Effect of Tax Incentive on Domestic Investment in Ethiopia: A Case Study in the Manufacturing Sector.

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Addis Ababa University


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



Manfacturing Sector, Domestic investment