Why foreign agricultural investment fails? Five lessons from Ethiopia

Abstract

In the past two decades, foreign direct investment (FDI) in emerging economies has witnessed substantial growth in the agricultural sector. Globally, more than a quarter of these investments have failed. Beyond case studies, the factors that contribute to these failures have been subject to limited research. To address this research gap, this article draws on a unique data set of 106 investments in Ethiopia, from which failures were identified and detailed case studies analysed to identify the causes of failure. Drawing on the literature on institutional voids, our analysis shows that the high rates of failure in the agricultural sector are often caused by insufficient planning at the proposal stage, assumptions about the availability of expertise, socio-political and environmental risks, insufficient financing and/or a changing investment landscape and underestimation and/or misunderstanding regarding the limits of extractive approaches. These lessons suggest that while FDI in the agricultural sector has potential, the working approaches require significant transformation. We offer a set of strategic recommendations to mitigate the risk of investment failure in agricultural investment.