Monday, April 15, 2024
CommentaryRole of BITs in attracting FDI to Ethiopia

Role of BITs in attracting FDI to Ethiopia

Ethiopia remains safe and sound market for investors. China, India, Germany, Italy, Sudan, Turkey, Saudi Arabia, Yemen, United States and Canada are the major sources of FDI. The conclusion of bilateral investment treaties (BITs) is one push factor in attracting FDI. As a result, with exception of FDI inflows from Saudi Arabia, United States and Canada, the FDI inflow from countries which have signed BITs with Ethiopia reveals that it is better inflow than non-signatories, writes Yohannes Eneyew Ayalew.

Globally, the number of bilateral investment treaties (BITs) that have been concluded has grown exponentially, mainly since the early 1990s, a trend that now overwhelms countries at all levels of development. The growth of the number of BITs was not rapid during the 1960s, 1970s and 1980s as compared with the period in the 1990s and onwards. According to a study of World Bank made in 1994, there were over 700 such treaties.  By the end of the millennium, the figure had moved towards 2,600 treaties. By May 30, 2017, there are tally of 2960 BITs concluded worldwide and out of them 2368 BITs have now in force.

Being fundamental norms of international investment law, BITs remained important due to the following rationales. First, the absence of Multilateral Investment Agreements (MIAs) on foreign investment paves the way for BITs to take the place. Put differently, bilateral solutions become necessary simply because of an absence of a consensus on multilateral norms. Second, they are made on an ad hoc basis meaning they are signed for years to be renewed based on parties’ agreement. In addition, such treaties could be negotiated in such a way as to suit the mutual interests of the parties, whereas a multilateral treaty may not be.

In modern times, Ethiopia’s investment treaty commitment through BITs dates back at least half a century ago when the first BIT is concluded with Germany in 1964. So far Ethiopia has signed more than 32 BITs, of which 11 are with individual European Union (EU) Member States. Important other partners include Russia India China and South Africa, minus Brazil from BRICS, and a number of Middle East and North Africa (MENA) economic partners such as Algeria, Egypt, Israel, Kuwait, Morocco, Sudan, Tunisia, Turkey and the United Arab Emirates (UAE).

Coming back to Ethiopia’s investment climate, the International Monetary Fund (IMF) 2016 report unveiled that Foreign Direct Investment (FDI) posted strong growth, helping to limit the deterioration of the external position. The report also noted that Ethiopia’s gross domestic investment has shown progress and boosted from 38 percent in the year 2013/2014 to 39.7 percent in the year 2015/2016.

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Aside to that, Ethiopia’s attractiveness for FDI is also related to its geographic location since Ethiopia is found at the center of the globe, within non-stop transport distance to all major markets almost equidistant between the United States and Japan, between China and Brazil, between Europe’s largest economy and India, and between Russia and South Africa.

Equally important, the legal and policy frameworks are investment friendly and also provide plethora of protections for investors both under the Federal Constitution and the 2012 investment proclamation, inter alia, colossal incentive packages, ownership of immovable for requisite of investment, guarantees from expropriation and remittance of capital.

In Ethiopia, looking at the flow of FDI to its soil, it looks like from the year 2005 to 2010 it has received average 274.5 million dollars, 626.5 million dollars for the year 2011,278.6 million dollars for the year 2012, 1.2813 billion dollars for 2013, 2.132 billion dollars for the year 2014 and 2.1676 billion dollar for the year 2015. Hence, it is observed that Ethiopia had received many investments in the past few years in astonishing manner. See the full data in the following figure.

Based on figures especially in the 2015, Ethiopia ranks sixth in Africa. Egypt is top in Africa in the year 2015 with FDI inflows 6.8850 billion USD, followed by Mozambique with 3.7108 billion USD, Ghana with 3.1923 billion USD, Morocco with 3.1623 billion USD, then followed by Nigeria with 3.0642 billion USD and Ethiopia with 2.1676 USD. The seventh up to tenth spot is held by DR Congo, South Africa, Sudan and Zambia with FDI inflows 1.8432, 1.7724, 1.7368 and 1.6530 billion USD respectively.  Thus, Ethiopia is expected to work more to attract FDI than ever. See the full figure in the chart below.

