Public Policy and Firm Level Investment Behaviour in Ethiopia

This paper addresses the effect of the bank foreclosure law on the investment behaviour of manufacturing firms in Ethiopia. The main premise of the paper is that this law has negatively affected private firm level investment in the study period. Using the Euler equation investment model, the two stage systems Generalized Method of Moments (GMM) estimation and an eight years survey panel data from the Ethiopian statistical Authority, the paper has tried to show, on average, a negative effect of the law on the investment rate of private firms. In addition all the Euler equation explanatory variables, augmented by variables which suit the context of developing countries, have the expected sign. More over, size and age of firms have also positive and negative effect on investment decision of Ethiopian firms, respectively. Further more, firms which have higher export to sale ratios are also more likely to invest than their non exporting counterparts.