between CIEDs and existing business support as well as technology development
organizations in each country. At the local level, strategic partnerships will be formed with
organizations like Empretec, which have already established strong links with manufacturing
enterprises and their associations. Linkages will also be forged with other organizations which have
experience in the promotion of enterprise innovation.
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Technology serves as the main point of departure for entry into manufacturing firms and
CIEDs work primarily with enterprise level personnel to generate and implement innovative
solutions to problems encountered within firms themselves. Any external inputs from consultants or
experts drawn from the S&T/R&D and other institutions in the country are complementary to efforts
within the firms. This is a cardinal principle that distinguishes CIEDs from most other business
development service providers and helps to ensure the sustainability of CIEDs’ initiatives.
CIEDs’ focus on firms, helps to stimulate the demand for business development services. As
firms begin to define their problems and enhance their capabilities for identifying and implementing
technological innovation projects, they also begin to recognize those resources which must be
sourced externally. This helps to strengthen the market for technical and other business development
services and also to ensure that such services respond to the real needs of the firms.
In order to increase the learning experience at firm level, participatory approaches to project
identification and implementation are used to the fullest extent possible ensuring that knowledge
acquisition and deployment are maximized within the firm. High-impact and lower-cost projects are
tackled first so as to minimize financial burdens on firms. Higher-cost projects are phased in
gradually as firms build up their internal knowledge and confidence levels and hence their capacity
to handle more capital-intensive activities.
CIEDs seeks to generate a continuous process of analysis and action within its client firms.
To this end, CIEDs employs three diagnostic tools at various stages in its interactions with
manufacturing firms. The first of these diagnostic tools Β known as Change Assessment and
Screening Tool (CAST) Β is designed to help in the selection of potentially innovative firms. The
second and third diagnostic tools Β known, respectively, as General Information Seeking Tool
(GIST) and In-Depth Enterprise Assessment System (IDEAS) Β are used to assist firms in analyzing
their problems and identifying possible solutions.
F. Attracting FDI from SMEs
A little known but growing phenomenon in global FDI flows is the emergence of SMEs as
TNCs. Today, the overwhelming majority of some 60,000 parent corporations are SMEs. A large
proportion of these are from the United States, Western Europe and Japan which invests mainly in
regional markets. In recent years, however, a new trend has emerged involving SMEs from the
Newly Industrialized Countries of East and South-East Asia. Rising labour costs, the push and pull
factors of globalization and the intense competition in domestic markets are forcing SMEs from
these countries to seek investment locations in the region and beyond, including Africa. These
SMEs have special features which make them attractive to countries like Ethiopia and should,
therefore, be special targets of investment promotion strategies.
They tend to be relatively labour intensive and therefore, appropriate for the Government of
Ethiopia's objective of employment creation. In most cases, they prefer greenfield investments when
establishing production abroad, thus contributing to technology transfer and local technological
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capability building. They also tend to prefer joint-venture activities, which is ideal for learning by
local partner enterprises. Finally, they tend to rely more on indigenous than expatriate personnel.
For these reasons, as well as the fact that negotiating with SMEs is relatively less complicated than
large TNCs, the option of targeting SMEs from East and South East Asia should be considered. The
problem, however, is the cost of obtaining accurate information on foreign SMEs and disseminating
it among potential local partners. This task should be performed by the EIA on the basis of a special
programme to attract investment from foreign SMEs.
G. Support Infrastructure for SMEs
Survey results show that none of the enterprises contacted have regular interaction with any
of the supporting institutions in the country. Some claimed occasional contact when specific
problems occurred. What is striking, however, is the fact that many of the small enterprises are not
even aware of the role and in some cases, even the existence of supporting institutions. In fact, the
institutions themselves, nearly all of them from the public sector, do not seem concerned with the
lack of information flow regarding their functions and objectives.
The two most important institutions that are directly involved in the promotion of SMEs are
MOTI and the newly established MSEDA. The latter is envisaged to operate the federal and
regional level of Government.
(i) The Ministry of Trade and Industry (MOTI)
The Ministry of Trade and Industry is the main body of Government which coordinates the
formulation and implementation of industrial policy. It is also the primary institution, at the Federal
Government level, responsible for the formulation, coordination and monitoring of national and
sectoral policies related to micro- and small-scale enterprises (MSEs).
(ii) The Federal Micro and Small Enterprises Development Agency (FeMSEDA)
Enterprise promotion efforts in Ethiopia have traditionally focused on urban based and small
and micro enterprises. In the 1960s and early 1970s, a department within the then Ministry of
Industry and Tourism was responsible for coordinating promotion activities which basically
consisted of providing training on business management. In 1977, the Handicraft and Small Scale
Industries Development Agency (HASIDA) was establish to provide training mainly in management
and technical skills and to serve as coordinating agency for Government policy on small enterprises.
Shortage of funds and unfavourable Government policy toward the private sector in the 1980s made
it extremely difficult for HASIDA to have an impact on the development of local small enterprises.
Since mid-1999, the Government has revisited the whole issue of SMEs promotion in
Ethiopia but with more focus on small and micro enterprises. A major study was conducted with the
support of a donor agency which resulted in the preparation of a National Micro and Small
Enterprises Development Promotion Strategy. The strategy outlines the policy framework and the
institutional environment for promoting and fostering the development of micro and small
enterprises and stimulating the entrepreneurial drive in the country.
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Specific objectives of the support strategy are:
♦ Create long-term jobs (through skills upgrading programmes for micro and small
enterprises and encouraging the use of appropriate and modern technologies to
improve their capacity to create employment);
♦ Strengthen cooperation between small enterprises;
♦ Promote export (especially in areas where the country has a comparative advantage);
♦ Provide needed technical support for the graduation of small enterprises to medium
and large-scale enterprises;
In addressing these objectives, FeMSEDA is expected to provide support to the Regional

