Role of imported raw materials in the performance of inward foreign direct investments in Ethiopia

Abstract

PurposeDrawing on the resource dependence theory (RDT), this paper investigates ownership composition, export intensity, and industry class as moderating factors to investigate the role of imported raw materials in performance of inward foreign direct investment (IFDI) in Ethiopia.Design/methodology/approachThe hypotheses were tested using secondary data obtained from the 2016 Central Statistical Agency (CSA) on Large- and Medium-Scale Manufacturing and Electricity Industries Survey. The data included basic quantitative information on the country's manufacturing industry. The data items for the 2016 manufacturing and electricity industries surveyed are the numbers of proprietors or establishments involved in various sectors. The report did not record small firms that employed fewer than 10 people and did not use power-driven machinery. Two-Stage least squares (2SLS) regression analysis was performed to test the proposed hypotheses.FindingsThe results of this study indicate that three moderators (ownership composition, export intensity, and industry classification) interact with the hypothetical relationships between imported raw materials and performance. These findings enrich the knowledge of IFDI firms' operations in Ethiopia and in other least-developed countries (LDCs). The findings could provide information for IFDI firms that are looking to invest in LDCs.Research limitations/implicationsLike all social science research, this study has some limitations. First, the research was conducted with the data found in the Report on Large- and Medium-Scale Manufacturing and Electricity Industries Survey In 2016. This was the first year of the second five-year Growth and Transformation Plan (GTP II), a national development plan for the 2016–2020 period. Continual research on IFDI in Ethiopia in the following years will be needed to get a full picture of the effects of the determinants on IFDIs.Practical implicationsTo IFDI investors, the result of this thesis demonstrates several alternatives to overcoming hurdles in manufacturing operation. The results find that J.V. firms make better use of imported raw materials than W.O. subsidiaries in order to achieve better performance. Concerning the choice between focusing on export or domestic markets, the study suggests that domestic market—oriented companies require less imported raw materials to achieve better performance. Concerning the comparative advantage on different industries, this study found the performance of firms in Industry 12 depended on imported raw materials. These findings highlight the challenges and opportunities for potential foreign investors. Ownership composition, market factors, and industry factors should be well considered in making investment decisions.Originality/valueThis is one of few studies on IFDI in Ethiopia, the most populous LDC. Ownership composition, export intensity, and industry class are used as moderating variables to investigate the difference between imported raw materials and the level of expatriate deployment to IFDI performance. For IFDI investors, the results of this study demonstrate several alternatives to overcoming hurdles in manufacturing operation.