Alleviating the Barriers to Domestic Investment in Addis Ababa: Underlying Causes and Proposed Solutions

Abstract

While Addis Ababa is rapidly urbanizing, productive job creation remains to be a key challenge. The root cause of this has been the lack of structural transformation towards industries with higher potential for growth and job creation. In response, the government of Ethiopia and the Addis Ababa city government in particular through their Growth and Transformation Plan (GTP2) target the industrial sector to enhance structural transformation and create more productive jobs in Ethiopia’s cities. Despite the priority and importance accorded to the industrial sector and efforts to improve the investment environment, quite a few domestic investors go beyond the licensing stage to start production. A recent World Bank report on the investment climate in Addis Ababa shows that only about 5% of domestic firms that receive investment licenses are able to convert from the pre-operational to the operational phase of investment to establish their businesses. This is also consistent with government reports. By any standard, this is one of the lowest investment conversion rates, and hence is quite concerning. So, the key question is: why 95% of investors were not able to move beyond the licensing stage to start operating? We tried to tackle this using qualitative/semi-structured firm level research among the firms who received an investment license but are stuck or discouraged