Apparently, Ethiopia’s investment climate is the recipients of huge billion dollars in the past few years and still will boost up better in the future if other indicator such as easing of doing business is shown progress for the up-coming years. Since unless the pre-investment activities are attractive, FDI flow will be at stake and to this effect the Ethiopian Investment Commission should take such assignments.

When we delve in to the issue that whether BITs really encourage FDI or not, studies come up with heterogeneous findings. BITs are primarily concluded for reciprocal encouragement and protection of investment which ultimately aimed at encouraging FDI. However, there are practical and theoretical debates which came across the role of BITs for FDI as positive or negative .

Although the findings of all remain conflicting, there are divergent studies and findings of such theme. The first one is the 2003 Hallward-Driemeir research which reiterates that BITs have not succeeded in improving property rights in developing countries which have weak domestic institutions, thus, the role of BITs in attracting FDI is negative.

The second study is undertaken by Tobin and Rose-Ackerman in 2005 found that BITs do have a positive impact on FDI flows to developing countries. This positive effect is, however, greatly dependent on the political and economic contexts. Thus, it is unlikely to have FDI in weak investment environment and fragile institutions.

The third notable study was done by Eric Neumayer and Laura Spess in 2005, provides evidence that a greater number of BITs signed with OECD member countries actually increases FDI flows to developing countries even countries with poor domestic institutional quality and high investment risk stand the most to gain from BITs.

To the paradox, other studies done by Jeswald Salacuse and Nicholas Sullivan shown BITs have modest impact for FDI promotion. Still others like Jason Yackee study in 2011shows that BITs have no impact for FDI inflows at all.  Recently one study in 2013 found that the content of BITs matters: the FDI impact of BITs is dependent on the presence or absence of certain substantive treaty provisions. For example, the National treatment and capital transfer clauses were found to be important in order for BITs to be effective and in turn attracting FDI.

After all, conclusion of BITs will boost investors’ confidence subsequently developing countries concluding BITs is clearly associated with the belief that they will lead to greater investor confidence by canning any impression of risk associated with the country in the past. The assumption behind BITs is that the framework they create leads to increased flows of foreign investment and legal certainty.

As per the Ethiopian Investment Commission report appeared in March 2016, in the year 2016 alone  Ethiopia has received FDI from China worth 754.6 million dollar, followed by 730.4 million dollar from Saudi Arabia, 381.6 million dollar from Turkey, 288.5 million dollar from India and 97.6 million dollar from France.

Ethiopia remains safe and sound market for investors. China, India, Germany, Italy, Sudan, Turkey, Saudi Arabia, Yemen, United States and Canada are the major sources of FDI. The conclusion of BIT is one push factor in attracting FDI.  As a result, with exception of FDI inflows from Saudi Arabia, United States and Canada, the FDI inflow from countries which have signed BITs with Ethiopia reveals that it is better inflow than non-signatories.

Nevertheless, it is flawed assumption that concluding BITs will generate more FDI since many investors from Saudi Arabia, US, Canada and Gulf States are investing in Ethiopia irrespective of BIT conclusion.

In closing, there is no hard and fast rule to argue BITs attract FDI since it needs interdisciplinary research, mixed methodologies and up to date empirical data. In case of Ethiopian Investment climate, though BIT conclusion enhances FDI inflow it is submitted that mere conclusion of BIT will not generate FDI. Therefore, apparently BITs have bandwagon role in attracting FDI albeit empirically the real implication of BITs for FDI inflows seemingly resembles bizarre.

Ed.’s Note: Yohannes Eneyew Ayalew is a lecturer of Law at the School of Law, Samara University. He is interested in International Law, Human Rights, Investment and Construction Law. The views expressed in this article do not necessarily reflect the views of The Reporter. He can be reached at [email protected].


Contributed by Yohannes Eneyew Ayalew




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