Benefits Which Fdi

This research paper has organized in five chapters. Chapter one provides introduction with the thesis paper. Chapter two provides a review of literature which focuses on theoretical and empirical literature related to manufacturing FDI. Chapter three concentrates on research methodology which included data source, method of collection, sample size and sampling techniques. Chapter four discusses data presentation and analysis on the response of foreign investors. Chapter five provides data presentation and analysis on the response of professional experts. Chapter six discusses with data presentation and analysis on challenges facing manufacturing FDI in Ethiopia. Chapter seven provides with summary, conclusion and recommendation.

Several factors are believed to prevent the emergence of a stronger manufacturing base in Ethiopia such as lack of management and technological capacity of some industries, insufficient supply of manufacturing inputs, quality problems with manufacturing inputs and delay in commissioning of several industries. However, the country has the natural and physical resources to alter these bad factors. These resources are also the country’s growth prospects and comparative advantages that are very important to the development of the sector such as cheap, trainable and inexpensive labor force, raw materials and supplies of basic utilities. Furthermore, the legal and policy framework creates conducive and attractive environment for the development of the sector. Moreover, it helps to increase the growth of manufacturing sector so as to benefit from vertical and horizontal linkages to the natural resource base of the country which is mostly agriculture and mineral resource.

FDI Absorptive Capacity Theory

Inward FDI plays an important role in developing countries in creating job opportunities, as source of capital, high productivity, advanced technology, competitiveness, improved managerial skills, higher exports, access to international markets and international currencies. All these are benefits which inward FDI offers to host countries. However, all these benefits will not become developing countries spillovers. This is because the economies of developing nations need to have certain sound capacities. It is referred to as absorptive capacity of the host nation. They are the initial conditions needed to absorb the benefits which FDI offers.Developing countries need to attain a minimum level of economic development before attracting and promoting FDI. Otherwise, it is so difficult to absorb benefits from FDI. Thus, developing countries need to develop the capacity to absorb benefits which FDI provides. After attracting FDI, developing countries start to facilitate and support inward FDI so as to transform registered projects into realized projects and thereby to benefit from job opportunities and invested capital. Challenges attempted to emerge when projects started to transform during this stage of development. These challenges hinder the progress of project transformation and thereby affected the benefit to gain from project realization. At initial time, investors spend much of their time on mobilizing finance, accessing land, training labor and other FDI activities. However, implementation challenges hamper their progress and transformation. Not only project progress is hampered but also transformation of registered capital and employment into actualized capital and employment. It becomes so difficult for developing countries externalities to be converted into internalities as a result of absorptive capacity of the host nations. This shows that there is gap in FDI implementation. The gap in FDI transformation is reflected as result of insufficient capacity in the economy of these countries such as shortage of skilled workers, the undeveloped of financial system, and the poor of physical infrastructure. The gap between registered FDI and actual FDI clearly depicts the absorptive capacity of developing countries. If developing countries have passed these implementation challenges, they start to reap the benefits from FDI attraction and entry. The harvested FDI benefits were translated not only in terms of actualized capital but also in terms of transfer of advanced technology, skill and knowledge. However, all developing countries are not expected to benefit from FDI entry as countries do not develop sufficient capacities as required. Thus, developing countries can able to harvest the benefits of FDI if they successfully developed absorptive capacity (Nguyen, H., Duysters G., Patterson J., & Sander H. (2009).


This is a model which argues that developing countries can gain from benefits of FDI if they developed sufficient absorptive capacities relating with physical infrastructure, technology and R&D, institutions, human capital, financial infrastructure, and domestic firms (Nguyen, H., Duysters G., Patterson J., & Sander H. (2009).

Maru Hiten M. (2012) analyzed challenges of FDI in Kenyan apparel manufacturing firms. His research problem was to investigate the challenges of foreign investors in Kenya. He used descriptive analysis method based on the primary data collected from fourteen FDI firms. The firms were involved in apparel manufacturing at the Kenya export processing zones. His findings concluded that fiscal factors were major challenge for FDI in apparel manufacturing industry followed by infrastructure, customs regulations and market and production. These factors were identified to be major challenges in Kenya.Here, I criticize here that a separate questionnaire is needed for professional experts to get their views on policy, legal, administrative and other related issues.

Adegbie, F. and Adeniji, A. (2012) analyzed challenges of manufacturing industry Nigeria. Their research objective is to examine challenges of manufacturing industry Nigeria. Two sets of questionnaires were distributed to respondents in the manufacturing industry and banking sector to assess the challenges. The researcher with analysis of variance (ANOVA) tested five hypotheses to show the accuracy of the discoveries of the research. The findings indicated that challenges of manufacturing industry Nigeria were weak demand for products, high cost of production, frequent electric interruption, high competition, higher interest rates in banks and poor performing Nigerian economy. Because of these challenges, banks consider the manufacturing industry as a high risk sector for lending. My critic here is that some sort of problems was identified to be major challenges but there are a lot of problems affecting the manufacturing sector beside the indicated ones.

Ethiopia has immense potential in the manufacturing sector and the government set new policies and strategies to attract foreign investors. Furthermore, Ethiopia has competitive advantage to develop the sector like abundant natural resource, cheap labor force, low energy cost, vast raw materials, etc.

The reason why Ethiopia involved itself in manufacturing industries deals with foreign investors include to create wide job opportunity for local people, capital accumulation, technology transfer, increase manufacturing production and productivity for export purpose, proper utilization of resources, maximize market opportunity and develop backward and forward linkage in the value chain of production.

Thus, the main reason for Ethiopia’s involvement in the manufacturing sector deals with foreign investors is to create vast employment opportunities and proper utilization of resources of the country.