Micro and Small Enterprises Development Agencies (ReMSEDA). The services include training,
business advisory services, information and facilitation of access to finance, technology, export
markets and business linkages/subcontracting with large local and international companies.
FeMSEDA has been established as an autonomous Government institution having its own legal
identity and run by a board of management which includes representatives of the private sector.
Private sector participation in the management of enterprise promotion agency is a new approach in
Ethiopia. FeMSEDA is directly accountable to the Ministry of Trade and Industry.
(iii) The Regional Micro and Small Enterprises Development Agency (ReMSEDA)
The identification and selection of priority target beneficiaries will be the task of each region
under the responsibility of ReMSEDA. However, broad guidelines are prepared by the federal
agency to assist with the selection of the target beneficiaries. They will include micro and small
enterprises which:
♦ Use local resources;.

♦ Have backward linkages with agriculture;
♦ Engage in import substitution and have the potential to export;
♦ Engage in activities that facilitate and promote tourism, etc.
The assessment of the Review Team is that while the latest strategy for small and micro
enterprises promotion is comprehensive and structurally more relevant, its approach to promotion,
nevertheless, is still traditional and training-oriented. First, the focus is on micro and small
enterprises only, leaving medium-scale enterprises without public sector support programme. As
indicated previously, the assumption is that medium-scale enterprises do not need promoting and
generally face less problems. Moreover, if support is required, they can afford to pay for the service.
These assumptions are erroneous and need re-examination. Second, there is a tendency to lead from
the top with heavy emphasis on training but little provision for enterprise-level diagnostic analysis
and capability building. In this situation, quantity and wider coverage is given more weight than the
quality of services provided.
The new strategy may, therefore, encounter difficulties in financing promotion programmes
because of its emphasis on spreading the available limited resources as widely as possible to ensure
that many of the regional agencies benefit from the new strategy. In addition, under the new support
programme, enterprises would be expected to contribute, in terms of payment for services, to the
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cost of managing the support programme. In fact, according to the Director of FeMSEDA, all
support programmes will be based on strict financial discipline and will be structured in a way that
self-help and financial contributions by entrepreneurs are encouraged and gradually increased.
Sustainability of support programmes is a novel idea and should be encouraged but, given the
history of private sector development in Ethiopia, it is somewhat unrealistic to expect small and
micro enterprises to pay for services received from a public sector enterprise promotion programme.
Furthermore, because of the diversity of SMEs activities and constraints, there is a need to
provide support services at different levels, including sectoral, enterprise, and specialized. This may
sometimes require selectivity in the provision of support services and continuous involvement with a
cluster of enterprises. FeMSEDA has not been designed, both in terms of objectives and resource
and organizational capacity, to operate in this manner. It lacks the flexibility and business-oriented
approach to service delivery. In this respect, the establishment in 1999 of the Enterprise Ethiopia
Programme (Box V.2) - is a business support and capability-building programme - is an important
addition to enterprise support structure in Ethiopia. The Review Team believes that the modalities
applied by Enterprise Ethiopia will be more effective in responding to enterprise needs and in
achieving sustainable results. FeMSEDA should seriously consider the possibility of adopting, fully
or partly, the Enterprise Ethiopia model of business support system.
What is missing in FeMSEDA's strategy is networking and integrated approach to enterprise

