7.3.5 Foreign Direct Investment
Too many sectors of Ethiopia’s economy are closed to foreign investment. Although international corporations do not normally operate in some of these sectors, the restrictions project a generally negative image to potential foreign investors in Ethiopia. In some of the closed sectors, in particular air transport, travel operations, and financial services, the financial and trading skills of foreign investors would likely be a positive influence on domestic investors and stimulate domestic investment activity. In addition, the Government should review and reduce or eliminate its current minimum investment requirements. Moreover, although the Ethiopia Investment Agency (EIA) has taken many positive steps toward encouraging private investment, it lacks resources in terms of the necessary scale and content of its investment promotion activities; its staffing, equipment, and information resources; and its access to and status with other government departments and agencies. To undertake effective promotional work, the EIA should be strengthened.
National policies on investment are critical for encouraging and facilitating foreign investment and maximizing the benefits from it. Ethiopia’s current regulatory regime, governing both foreign and domestic investment, has undergone significant changes as part of the reform process started in 1992–1993. The investment regime in Ethiopia is based on a series of investment proclamations issued between 1996 and 2003.In combination, these laws specify the economic sectors that are open both to domestic and foreign direct investment (FDI); the financial limits and requirements for FDI; the monitoring and reporting requirements; and the financial incentives that are available.
FDI Admission under Ethiopian Investment Law
Unlike many other transition countries, Ethiopia does not have a separate law for FDI. Rather, its various investment proclamations govern both domestic investment and FDI. There are significant distinctions, however, among the type of investments foreigners and domestic investors may make.
Sectors open to FDI
Foreign investors are permitted to invest in all economic sectors except those reserved for domestic private sector or State investment. The domestic private investor category includes foreign nationals who are permanent residents in Ethiopia and who have requested domestic investor status. Moreover, foreign nationals of Ethiopian origin will be considered as domestic investors pursuant of Proclamation 270/2002, even when they are not permanent residents of Ethiopia, so long as they have an Ethiopian identification card attesting to their Ethiopian origin.
Sectors open only to the State
Sectors exclusively reserved for investment by the State currently include: transmission and supply of electrical energy through the Integrated National Grid System and postal services, with the exception of courier services and air transport services using aircraft with a seating capacity of more than 20 passengers. Manufacturing of weapons and ammunition as well as the provision of telecommunication services are open to foreign and domestic investors only when they invest in a joint venture with the State. Investment in generation of electricity (though not its transmission) from hydropower is allowed for both foreign and domestic investors, without any limitation on generation capacity.
Sectors Open to Domestic Investors
A number of sectors are currently reserved for domestic investors, including wholesale trade and distribution (excluding fuel and the domestic sale of locally produced goods from FDI plants); importing (except material inputs for export production); exports of raw coffee, oil seeds, pulses, hides and skins (if bought from the market), and live sheep, goats, and cattle (if not fattened by the investor). Foreign investors are also excluded from the following services and manufacturing activities: construction companies (excluding grade-one contractors) and building maintenance; tanning hides and skins up to crust level; hotels other than those “star-designated”, motels, tearooms, coffee shops, bars, nightclubs, and restaurants, excluding international and specialized restaurants, tour and travel operators, car-hire, taxis, and commercial road and water transport, grain mills, barber and beauty shops, goldsmiths; non-export tailoring; saw milling and non-export forest products; customs clearance services, museums, and theaters operation, and the printing sector.
Sectors open to Ethiopian nationals
Investment in sectors that the Ethiopian Government considers strategic is reserved to Ethiopian nationals; that is, foreign nationals permanently residing in Ethiopia and foreign nationals of Ethiopian origin, even if they are considered domestic investors, cannot invest in these sectors. The sectors, which are open only to Ethiopian nationals, include banking, insurance, broadcasting, air transport with seating capacity of up to 20 passengers, and forwarding and shipping agency services.
Ownership Limitations and Requirements
Under Article 11 of Proclamation 280/2002, any foreign investor who is allowed to invest pursuant of the proclamation must allocate a minimum amount of investment capital. The proclamation defines “capital” broadly to cover local or foreign currency, negotiable instruments, machinery or equipment, buildings, initial working capital, property rights, patent rights, or other business assets. The Ethiopian Government has relaxed the minimum capital required for foreign investors in its series of Investment Amendments. Pursuant of Proclamation 280/2002, a minimum investment capital is required for wholly-owned operations and joint ventures.
Ethiopia offers a number of incentives to investors. First, they are fully exempted from customs duties and import tariffs on all capital equipment and up to 15% on spare parts and from export taxes. Income tax holidays are given, varying from 1 to 5 years (depending on the sector and region within Ethiopia). In addition, investors can carry forward initial operating losses and are free to use any depreciation method in their financial statement.
Investment guarantees for FDI include full repatriation of capital and profits. The term “capital and profits” encompasses profits, dividends, interest payments on foreign loans, asset sale proceeds, and technology transfer payments. With regard to investment protection, Investment Proclamation 280/2002 provides protection against expropriation or nationalization. It states that no private investment may be nationalized or expropriated except when dictated by public need, and then only in accordance with the law.
In the event of nationalization or expropriation, the constitution guarantees advance payment of adequate compensation corresponding to the prevailing market value of the investment. There has been no instance of expropriation since the assumption of power by the current government in 1991. Because Ethiopia does not distinguish domestic investment from FDI, the country’s incentive system is the same for both. This is a sound, non-discriminatory policy, and it is also the direction pursued by some countries that started with the two-policy strategy. The only possible “discrimination” occurs in the pre-admission of sub sector restrictions discussed earlier in this section.
