The Determinants Is of Private: Investment (In Case of Debre Berhan Town)

THE DETERMINANTS IS OF PRIVATE
INVESTMENT (IN CASE OF DEBRE BERHAN TOWN)
A SENIOR ESSAY SUBMITTED TO THE DEPARTMENT OF MANAGEMENT,

COLLEGE OF BUSINESS AND ECONOMICS, DEBRE BERHAN UNIVERSITY IN
PARTIAL FULFILLMENT OF THE BACHELOR OF ARTS DEGREE IN
MANAGEMENT
DEBRE BIRHAN UNIVERSITY COLLEGE OF

BUSINESS AND ECONOMICS
Prepared by:
No Name ID No
1. WOROTAW YIDEGE………………208/03
2. H/EYESUS AWLEW ……………….067/03
3. TESFAYE ASMARE ……………….205/03
4. ROBIEL WONDAFRASH………….147/03
5. K/Maryam Teferi…………………….137/03
Advisor: Brihanu Moltot
DEBRE BERHAN UNIVERSITY
ETHIOPIA
DECLARATION
we (researchers), undersigned, declared that this research paper titled” determinates of privates
investment ” is our original work and has not been presented for a first degree in any university,
and that all sources of materials used for the research have been duly acknowledged
Researchers Name Signature
1. Worotaw yidege
2. H/eyesus awlew
3. Tesfaye asmare
4. Robiel wodefrash
5. K/maryam teferi
Advisor’s Name Signature
Examiner’s Name Signature

ACKNOWLEDGEMENT
First and for most, we would like to thanks “GOD” the most gracious and the most merciful,
who make us to conduct this research and make everything possible next we would like to tank
for our senior essay advisor’s Birhanu Moltot and G/kiros.G his whole, hearted and unreserved
comment, evaluation, and advice. And also we appreciate Ato Redit Shemelese for the
collaboration of typing this paper.
Finally it gives us pleasure to take this special opportunity to express our heartfelt gratitude’s to
our family
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TABLE OF CONTENTS
Contents
Acknowledgement........................................................................................................................................i
Table of contents.........................................................................................................................................ii
List of Table...............................................................................................................................................iii
Acronyms...................................................................................................................................................iv
Abstract.......................................................................................................................................................v
CHAPTER ONE..........................................................................................................................................1
INTRODUCTION.......................................................................................................................................1
1.1. Background of the study..............................................................................................................1
1.2. Statement of the problem.............................................................................................................2
1.3. Objective of the study..................................................................................................................3
1.3.1. General objective of the study.................................................................................................3
1.3.2. Specific objective of the study.................................................................................................3
1.4. Research questions.......................................................................................................................3
1.5. Significance of the study..............................................................................................................4
1.6. Limitation of the study.................................................................................................................4
1.7. scope of the study........................................................................................................................4
1.8. Methodology................................................................................................................................4
1.8.1. population, Sample Size and Technique..............................................................................4
1.8.2. source of data.......................................................................................................................5
1.8.3. Method of data collection....................................................................................................5
1.8.4. Method of data analysis.......................................................................................................6
Chapter two.................................................................................................................................................7
Literature review.........................................................................................................................................7
2.1. Theoretical literature....................................................................................................................7
2.1.1. Definition and some argues on the back ground of investment literature.............................7
2.1.2. Factor that should be considered for enhancing private sector investment.........................12
2.1.3. Problems of private investment in Ethiopia.......................................................................13
2.1.4. Kinds of investment...........................................................................................................14
2.2. Empirical literature....................................................................................................................18
ii
2.3. Empirical analysis of investment challenges..............................................................................20
Chapter three.............................................................................................................................................24
Data analysis and Interpretation................................................................................................................24
1.1. DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS..............................................25
1.2. Major questionnaire analysis.....................................................................................................27
1.3. Analysis for information obtained from concerning bodies through key informative interview.
33
Chapter four...............................................................................................................................................35
Conclusion and recommendation...............................................................................................................35
4.1. Conclusion.................................................................................................................................35
4.2. Recommendation.......................................................................................................................36
Reference...................................................................................................................................................37
research Questionnaire.............................................................................................................................40
iii
LIST OF TABLE
.
Table 1 :-Percentage distribution of respondents with respect to sex.........................................................29