promotion. The main problem in Ethiopia is not lack of supporting institutions as such, because
some facilities for the provision of basic services do exist, but rather the lack of interaction between
existing service provides and enterprises, especially small enterprises. A unique role for FeMSEDA
and ReMSEDA is to serve as a broker between small and micro enterprises, on the one hand, and a
network of public and private sector supporting institutions on the other.
What would a brokering role involve in practice? It would primarily involve: ensuring that
the target groups of enterprises are aware of the support services available in the country; identifying
gaps in support services; assessing enterprise needs and matchmaking with the appropriate service
providers; monitoring the impact of services; and providing market-oriented and businesslike
support services. It would also involve working closely with private sector self-help organizations
such as the sectoral and activity-related industrial associations. The most dynamic of these
associations is the Ethiopian Small and Medium Enterprises Association (ESMENA). Among its
objectives are encouraging inter-firm cooperation and the technological upgrading by SMEs.
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Box V.2
The Enterprise Ethiopia Programme
Enterprise Ethiopia is an integrated capacity-building programme to foster entrepreneurial small and medium
enterprises and regional business linkages. The programme is a joint initiative of the Government of Ethiopia, the private
sector of Ethiopia, and supported by UNCTAD, UNDP, and the Enterprise Africa Regional Programme. It aims at
stimulating the growth of new SMEs as well as existing companies from a cross-section of the small and medium
enterprise sector, particularly in the manufacturing and service industries. In the selection of target beneficiaries, emphasis
is given to existing companies with growth potential although start-ups are not excluded. In general, the target group
consists of five basic types of SMEs:
Existing companies in the manufacturing and service sectors, with an initial track record of good performance;
Enterprises currently engaged in agri-business activities;
Individuals who have had successful general retail operations and are willing to diversify into new value added
activities;
Companies which have benefited from grants or other credit facilities and are interested in consolidating or
expanding their businesses;
Start-up companies whose project proposals have the best chance of fulfilling the sub-contract requirements of
large companies.
The primary goal of the Programme is to create success stories of Ethiopian entrepreneurs who would act as role
models and generate the required demonstration effect for the local private sector. To achieve this goal, the basic strategy
is to identify, screen, select and support high growth-oriented companies or potential "winners", especially those with the
best chances to succeed and capable of effectively utilizing programme support. This strategy is based essentially on the
Empretec Programme model. UNCTAD's Empretec model is a comprehensive and integrated package of core services
and follow-up support interventions designed to improve the operational efficiency and enhance the competitiveness of
emerging small and medium enterprises both in the domestic and export markets.
Overall Assessment
A major drive behind investment, technological learning and innovation is the incentive
system and the macroeconomic environment in which enterprises operate. In Ethiopia, this
environment has improved greatly since the introduction of policy reforms in early 1992. The
revival and growth of the private sector, especially manufacturing SMEs, since then is directly
related to rapid improvements in the macro policy environment. This chapter has shown that SMEs
are among the most dynamic and innovative enterprises in the country. To ensure that they become
the engine of growth for the Ethiopian economy and assist in attracting foreign investment, the
isolated signs of emerging innovation must be nurtured and strengthened through more focused
policies and support system. However, the culture of change, innovation and inter-firm cooperation
cannot be created overnight nor are they effortless and costless, especially in Ethiopia where
traditional habits and practices are entrenched and the support institutions required to build linkages
are generally lacking.
An integrated and bold policy approach is needed to create awareness of the importance of
quality and innovation to competitiveness and to build the incentive system and supporting
infrastructures required to motivate SMEs to learn and respond to external pressures through
innovative strategies. In short, therefore, the challenge confronting policy makers in Ethiopia is how
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to build a policy framework that encourages continuous technological learning, investment in key
sectors and ensuring that innovative strengths and core competencies which exist within individual
enterprises, do not remain isolated.
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Conclusions and Recommendations
A. Conclusions
(i) Overall assessment
The investment and innovation policy review of Ethiopia has taken place at a point when the
country is at a watershed of radical change. On the one hand, it is emerging from a destructive and
costly regional conflict. On the other, it is striving to do so in the context of rapid and fundamental
changes in the global economy. In this new and intensely competitive global context, attracting
foreign investment requires more than the willingness to host FDI on the basis of a liberal market
and macro-policy environment only. Liberalization and the process of globalization have
considerably increased the choices available to foreign firms over where to invest and locate each of
their activities. Therefore, countries competing to attract FDI need to offer more than a liberal
environment in order to ensure sustained inflows of FDI. It calls for more focused and well
coordinated investment strategy, aggressive investment promotion efforts and above all, a host
country that is politically stable with the necessary skills and a strong technological and
infrastructure base. Before identifying specific policy recommendations for consideration by the
Government of Ethiopia, a number of broad policy perspectives that have arisen from this Review
exercise will be identified briefly.
(ii) The need for vision and a realistic view of the changing global investment climate
As competition to attract investment intensifies, it is becoming increasingly necessary that

