The role of labour regulation in attracting foreign direct investment : the case of export-oriented industries in Ethiopia

Abstract

Attracting export-oriented FDI is considered as a way of economic development by many developing countries since it brings capital, employment, know-how and new export market. The flow of export-oriented FDI depends on the gain from the investment. Before deciding the location of the investment, investors explore factors including the country's economic, trade and labour policy. Related to labour policy, there are different opposing arguments whether labour policy is a factor to decide the location of the investment. The research, however, found out that for various developing countries, flexible labour law is a means to attract export-oriented FDI and to bring rapid economic development. Ethiopia is one of the African countries that has received a high volume of export-oriented FDI. The country plans to become a lower-middle-income country in 2025 using export-oriented manufacturing industries. To attract EOI, Ethiopia has been offering cheap labour, and it has also amended the labour proclamation, which is considered as rigid for industries. This research focuses on the amendments made on the newly approved labour proclamation related to attracting EOI. By researching the amendments made on the new labour proclamation, it becomes clear that after four years revision process the new labour proclamation was recently approved keeping most of the existing labour proclamation provisions except with a slight change and a possibility of the establishment of the minimum wage system. The research, hence, concluded that the amendment made on the labour proclamation without a significant change might adversely affect the government’s effort to attract EOI and to transform the country into a middle-income country.