Table 2 :- Percentage distribution of respondents with respect to age.......................................................29
Table 3 ;.Percentage distribution of respondents with respect to marital status.........................................29
Table 4 : Percentage distribution of respondents with respect to educational level...................................30
Table 5 :- percentage distribution of respondent with respect to monthly income.....................................31
Table 6 :- percentage distribution of respondents with respect to their own investment project................31
Table 7 : Percentage distribution of respondent’s responsibility................................................................32
Table 8 : Percentage distribution of respondents answer regarding the government emphasis to the
project........................................................................................................................................................32
Table 9 : Percentage distribution of respondents answer regarding personal capital................................33
Table 10 ; Percentage distribution of respondents answer with regarding to financial fund ....................34
Table 11: Percentage distribution of respondents answer with regarding to conducive for environment ..34
Table 12 : Percentage distribution of respondents answer with regarding to factors motivating private
investment.................................................................................................................................................35
Table 13 : Percentage distribution of respondents answer with regarding to project support about society.
................................................................................................................................................................... 35
Table 14 : Percentage distribution of respondent answer with regarding to beneficial for the society.......36
Table 15 : Percentage distribution of respondents answer with regarding to current challenge of investors .
................................................................................................................................................................... 36
Table 16 : Percentage distribution of respondents answer regarding to opportunities for investors ..........37
Table 17 : Percentage distribution of respondents answer with regarding to impact of taxation system for
the project..................................................................................................................................................38
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ACRONYMS
GDP- Gross Domestic Product
R&D- Research and Development
MOFAED- Ministry of Finance and Economic Development
LDC’S- Least Developed Countries
Percentage – Percentage
NPV- Net Present Value
IMF- International Monetary Fund
v
ABSTRACT
This research entitled with the determinants of private investment in Debre Birhan town.
The aim of this study is to identify the determinants of private investment and to assess the
source of the problems to private investment in the town. In this study for the data collection
purpose both primary and secondary data type was used that include questioner, and key
informative interview, the secondary data includes annual report of Debre Birhan investment
office. Accordingly the data has been collected and analyzed based on descriptive method so as
to conclude and recommend based on finding.
As to the finding, the source for the determinants of private investment is both from investors
and government side. The former include financial problem, lack of sufficient know how in the
area they were investing, no interest (intention) to take loan due to high collateral requirement.
While the later include unfair taxation system, lack of strong monitoring and evaluating bodies
and to some extent environment conditions in the town.
vi
CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
According to Ikhide (1994) investment funds can came from two main sources, domestic and
foreign. Where there are constraints on foreign saving, resource has to be made to domestic
sources, this by itself suggests that polices must be formulated to attract domestic saving if a
given level of investment fund is to be under taken in other words the act of saving must be
necessarily precedes that of investment.
Capital accumulation is a sufficient condition for a successful development i.e. if a poor country
is growing faster its economy must encourage private investment and yields form investment
must be higher (shunid t-hebbel and muller,1991). However, in many countries macro economic
adjustment has not improved the response of private investment. Even when substantial progress
has been in correcting imbalances and restoring profitability, the effect on private investment
hasbeen weak and slow to occur beyond and which conventional investment theories can explain
(serven and Andre, 1992).
There is a strong association between growth domestic investment ratios and long term growth
performance. The success of East Asian economies in achieving rapid and sustained grow the
thirty years, 1960s to 1980, has witnessed this. They have been able to maintain rates of GDP
expansion on the order of 7%- 8% a year, supported by rates of growth capital accumulation of
about 30% GDP higher growth and higher investment have thus gone hand in hand (serven and
solomaon, 1993)
Investment is the primary objectives of less developed country, since they have been working to
reduce poverty and stared a new way of development. Many economic policies and theories have
been formulated and implemented the success of these developing countries, many of these
Economic theories and places on economic development take of by accumulating a necessary
capital which also knows as capital formation that enables the nations to facilitate the process of
1
economic growth. Its achievements of economic growth will not be so much different like those
countries which are in vicious circle of poverty (world investment report, 1990)
Generally investment particularly private investment is relevant to economic growth in