investment policies and promotion strategies are designed on the basis of dynamic competitive
advantages. What does this mean in practice? It means that developing countries like Ethiopia
should start by asking themselves what it is that they offer different from and more attractive than
the choices available in competitor countries in the region or elsewhere. This, in effect, also means
taking stock of ones assets or capabilities and being strategic in attracting investment. The tasks
involved include:
(i) Mapping out the core competencies and assessing the strengths and
weaknesses of the economy and the growth opportunities available at the
national, local and firm level;
(ii) Identifying sectors or clusters of activities where competitive advantages
already exist and where new ones can be developed;
(iii) Formulating policies and incentive schemes that target sectors or activities
identified as priority investment areas and that foster linkages between FDI
and local enterprises.
In addition, policy-makers in Ethiopia need to be aware that the relationship between FDI
inflows and domestic economic development run in both directions. It is evident that FDI
contributes to host a country's economic development by injecting capital, technology and skills.
However, it has become increasingly apparent that FDI is attracted most strongly to those countries
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that have taken measures to strengthen their own technological capabilities and have created an
environment conducive to domestic investment and the growth of the private sector. In effect,
therefore, creating a vibrant domestic economy and a competitive enterprise sector which is
supported by a strong local technological base is an important strategy for attracting and sustaining
FDI inflows.
(iii) Devolved responsibilities through enhancing the role of institutions
Every opportunity should be taken to give greater attention to innovative activities and
decisions at the individual entity level (e.g. enterprise, university, R&D institution, etc.). This will
give these entities more freedom and flexibility to pursue specific objectives. For example, the
evidence of the Bahir Dar Polytechnic indicates that its role in the new knowledge market should be
quite different if it is to play the development function so badly needed in this region. Simply
preserving it as a conventional tertiary education institute is not sufficient in itself, rather it should
see itself as a key knowledge resource centre. Similar functions should be fulfilled by other tertiary
education/research institutions across Ethiopia.
(iv) Policy analysis
There is a need to improve business analysis skills at all professional levels, especially within
the civil service. Alongside this, the Government should foster the policy analysis skills of its junior
staff. Such staff should begin to see their function not so much as ciphers in a hierarchy (the
traditional role), but rather as key players in the evaluation of economic sectors and providing
imaginative policy options for their supervisors. Where capacity is limited, greater use should be
made of consultants from the local or external private sector. Ultimately, however, the objective
should be to foster such capacities. The main objective should be to improve the creative energies in
the enterprise sector as a whole and to lay the foundations for long-term sustainable development.
(v) Sector-system interactions
Finally, there is need for policy-maker and policy analysts in Ethiopia to think beyond a
specific sector or activity and to relate their policies into the wider national system. In the case of the
leather industry, for example, its effective development as a competitive and innovative sector and
its attractiveness to FDI will depend on policy interventions at all levels of the value chain in the
production process and the linkages generated between producers in the sector and supporting
institutions. What is needed, therefore, is policies that impinge on supplier and customer sectors,
ancillary services (such as finance and training) and the regulatory environment. At the regional
level, for example, one way of bridging possible gaps in this area could be by turning regional
investment offices into something akin to the “Development Agencies” increasingly common in
many developed and developing countries. Transforming them in this way would reduce a natural
tendency toward heavy bureaucracy and give much greater economic content to devolved powers.
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B. Recommendations
(i) Investment policy and promotion
In the Management of foreign investment promotion:
♦ A single agency should have overall responsibility for all international investment
promotion activities and negotiations in Ethiopia. Currently, there are other public-
sector agencies that undertake international investment promotion in an ad hoc
manner. This could give misleading signals to potential investors. At the present
juncture, the ideal candidate to take the overall responsibility of investment
promotion and coordinate promotional activities carried out by other agencies is the
EIA. However, EIA must be strengthened and managed as an effective one-stop-
shop and single entry door for inward investment into Ethiopia, including joint
venture and new project investment by existing investors;
♦ The establishment of a small International Investment Advisory Council composed of
senior executives from private sector international companies operating in Ethiopia.
This Advisory Council will advise EIA and the Government on investment
promotion policies and activities and act as contact group for potential investors
seeking a private sector view on investment opportunities and potential in Ethiopia. It
is important to build a stronger partnership between EIA and existing international
investors.
In the area of foreign investment promotion activities, existing investment promotion effort
can be enhanced through:
♦ Active planned enquiry and promotion visits to appropriate and targeted international
investors by staff (Commercial Attaches) in Ethiopian Embassies abroad. EIA can
support these through promotion skills training; the production of briefing profiles on
target corporations; provision of essential market, incentives and other data; and case
follow-ups for confirmed prospects;
♦ The use of Ethiopian Airlines executives, staff and resources to help promote
recognition of and interest in industrial and commercial investment opportunities.
This can include the dissemination of information on investment projects and
opportunities in Ethiopia through in-flight magazines and entertainment services.
Support from the Ethiopian Tourism Commission in these activities is vital;
♦ Effective marketing of business opportunities through Government media
organizations including the expansion of the existing Government Website to
encompass specific investment opportunities in a commercially relevant manner,
drawing on best-practice in investment promotion from other promotion agencies.
Benchmarking must be encouraged;
♦ In addition, the EIA should actively encourage Ethiopian businessmen and
executives in other countries to contribute to the nations investment promotion
activities and programmes. This includes encouraging them to consider investment
in Ethiopia and to use their wider experience and corporate contacts to identify
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appropriate companies and executives as realistic promotion targets for EIA. This
has begun to emerge, but can be enhanced through active involvement by EIA;
♦ Ensure that FDI already operating in Ethiopia plays an active role in the international
investment promotion process. Regular contacts between EIA and executives of
foreign companies in the country and the involvement of the latter in investment
promotion activities should be encouraged and supported.
There are also a number of areas of economic development associated with the promotion of
international investment where the planned provision of infrastructure support will be necessary for
and expected by inward investment. These include:
♦ Fully serviced industrial and commercial sites that are ready for immediate
occupation by investors once they have decided to commit to Ethiopia. These sites
are being developed, but must be expanded in terms of high quality locations and
facilities throughout the country and available on attractive terms. Sites are more
important than property;
♦ A clear long-term (and prioritized) national investment programme to improve the
efficiency, quality and coverage of essential infrastructure in terms of utilities, power,
roads and communications;
♦ The introduction of a programme to help establish linkages between new
international investors and local suppliers of raw materials, goods, components and
services to ensure the supplier infrastructure supports the competitiveness of
international investors. This also requires an improved knowledge of the existing
supplier base in Ethiopia; of the business development requirements of the local
companies involved; and the associated national advisory and consulting capability
on business development.
As indicated above, the main policy recommendation for the Regional Investment Bureaus
(RIBs) is that they should be restructured to create Regional Development Agencies (RDAs). One
of the key success factors in international investment promotion is, (as explained in chapter two of
this report) formulating, delivering and managing an investment targeting strategy and action
programme to attract and secure new investment in Ethiopia. Equally important in this investment
promotion framework is an internal capability to meet all the demands made by investors as they
consider facilities or a joint-venture. It is now increasingly accepted that this is also best pursued
through a more focused and coordinated economic development framework and that this cohesion
on the supply side is perhaps best delivered through RDAs. There is no doubt that the creation of
RDAs could play a central role in strengthening the national investment promotion and process. The
role in investment promotion are increasingly important in the context of international companies
wishing to make quick decisions on investment projects; to have all the necessary information for
their evaluations; and to have confidence that their property, labour, infrastructure, communications
and fiscal requirements can be met. RDAs thus will have an operational unit dedicated to serving
international investment both for potential greenfield investors and (equally) important for existing
international companies already located in the region: this provides the matching single-door
interface with the EIA. There is thus an effective partnership between the EIA's role in attracting the
interest of international investors, and the RDAs responsibility in ensuring that appropriate land,
infrastructure, labour and development support is available.
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(ii) The agricultural sector
♦ Consideration should be given to refocusing agricultural R&D in order to make it

