Beyond resource and socio-cultural factors: does political influence drive regional disparities in foreign manufacturing firm location choices in Ethiopia?

Abstract

Abstract Despite increasing FDI inflows, Ethiopia faces significant regional disparities in the distribution of firms across regions. Understanding the drivers of firm location preferences is crucial to the country’s balanced development. This study examined the extent of regional disparities and the factors influencing the location choices of foreign manufacturing firms in Ethiopia. Primary data were collected from July to October 2024 through a cross-sectional field survey of 187 foreign manufacturing firms. Descriptive statistics revealed significant regional disparities, with 65.78% of firms located in Addis Ababa. The multinomial logit model results indicated that Addis Ababa remained the primary destination for foreign firms, mainly due to its low investment risk, reliable costs, industrial agglomeration, and market potential. The Oromia region, ranked second, attracted firms because of its established infrastructure, better investor rights protection, and political influence. The Amhara region attracted firms that prioritized skilled labor, raw materials, and the optimistic attitude of the local community. Notably, political influence shaped firm entry differently across regions: it facilitated entry in Oromia with supportive political backing, reduced it in Amhara, and had no significant effect in Addis Ababa. Therefore, the findings underscore the need for targeted infrastructure investment and institutional reform to manage political influence and enhance investor security, thereby reducing regional disparities and promoting balanced economic development in Ethiopia.