developing countries. It has been argued that marginal productivity of private investment is much
higher and thus plays a more important role in the growth process than public investment. The
ratio of private investment to GDP averaged is 2.2, 2.0, 2.0 and 19% the period of 1985, 1986
1987, 1988 and 1989, respectively in Ethiopia this is much lower than the relation public
investment for the periods of 1985, 1986, 1987, 1988, and 1989 which is 14.0, 12.7, 14.6, 15.6,
and 14.4 respectively during the early phase of structural adjustment program (1992-1996), the
relation of private investment in GDP a averaged is 6.0, 9.8, 6.1, 9.1, and 13.1, percent for
period of 1992, 1993, 1994, 1995, and 1996, respectively of GDP which is 4.3, 3.4, 5.0, 9.0, and
7.4, percent for the period of 1992, 1993, 1994, 1995, and 1996, respectively (African
development indicators the world bank, 1991)
1.2. STATEMENT OF THE PROBLEM
Private investment is one of the real variables that are including in the calculation of the
economy. This implies that private investment development measures the performance of an
economy’s growth and development by its contribution of capital formation, employment
creation, technological, innovation market creation etc. on economy which devotes more of its
output on investment and given more focus for private sector investment participation in the
economic development through market liberalization or more of free market operation is more
successful than that of which have unfavorable environment and less expenditure and investment
(Africa development bank, 2000 as cited in nation bank of Ethiopia, 2002- 2003)
Since private investment is the primary sources of economic growth in Ethiopia, the government
alleviating the problem like allocation of land, slow process of privatization program, banks
credit to investors and fulfill infrastructural faculty for the investors
The significance of investment to developing countries lies mainly to improve the living standard
of their citizens by crating employment opportunities, enhance specialization, acquire large scale
of production and technical progress ( Nemal static 1992, 69 as cited by Dawit 2000) according
2
to studies made by Elisabeth Asiedu 2003, a key challenge facing to developing country is to
come up that will keep raise private investment, in order to stimulate and sustain economic
growth with a view to draw such determinates like poor level of human capital lack of access to
finance, policy uncertainty, cost uncertainty, lack of skilled man power in efficient and
ineffective legal system and lack of liberalization
In consistent to this private investment is a key to sustainable economic growth (khan and
Reinhart, 1990:21) and d Devarjan, Eesterly and pack (2001:82)
The aim of this study is to identify the determinants of private investment like slow process of
privatization program, Problem of land allocation, bank credit to the private investment, lack of
infrastructure which is providing by the government like lighting, road, and water as well as
administrative system, and incentive which is provided by the government to investors so as to
motivate them.
1.3. OBJECTIVE OF THE STUDY
1.3.1. GENERAL OBJECTIVE OF THE STUDY
The overall objective the study is to identify and assess the determinants of private investment in
Debre Berhan town.
1.3.2. SPECIFIC OBJECTIVE OF THE STUDY

 To identify the determinates of private investment
 To assess the sources of the problems to private investment in the town
 To assess the current private investment in the town
 To provide the relevant recommendation that could significantly contribute for ensuring
smoothing function of privation investment in the town
1.4. RESEARCH QUESTIONS
 What are the determinants of private investment in the town?

 What are the sources of the problems to private investment in town?
 What looks like the current private investment in town?
3
 What are the relevant recommendation that could significantly contribute for the
determinants of private investment in the case of Debre Berhan town?
1.5. SIGNIFICANCE OF THE STUDY
The study has provided certain significances for investors; to show possible investment
areas, for scholars and researchers who want to use this study as a reference for further
study. It is also used for governmental and nongovernmental organizations to determine
policies related with taxation system and other related policies.
1.6. LIMITATION OF THE STUDY
When the study has taken out, it has faced by limitations like lack of well organized information
to provide answer with interest from sample respondents. If this is so occur, it may not accurately
reflect the opinions of the whole population. The other limitation was time and resource which is
explained as follows. The availability of time to accomplish this study was not so much enough,
since it was limited only for nine months the resource or budget to perform the study was also
not enough, because it has been studied by researchers who have faced by lack of capital.
1.7. SCOPE OF THE STUDY
The study mainly confined the period between 1991 E.C up to now, due to lack of time and
resources, the study would delimited in the area of Debre Berhan town
1.8. METHODOLOGY
Research methodology is the heart of any research proposal. This is because research
methodology has planned to specify the type of research, research procedure, research design,
method of data collection, and method of data analysis. So as to make successful its study, the
necessary methodology of the study has presented under the following subtitles.
1.8.1. POPULATION, SAMPLE SIZE AND TECHNIQUE
4
There are a total of 300 investor’s in the town which are involved in different projects like
construction with 115, industry 40, agriculture 29, education 14 hotels and tourism 96, trade 3,
and health 3.
From those target populations the researchers were taken 80 populations as a sample which is
high form the sample size determination developed by carvacho (1984) as cited by sample
zelalem (2005) in order to increase the accurate representativeness of the sample.
The sampling technique that the researchers were used stratified sampling because of
heterogeneous nature of the investing areas, investor’s sex and income.
Sample size determination table
Population size Low Medium High