demand driven and client oriented (including small holder farmers, agro-industries,
exporters and commercial farmers). This will ensure that agricultural R&D addresses
development needs more directly than at present. In this context EARO should play
a greater role in monitoring and evaluation to ensure relevance of research to
development;
♦ ESTCs role should shift from direct research funding to facilitator of R&D in a more
generic sense. For example, it could begin to place even more emphasis on strategic
questions such as monitoring research duplication; providing policy advice to higher
levels of Government, giving research consultancy advice to R&D centres,
developing measurable output targets against which to judge centre performance and
fostering long-term links with overseas institutions;
♦ Within the funding of higher education (and given the imminence of cost-sharing
measures) the Government should change patterns of funding to give more control to
individual scientists and departmental heads. Budgets should be managed at a lower-
level hierarchy subject to generic rules for each institution;
♦ Similar arrangements should be put in place for research institutions in the public
sector. In addition, research managers should be asked to fulfil measurable levels of
performance in return for being given a greater measure of discretion on how funds
are spent. For this recommendation and the previous one there are now many models
in Europe and North America that can be drawn on for inspiration. The Ethiopian
authorities are encouraged to examine these with a view to reform part of its own
governance structures;
♦ ESTC should take steps to ensure that its work is as much guided by development as
by scientific norms in the conventional sense. That is, it should begin to see its role
less as a traditional “science council” and more as an institutional means of
encouraging innovation within relevant bodies. For example, it could advise on
imaginative ways of using the private sector both as a source of technology and as an
improved institutional way of encouraging exports. It should play a more direct role
in advising senior levels of Government than it has done in the past;
♦ Human resource measures should focus more on “capacity-building” rather than
“training” in the traditional sense. This would permit a greater focus on field research
as part of courses and the use of distance learning arrangements with national
resource centres. It would encourage the development of interdisciplinary and policy
oriented skills as an essential human development ingredient;
♦ Care should be taken in the recruitment and use of expatriate staff to ensure that
those employed do not take a narrow, discipline-driven approach to education. There
was some evidence to the contrary given to the Review Team;
♦ Greater efforts should be made on the part of central bodies such as EARO, EIA and
the ESTC to encourage greater integration across the Ethiopian NARS.
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(iii) The leather and leather products sector
♦ Policies and incentive measures to promote investment and innovative activities in

