The Effects of Domestic Private Investment on Ethiopian Economic Growth: Time Series Analysis

Abstract

Purpose:The primary aim of this study is to examine the factors affecting domestic private investment and its effect on economic growth in Ethiopia. To meet its goal, the study used a quantitative research strategy. Design/Methodology/Approach: Using the ARDL model and the relevant software, E-views version 12, the study concentrated on 31 years of secondary data (i.e., from 1992 to 2022). Findings: The study's key finding demonstrates that domestic private investment was negatively and significantly impacted by the inflation rate, public investment, and real effective exchange rate over a period of both the short-and long-run. While Domestic credit to the private sector, foreign direct investment, real GDP and trade openness were found positive and significant effect on domestic private investment in long run. Unemployment rate was found positive and significant effect in short run but insignificant in long run. Annual interest rate was found negative significant effect in short run but insignificant in long run. While total government expenditure insignificant in both short and long run. Inflation has a negative relation with domestic private investment in both short and long run, therefore the study suggested that policymakers should recognize the cause for fluctuations in inflation and keep in a stable manner. Practical Implications: An important factor in a nation's economic development is investment activity. The ability of a nation to invest and use its resources effectively and productively is a major factor in economic growth. Although, Domestic private investments are crucial for economic growth, its expansion in Ethiopia is still in its early stages. Originality/Value: The study recommended that since inflation has a negative relation with domestic private investment in short run and long run, policymakers should understand the cause for inflation volatility and keep in a stable manner.