51-90 5 13 20
91-150 8 20 32
151-280 13 32 50
281-500 20 50 80
501-1200 30 80 125
1201-3200 50 125 200
3201-10,000 80 200 315
10,001-35,000 125 315 500
35,001-50,000 200 500 800
Source: zelalem challenges of rural water schme, 2005 as cited from carvalho (1984)
1.8.2. SOURCE OF DATA
The researchers were used both primary and secondary data sources.
The primary data Collection method were used to collect information from investors by using
interview and questioners whereas, the secondary data source were used to gather information
from annual report of investment bureau.
5
1.8.3. METHOD OF DATA COLLECTION
The data collection method that the study has used was questionnaire and interview.
Questionnaires were used to collect information from the selected investors (sample respondents)
whereas, key informative interview were used to gather information from the mangers of the
project and from the managers of investment office.
1.8.4. METHOD OF DATA ANALYSIS
The unprocessed data which were gather by using questionnaire and key informative interview
has analyzed by using qualitative method of data analysis which is descriptive in nature and
which has been presented by percentage and table.
ORGANIZATION OF THE STUDY
The study has organized in to four chapters. The first chapter has consisted introduction,
statement of the problem, objective, significance, research question, scope, limitation, and
methodology of the study. The second chapter dealt with related theoretical and empirical literate
review. The third chapter concerned with result, analysis and discussion parts. The last chapter
dealt with conclusion and recommendation parts.
6
CHAPTER TWO
LITERATURE REVIEW
2.1. THEORETICAL LITERATURE
2.1.1. DEFINITION AND SOME ARGUES ON THE BACK GROUND OF INVESTMENT LITERATURE
Investment is musty used to refer the flow spending that adds to physical stock of capital.
Investment spending determines rate at which the economy adds to its stock of physical capital
and thus helps to determine the economy’s long run growth and productivity performance, (Dorn
bush and fisher, 1994)
The term also refers to the expenditure of funds for capital goods such as factories, for
equipment to produce other goods and services (world book encyclopedia, p323)
Sustained economic growth and employment generation is necessary for poverty reduction and
require enhanced private sector investment that result in economic growth, reduction in poverty
and improved quality of life for the majority of the population. Enhancing private sector
investment entails enhanced utilization of labor and other resources of the country though growth
of private business by providing predictive environment (world book, 2000).
The specification of the private investment and saving determinants can be drawn from empirical
literature on investment behavior with appropriate consideration of the structural feather of an
economy. Accordingly, Kahn and rein heart (1990) argued that growth or exports in a number of
developing countries lead to the development of infrastructure and transportation and
communication, which in turn facilitated investment in the production of goods and services.
Furthermore, investment opportunities are opened far removed from the actual export activity to
supply inputs raises and productive facilities are created utilizing inputs and out puts nonexistent
prior to the expansion of exports.
7
Recent works on development theory emphasizes the role of education and research and
development (R&D). Public investment can course crowding out if it utilizes scarce physical and
financial resources that would, otherwise be available to the private sector if it produces
marketable output that compute with private output. (Ministry of finance and economic
development, MOFAED, 2002)
Furthermore, the financing or public sector investment whether through high taxes, issuance of
new debt, or inflation will lower resource available to the private sector and thus depress private
investment activity, such crowding out would work in favor of strategies aimed at cutting back
public sector investment, as they would create a commensurate increase n private investment
(Annual report of MOFAED, 2002)
Yet public investment that is related to the development of infrastructure and the provision of
public goods can also clearly be complimentary to the private sector, public investment of this of
the types can enhance the possibilities for private sector and rise the productivity of capital,
increase the demand for private output and ancillary service and augment over all resource
availability by expanding aggregate output and saving. Consequently it’ can be argued that the
marginal productivity of private capital reflects the rate of public sector investment (Rem, Rati
1985)
Shumidt Hebbelet (1996) also that the alleged affect of financial repression and low real inters
treats are twofold. On one side productive investment is low because, households both decrease
savings and increases luxury durable goods consumption; on the other side, the existing founds
for the productive investment are allocated in efficiently because, the market price rationing is
not at work; firms, not knowing the true shadow price of capital relay on an excessively low,
nonmarket signal.
The opportunity of channeling more founds through the banking sector in order to boost
investment and growth has been challenged by many empirical studies on the ground that the
intersect elasticity of savings in developing countries might be sizeable enough to grant the
efficiency of polices aimed at rising interest rates in order to encourage capital accumulation
(Giovannini, Alberto 1983)
8
In recent decades, African countries have achieved significantly lower private investment levels
than other developing countries. These low levels of domestic investment are attributable, in
part, to the apparent scarcity of domestic saving, weak and shallow financial system, and high
country risk due to unstable macroeconomics and political conditions. The idea that
underdevelopment, is a problem of too little saving in deeply embedded in the history of
development economic. The argument seems that capital accumulation is necessary and
sufficient condition for growth and capital accumulation is almost synonymous with saving; the
root to development is then one of rising saving rations (Deaton, 1990)
According to Dorn Bush and fisher, investment spending is important since it contributes too
much of the movement in the business cycle, when expenditure for goods and services falls
during recession, much is due to drop in the investment speeding therefore, it is important to
assess investment behavior to better understand fluctuations in the economy’s put of goods and
services.
Development theories have long regarded the accumulation of physical capital as an engine for
growth. Certainly, the notation that raising the investment rate is key to increase long run growth
has been at the heart of growth thinking since the time of David Ricardo. (Bank of Botswana
1997)
As citied in Todaro 1994 Rostow in his “stage theory” argued that the mystery of economic
growth and development is simply a matter of increasing national savings and investment. He
puts five stages of development that every country should pass. In this sense LDS are in the
second phase, which is the pre condition to take off in this stage, countries require three things,
of which a minimum social over head capital is the one.
Thus sufficient amount of saving is required to finance investment, especially in infrastructures