the leather sector should be designed taking into account the value chain in the
production of leather goods and the support services necessary to foster the
development of a competitive industry;
♦ Specific regulations, incentive measures and support from the Ministry of
Agriculture are urgently needed to reduce the disease incidences and ecto-parasites
(“Ekek”) problem and to promote improved animal husbandry practices which are
badly needed to raise the quality of hides and skins supplied to manufacturers of
leather goods. The implementation of these measures should involve all key players
in the industry;
♦ A procurement system based on premium prices for better quality materials should be
introduced in order encourage the supply of higher standard hides and skins. The
mechanism for implementing such a system is well developed and could be adopted
in Ethiopia;
♦ The incentive structure should be designed to encourage the full utilization of
existing/idle capacity rather than the expansion of the industry through additional
investment to increase the number of tanning units;
♦ More focused policy instruments and incentive measures should be used to stimulate
investment in effluent treatment plants and to induce tanneries to meet the required
standards in effluent discharge. Concrete action at this stage of the development of
the industry will help prevent future environmental hazards;
♦ Consultation and collaboration between the Government and private sector operators
in the leather and leather products sector is needed to deal with skills shortage
problem and to identify clearly the types of skills required to make the sector
dynamic and competitive. In this respect, the establishment of the LLTPDI has been
a timely addition to the support structure for the sector;
♦ In order to promote learning by enterprises in the leather sector and to encourage the
transfer of technology and know-how, partnerships between leather products
manufacturers in Ethiopia and foreign enterprises should be encouraged through
incentive measures and direct Government support. Possible support mechanisms are
identified in chapter five of this report;
♦ Although quality control and certification mechanisms exist, their implementation
has been weak. There is a need to re-examine the implementation process and to
define responsibilities of institutions and interactions between key actors in the
sector. The Ethiopian standards on raw hides and skins and finished leather products
should be revised.
(iv) Small- and medium-sized enterprises (SMEs)
♦ The EIA should develop a special FDI targeting programme aimed at foreign SMEs,
in particular SMEs from the East and South-East Asian countries. This will require
the EIA informing itself about foreign SMEs, their locational needs and areas of
investment interest;
112
♦ The mandate of Micro and Small Enterprises Development Agency (MSEDA) should
be refocused with emphasis on enterprise networking and brokering, as discussed in
chapter five of this report. There is a desperate need for institutional capacity that
links SMEs with existing public sector service providers and MSEDA is in a unique
position to play that role. This mandate will require training and additional resources
for the agency;
♦ Developing a culture of innovation and innovative capacity requires a concerted and
determined effort and must be handled by a specialized agency with relevant skills
and capability. Although MSEDA's mandates include supporting innovative
activities, there is a need for more focused and targeted approach to promote
innovation and technological upgrading. To that end, it is recommended that CIEDs
(see Box V.I) be established in Ethiopia. Experiences from other developing
countries show that such a centre could serve as a pivotal agent in stimulating
innovative activities at the enterprise level. The Centre should be managed through a
Board consisting of key stakeholders in the country, more specifically the Ministry of
Trade and Industry, MSEDA, the Ethiopian Science and Technology Commission
(ESTC), the Ethiopian Small and Medium Enterprises Association (ESMENA) and
selected centres of learning, in particular the engineering department of the
University of Addis Ababa;
♦ Technology can only be effective when people can use it. The development of a
capable and competitive workforce is a key factor in improving the country's
prospects for attracting investment and building innovative enterprises. However, it
should be noted that learning and skill generation takes place not only in official,
often public sector centres of learning but also at the enterprise level. The
Government should provide incentives through relevant policy tools (for example,
tax incentives, direct subsidies) to encourage enterprises to train their workforce with
advanced skills. As explained in this report, the cost of training and high turnover
has discouraged many enterprises from providing enterprise-level training;
♦ One of the major constraints in SMEs efforts to attract investment and introduce
technological change is the lack of information about markets, supply networks and
types and sources of technology. Indeed, this particular problem has been identified
by many enterprises in Ethiopia, especially medium-scale enterprises, as more urgent
than the traditional problems such as access to credit, and management skills. To
ease this constraint, it is recommended that an "information bank" should be set-up
with the help of international organizations that have experience in the modalities and
functions of such a bank;
♦ In view of the willingness by many SMEs in Ethiopia to establish supplier and
subcontractor relationships with foreign enterprises and the capacity that exists in a
number of these enterprises, the EIA, in collaboration with ESTC, should establish an
"investment, technology and marketing partnership" programme and assist local
SMEs in searching for partners and arranging partnership agreements. Some of the
key aspects of establishing partnership agreements are identified in chapter five;
♦ An annual award for innovative enterprises should be introduced under the
responsibility of the Prime Minister's Office. The scheme should be managed by a
board that includes the ESTC, the Ethiopian Chamber of Commerce, the MOTI and
selected representatives from the private sector and the centres of learning.
113
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120
SELECTED UNCTAD PUBLICATIONS ON TRANSNATIONAL

CORPORATIONS AND FOREIGN DIRECT INVESTMENT
(For more information, please visit www.unctad.org/en/pub on the web.)
A. Individual studies
Ten Years of World Investment Reports: The Challenges Ahead. Proceedings of an

UNCTAD special event on future challenges in the area of FDI. UNCTAD/ITE/Misc.45. Free
of charge.
Available from http://www.unctad.org/wir.
World Investment Report 2001: Promoting Linkages. 384 p. Sales No. E.01.II.D.12. $49.
World Investment Report 2000: Cross-border Mergers and Acquisitions and Development.
368 p. Sales No. E.99.II.D.20. $45.
Selected materials available also from http://www.unctad.org/wir/contents/wir00content.en.htm.
World Investment Report 1999: Foreign Direct Investment and the Challenge of Development.
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World Investment Report 1998: Trends and Determinants. 430 p. Sales No. E.98.II.D.5. $45.
World Investment Report 1997 - Transnational Corporations, Market Structure and

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World Investment Report 1996: Investment, Trade and International Policy Arrangements.
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World Investment Report 1995: Transnational Corporations and Competitiveness. 491 p.

Sales No E.95.II.A.9. $45.
World Investment Report 1994: Transnational Corporations, Employment and the Workplace.
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World Investment Report 1993: Transnational Corporations and Integrated International

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121
World Investment Report 1992: Transnational Corporations as Engines of Growth. 356 p.

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World Investment Report 1991: The Triad in Foreign Direct Investment. 108 p. Sales
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World Investment Directory. Vol. VII (Parts I and II): Asia and the Pacific. 646 p. Sales No.
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World Investment Directory. Vol. VI: West Asia. 192 p. Sales No. E.97.II.A.2. $35.
World Investment Directory. Vol. V: Africa. 508 p. Sales No. E.97.II.A.1. $75.
World Investment Directory. Vol. IV: Latin America and the Caribbean. 478 p. Sales No.
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Foreign Direct Investment in Africa: Performance and Potential. 89 p.

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International Investment Instruments: A Compendium. Vol. IV, 319 p. Sales No.

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International Investment Instruments: A Compendium. Vol. I. 371 p. Sales No. E.96.II.A.9;

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Bilateral Investment Treaties 1959-1999. 143 p. UNCTAD/ITE/IIA/2. Free of charge.

