Effect of Tax Incentive on Domestic Investment in Ethiopia: A Case Study in the Manufacturing Sector.
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Date
2016-01
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Addis Ababa University
Abstract
In the growth and development literature, capital accumulation and industrialization are
considered the crucial and critical key to economic growth. Given this, many developing
countries particularly Ethiopia which follows agriculture led industrialization policy made
number of attempts to increase ratio of investment in the country. Tax incentives schemes are
among the attempts made to create investment friendly environment.
This study poses a general question of whether or not domestic manufacturing investment have
increased in Ethiopia because of the tax incentives offered; and thus whether or not offering
such incentives has been beneficial to the country.
To answer this question the study adopts mixed methods of research by using both descriptive
and inferential statistics where primary data is collected using interview with MOFED and
ERCA officials and secondary data is collected from different sources such as
MOFED,EIA,ERCA,IMF and World bank.
Descriptive statistics is used to analyze the trends of domestic manufacturing investment, tax
revenue and expense rate of Ethiopia. Inferential statistics is also used by employing time series
OLS model. A 23 years secondary data from 1992-2014 was collected then time series OLS
regression was applied by employing Log DMIN as dependent variable along with tax incentives
as independent variable and GDP growth rate, inflation, market openness and Log transport
availability as control variables. The regression analysis is conducted using Eviews 8 software
and to account for inherent problems of time series data, different tests such as correlation,
autocorrelation and stationarity test were applied.
The regression result show that tax incentives and market openness have significant positive
long run effect on private domestic manufacturing investment, inflation on the other hand has
significant negative long run effect. Hence to promote the performance of domestic
manufacturing investment in the country, the study recommended that the government should
continue marketing the tax incentive scheme and bring them to be on budget. Further the study
recommended that the government should continue working on improving the trade and
infrastructural environment of the country
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Keywords
Manfacturing Sector, Domestic investment