Post-Admission Restrictions: Performance Requirements
Ethiopian FDI policy does not explicitly require foreign firms to meet specific performance goals or guidelines such as export limitations, foreign exchange restrictions for imports, minimum local content levels in manufactured goods, or employment limits on expatriate staff. In some countries, once a foreign investor is permitted to enter the host state, restrictions can still be imposed on the ownership or operation of the foreign investment. The most common forms of post-admission restrictions are performance requirements, which are used to optimize the impact of FDI. Performance requirements are stipulations, imposed on investors, requiring investors to meet certain specified goals with respect to their operations in the host country. Broadly speaking, Ethiopian investment laws do not have any significant post-admission restrictions.
Screening and Registration
Together with the application for an investment permit, a potential investor must submit supporting documents. The EIA will, upon receipt of the documents, issue a certificate of registration evidencing the formation of a branch of an overseas company. The operation of any business organization in Ethiopia will be governed by the 1960 Commercial Code of Ethiopia, which recognizes the following forms of business organizations: (a) general partnership, (b) limited partnership, (c) share company, and (d) private limited company. The most common of these are private limited and share companies.
Any two individuals may set up a private limited company, but a minimum of five founders is required to establish a share company, which is a public company. An individual investor may also invest as a sole proprietor, with full equity ownership in most areas. Areas open for joint-venture investment with the government are the manufacture of weapons and ammunition and telecommunication services. By reducing the minimum capital requirement, the investment proclamation encourages joint ventures with Ethiopian individuals and companies. Partially or fully foreign-owned companies may sell their shares in accordance with the law. However, there are no stock markets to facilitate the quick disposal of shares.
Acquisition of Immovable Property and Access to Capital
Articles 390–393 of the Ethiopian Civil Code prohibit foreign ownership of immovable property except by “imperial order.” However, Article 38 of Investment Proclamation 280/2002 gives a foreign investor the right to own a dwelling house and other immovable property necessary for his investment. Article 38 of Proclamation 280/2002 can, therefore, be considered an exception to the Civil Code. Legally established foreign companies in Ethiopia have access to domestic bank loans on the same terms as domestic investors. Exporters also have access to external loans and suppliers’ or foreign partners’ credit in keeping with the directives of the National Bank of Ethiopia (NBE). However, foreign investors must have their investment capital, external loans, and suppliers’ or foreign partners’ credits registered with the NBE.
Access to Land
The 1993 Urban Land Proclamation gives investors the use right of land on leasehold for periods of up to 99 years. The land cannot be mortgaged or sold, but the lease value of the land and the fixed assets thereon may be mortgaged or transferred to a third party. State governments and municipal administrations are authorized to allocate rural and urban land free of charge or on lease, in accordance with the provisions of their laws. Investment projects in social services, such as hospitals and educational institutions, may acquire land free of charge, while export-oriented investment schemes may obtain land at reduced lease prices. All other projects may rent land through public auction or through negotiation with the relevant authorities. Regional governments are expected to allocate land to investors within 60 days after receiving their applications.
Article 35 of Investment Proclamation 280/2002 provides that “[when] a regional government receives an application for the allocation of land for an approved investment, it shall deliver within 60 days, the required land to the investor.” However, this does not always occur in practice because there is no sanction if a regional or local government does not meet the 60-day requirement. The lease price of urban and rural land varies according to location, type of investment, and class of land. The high cost of land lease and the lengthy bureaucratic process are considered impediments to investment inflows. This material’s section on Real Property discusses the adverse effects on foreign and domestic investment of the current land laws and procedures and makes a number of recommendations on how they can be addressed.
Exchanging and Remitting Funds
A foreign investor has the right to take the following remittances out of Ethiopia in convertible foreign currency:
• profits and dividends;
• principals and interest payments on external loans;
• payments related to technology agreements;
• proceeds from the sale or liquidation of an enterprise; and
• proceeds from the sale or transfer of shares or partial ownership of an enterprise to a domestic investor.
Although Article 20 of Proclamation 280/2002 guarantees to foreign investors the right to make remittances, domestic investors who do not have the same assurance and remittances are subject to NBE approval. Also the trading rights of foreign investors are limited because import and export trade, except material inputs for export products, is reserved for domestic investors. Ethiopia has signed the World Bank’s convention on the settlement of Investment Disputes and Nationals of other States. A Multilateral Investment Guarantee Agency (MIGA) guarantee program is also operational.
Exit from FDI
The Commercial Code of Ethiopia (1960) provides for the dissolution and winding up of legally established business organizations. The possible reasons for dissolution of the different types of business organization recognized by the Commercial Code are also provided. One legitimate reason for the dissolution of a share company, for example, may be the resolution of an extraordinary general assembly of shareholders. Having resolved to liquidate, the general meeting must appoint liquidators, if provisions are not made for such appointment in the memorandum or articles of association. The liquidators must follow the rules and procedures of the Commercial Code in liquidating the share company.
 The key proclamations, which set forth the law governing investment as amended, are Proclamations 7/1996, 37/1996, 35/1998, 36/1998, 116/1998, 168/1999, 280/2002, and 375/2003. (See Annex A for full titles of proclamations.)
 Proclamation 280/2002, article 2 paragraph 6 defines a foreign investor as “a foreign or enterprise owned by foreign national, having invested foreign capital in Ethiopia, and includes an Ethiopian permanently residing abroad and preferring treatment as a foreign investor.”
Immigration Proclamation 354/2005 and Immigration Regulation 114/2004(Article28) govern the issuance of permanent residence permits.
 See Article 3 of Investment (Amendment) Proclamation, Pro.No.375/2003.
 See Article 5 of Proclamation 280/200
 See Council of Ministers Regulations on Investment incentives and Investment Areas Reserved for Domestic Investors No. 84/2003.