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Bilateral Investment Treaties in the Mid-1990s. 314 p. Sales No. E.98.II.D.8. $46.
The TRIPS Agreement and Developing Countries. 64 p. Sales No. E.96.II.D.10. $ 22. [Out of
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122
TNC-SME Linkages for Development: Issues-Experiences-Best Practices. Proceedings of the

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Handbook on Foreign Direct Investment by Small and Medium-sized Enterprises: Lessons

from Asia. 200 p. Sales No. E.98.II.D.4. $48.
Handbook on Foreign Direct Investment by Small and Medium-sized Enterprises: Lessons

from Asia. Executive Summary and Report of the Kunming Conference. 74 p.
UNCTAD/ITE/IIT/6 (Summary). Free of charge.
Small and Medium-sized Transnational Corporations. Executive Summary and Report of the
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Small and Medium-sized Transnational Corporations: Role, Impact and Policy Implications.
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Measures of the Transnationalization of Economic Activity. 93 p. Sales No. E.01.II.D.2. $20.
The Competitiveness Challenge: Transnational Corporations and Industrial Restructuring in

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Integrating International and Financial Performance at the Enterprise Level. 116 p. Sales
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FDI Determinants and TNCs Strategies: The Case of Brazil. 195 p. Sales No. E.00.II.D.2.
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The Social Responsibility of Transnational Corporations. 75 p. UNCTAD/ITE/IIT/Misc. 21.

Free of charge. Out of stock.
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Conclusions on Accounting and Reporting by Transnational Corporations. 47 p. Sales No.

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Accounting, Valuation and Privatization. 190 p. Sales No. E.94.II.A.3. $25.
Environmental Management in Transnational Corporations: Report on the Benchmark

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Management Consulting: A Survey of the Industry and Its Largest Firms. 100 p. Sales No.
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Foreign Investment and Trade Linkages in Developing Countries. 108 p. Sales No.
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123
Transnational Corporations from Developing Countries: Impact on Their Home Countries.

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Debt-Equity Swaps and Development. 150 p. Sales No. E.93.II.A.7. $35.
The Financial Crisis in Asia and Foreign Direct Investment: An Assessment. 101 p. Sales
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Sharing Asia’s Dynamism: Asian Direct Investment in the European Union. 192 p. Sales No.
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Investing in Asia’s Dynamism: European Union Direct Investment in Asia. 124 p. ISBN 92-
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World Economic Situation and Prospects 2001. 51 p. Sales No. E.01.II.C.2. $15. (Joint
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International Investment towards the Year 2002. 166 p. Sales No. GV.E.98.0.15. $29. (Joint
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International Investment towards the Year 2001. 81 p. Sales No. GV.E.97.0.5. $35. (Joint
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Liberalizing International Transactions in Services: A Handbook. 182 p. Sales No.
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The Impact of Trade-Related Investment Measures on Trade and Development: Theory,

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Transnational Corporations and World Development. 656 p. ISBN 0-415-08560-8 (hardback),

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Companies without Borders: Transnational Corporations in the 1990s. 224 p. ISBN 0-415-
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The New Globalism and Developing Countries. 336 p. ISBN 92-808-0944-X. $25. (Published
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B. IIA Issues Paper Series
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Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.
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Employment. 69 p. Sales No. E.00.II.D.15. $12.
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International Investment Agreements: Flexibility for Development. 185 p. Sales No.

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Taking of Property. 83 p. Sales No. E.00.II.D.4. $12.
Trends in International Investment Agreements: An Overview. 112 p. Sales No. E.99.II.D.23.

$ 12.
Lessons from the MAI. 31 p. Sales No. E.99.II.D.26. $ 12.
National Treatment. 104 p. Sales No. E.99.II.D.16. $12.
Fair and Equitable Treatment. 64 p. Sales No. E.99.II.D.15. $12.
Investment-Related Trade Measures. 64 p. Sales No. E.99.II.D.12. $12.
Most-Favoured-Nation Treatment. 72 p. Sales No. E.99.II.D.11. $12.

Admission and Establishment. 72 p. Sales No. E.99.II.D.10. $12.
Scope and Definition. 96 p. Sales No. E.99.II.D.9. $12.
Transfer Pricing. 72 p. Sales No. E.99.II.D.8. $12.
Foreign Direct Investment and Development. 88 p. Sales No. E.98.II.D.15. $12.
C. Serial publications
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No. 30.Incentives and Foreign Direct Investment. 98 p. Sales No. E.96.II.A.6. $30. [Out of
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No. 29.Foreign Direct Investment, Trade, Aid and Migration. 100 p. Sales No. E.96.II.A.8.
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No. 28.Foreign Direct Investment in Africa. 119 p. Sales No. E.95.II.A.6. $20.
No. 27.Tradability of Banking Services: Impact and Implications. 195 p. Sales No.
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No. 26.Explaining and Forecasting Regional Flows of Foreign Direct Investment. 58 p. Sales
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No. 25.International Tradability in Insurance Services. 54 p. Sales No. E.93.II.A.11. $20.
No. 24.Intellectual Property Rights and Foreign Direct Investment. 108 p. Sales No.
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No. 23.The Transnationalization of Service Industries: An Empirical Analysis of the

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Sales No. E.93.II.A.3. $15.
Advisory Studies (formerly Current Studies, Series B)
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No. 16.Tax Incentives and Foreign Direct Investment: A Global Survey. 180 p. Sales No.
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Summary available from http://www.unctad.org/asit/resumé.htm
No. 15.Investment Regimes in the Arab World: Issues and Policies. 232 p. Sales No.
E/F.00.II.D.32. $39.
No. 14.Handbook on Outward Investment Promotion Agencies and Institutions. 50 p. Sales

No. E.99.II.D.22. $ 15.
No. 13.Survey of Best Practices in Investment Promotion. 71 p. Sales No. E.97.II.D.11. $ 35.
No.12. Comparative Analysis of Petroleum Exploration Contracts. 80 p. Sales No. E.

