Macroeconomic Determinates of Private Fixed Investment in Large and Medium Scale Manufacturing Industries of Ethiopia: A Time Series Analysis

Abstract

This study provides an empirical analysis of macroeconomic determinates of private fixed investment in large and medium scale manufacturing Industry of Ethiopia over 1979/80 to 2008/09 periods using cointegration and Error Correction Model (ECM). The objective of this paper was to determine the impact of macroeconomic variables on the level of private fixed investment in large and medium scale manufacturing industry Ethiopia. The time series characteristics showed that all variables are integrated of order 1. The long run private fixed investment in manufacturing industry in Ethiopia is affected by Real Gross Domestic product (RGDP), inflation rate and Dummy variable that capture policy change. In the long run RGDP growth and policy change variable indicated positive and statistically significant impact on private manufacturing investment. However, the effect of inflation rate on private fixed investment in manufacturing sector was found to be negative. In the short run, the coefficient of error correction term was -0.695 indicating high speed of adjustment towards the long run equilibrium. In the short run ECM, it was found that the RGDP growth and bank loan disbursement to manufacturing (BLM) industry as well as lagged value of investment in manufacturing industry have positive impact on private manufacturing investment. Based on this result it is therefore suggested that improving the productivity of economic sectors, developing basic investment projects by reducing government consumption and strengthening inflation management policies as well as establishing industrial bank should be considered to raise fixed capital investment in Ethiopia.