96.II.A.7. $35.
No.11. Administration of Fiscal Regimes for Petroleum Exploration and Development. 45 p.

Sales No. E. 95.II.A.8.
No.10. Formulation and Implementation of Foreign Investment Policies: Selected Key Issues.
84 p. Sales No. E. 92.II.A.21. $12.
No.9. Environmental Accounting: Current Issues, Abstracts and Bibliography. 86 p. Sales

No. E. 92.II.A.23.
126
Investment Policies Reviews
Investment Policy Reviews. Presentation of the Investment Policy Reviews is available from
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Investment Policy Review of Ecuador. 117 p. UNCTAD/ITE/IPC/Misc.2. Forthcoming.

Summary available from http://www.unctad.org/en/docs/poiteipcm2sum.en.pdf
Investment and Innovation Policy Review of Ethiopia. 115 p. UNCTAD/ITE/IPC/Misc.4.

Forthcoming. Advance copy available from http://www.unctad.org/en/docs/poiteipcm4.en.pdf
Investment Policy Review of Mauritius. 84 p. Sales No. E.01.II.D.11. $22. Advance copy
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Investment Policy Review of Peru. 108 p. Sales No. E.00.II.D. 7. $22. Summary available
from http://www.unctad.org/en/docs/poiteiipm19sum.en.pdf
Investment Policy Review of Uganda. 75 p. Sales No. E.99.II.D.24. $15. Summary available
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Investment Policy Review of Egypt. 113 p. Sales No. E.99.II.D.20. $19. Summary available
from http://www.unctad.org/en/docs/poiteiipm11sum.en.pdf.
Investment Policy Review of Uzbekistan. 64 p. UNCTAD/ITE/IIP/Misc. 13. Free of charge.

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Series is available from http://www.unctad.org/en/pub/investguide.en.htm
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Misc.30. Free of charge. Full version available also from http://www.unctad.org/en/docs/
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Misc.29. Free of charge.
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An Investment Guide to Ethiopia: Opportunities and Conditions. 69 p.

UNCTAD/ITE/IIT/Misc.19. Free of charge. Full version available also from
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UNCTAD/ITE/IPC/Misc.

United Nations Conference on Trade and Development

INVESTMENT AND INNOVATION POLICY REVIEW

The following symbols have been used in the tables:

A blank in a table indicates that the item is not applicable;

UNITED NATIONS PUBLICATION

A. Recent Changes in the Macro-policy Environment........................................................ 10

A. FDI Inflow to Ethiopia: 1991-1999 ................................................................................ 23

Conclusions and Recommendations

A. Conclusions .................................................................................................................... 107

First, FDI is a complement rather than a substitute to domestic investment. Therefore,

Second, with knowledge-intensity, increasing volume of information essential for

Gross Capital 13.7 11.9 9.7 8.7 13.2 13.6 15 17 19.1

*ppp purchasing power parity

Source: IMF, Investment Financial Statistics

Fresh Food global sourcing

National determinants of investment flows into Ethiopia

♦ A large domestic market and a unique geographical location enabling investors in

A. Recent Changes the Macro-policy Environment

B. Policy Coordination in a Federal System

Within the context of a federal system, however, coordination is always a problem.

Federalism in Ethiopia, as elsewhere, will necessarily involve a continuous balancing of

C. The Need for Core Competence at the Regional Level

Policy-making and management at the Government level is centralized in Addis Ababa. In

D. Comparative International Position of the Ethiopian Economy

As shown in Chart 2, accompanying optimism is a realistic assessment of Ethiopia's

Technological development: Ethiopia’s general level of technological capability is low and

Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-Saharan

Population (millions) 60 28 20 31 60 9 28 614

Total Exports of good 16 32 11 22 21 42 25 28

Non-manufacturing 89 73.6 99.3 82.5 68.4 20.2 49.7

FDI (inflows, millions 15 40 250 250 834 360 500

* Data cover mainland United Republic of Tanzania only

NATIONAL LEVEL TECHNOLOGY CAPABILITY INDICATORS

Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-

Tertiary natural and 36 --------- 13 39 15 24 29

Public expenditure on 11 14 --------- 17 36 19 16

Access to Information Technology

Radio 206 96 123 398 312 176 226 --------

TV 4 19 26 16 126 156 145 43

Main telephone lines 3 8 2 3 50 64 45 14

Ethiopia Kenya Uganda United Egypt Tunisia Morocco Sub-

Primary schools gross 31 85 73 67 100 116 83

Pupil/teacher ratio 38 30 35 36 (1996) 23 24 28

Secondary gross enrolment 11 24 12 5 74 61 39

Tertiary natural and 36 --------- 13 39 15 24 29

Electricity consumption 22 144 34 58 787 848 480

Commercial energy use 22 110 23 34 600 595 327

Paved road % of total 15 14 --------- 4 78 79 50 17

* Data are for the most recent year available

Source: African Telecommunication Indicators 1998

Table No. I.3

FACTORS THAT CONTRIBUTE TO ETHIOPIA'S COMPETITIVENESS

Political environment < Democratic system of < Regional instability

Natural resources < Abundant agricultural < Only 4 per cent of

< Nine major river basins and

Chart 1: Optimism index (1997 - 1999)

0.0 5.0 10.0 15.0 20.0 25.0

Chart 2: Competitiveness index

Source: The Africa Competitiveness Report 1998.