education health electricity, etc. he raised at this stage is important stage that LDCs, have to
devote themselves in coordinating resource both from local and foreign resources, they need
assistance from developed world as did “ marshal plan”.
Keynes in his “General theory” introduced the idea of an independent investment function in the
economy. He argued that investment depends on the prospective marginal efficiency of capital
relative to some interest rates, reflecting the opportunity cost of investment.
9
He also pointed out that, investment decisions are made on uncertain basis. Thus, he argued
private investment is intrinsically volatile since any rational assessment of the return of
investment was bound to be highly uncertain. Hence, he said, investment decisions are very
much affected by how optimistic or pessimistic the investors feel. This he described as the
“animal spirit” which implies there may be no good basic for the expectations on which investors
base their decisions, with out of investment could well change along with the expectations.
Various models have been used to explain the investment behavior, mostly based on the
experience of the developed countries. Following Keynes investment theory developed around
growth models born to “accelerator theory” according to the theory investment is a linear
proportion of because it disregards the role of profitability importance of expectations and the
cost of capital as determinants of Kuttisian (macro Economics theory and policy).
(workie matiku 1997) private investment response among the low income (sub Saharan African)
countries in addition to macroeconomic stability is surely also constrained by long term factors a
worker human capital base, inadequate and often deteriorating infrastructure less diversified
economies and poorly functioning institutions and factors market. Pefefferman and madarassy
(1993) studied the determinants of private investment in to positive and discouraging factors
growth of domestic demand and availability of fiancé i.e. Increase of credit of private sector are
found to be positive factors for private investment. Whereas the fiscal deficit external
indebtedness, volatility of inflation and exchange rates re found to be discouraging factors. The
study has also classified factors such as public investment and the real interest rate is uncertain
factors, I.e. their effects can be determined.
Tobin’s Q theory (2996), postulates that the main force driving investment is the Q ration or the
ration of the market value of the existing capital stock to its replacement value. That is to say the
entrepreneurs well want to invest (divest) if the increase in the market value of an additional
unity exceeds (fall short of ) the replacement cost. However, the marginal Q is not easily
measured and thus what is used in steady is the ration of the market value of the entire existing
capital stock to its replacement cost, i.e. the average Q ration. But there are problems associated
with use of average Q. according to Abel 91980) and Hayasha 91982), if firms enjoy economies
of scale or market power or if they cannot sell all they want, marginal Q will certainly differ.
Industrial Economics hand out)
10
Tobin’s Q theories of investment are not applicable in LDCS because of the restrictive
assumptions on which they are based e.g. perfect capital market, perfect how of information and
little or no government investment. Typically, these countries do not have equity markets and
have for a long time suffered financial repression, debt overhang and a dominate role of imported
capital goods and macro economic instability (Agenor and Montie) (1996)
Though these factors act as a barrier to private investment they are often not incorporated in
traditional models of private investment e.g. private investment in LDCS face enormous
financial and physical resources constraint e.g credit and infrastructure, which are normally not
considered in the traditional models (agenor and monteil 1996)
Research has made on departure from the traditional net present value (NPV) rule, which says
that one should invest when the purchase and installation cost equals the expected return. This is
because it ignores the irreversibility and the option of delaying an investment the hew theory
emphasizes that the anticipated return on the new investment project, must exceeds the purchase
and installation cost by an amount equal to the value of keeping the investment option value a
live [Schmidt serven and solimano 1996]. A study (survey) in Ghana shows the importance of
the elements a 1990 survey of 31 large form and 82 micro- and small enterprises in Ghana shows
that the main constraints to investment responses at the micro cruel has been the lack of both
working capital and credit to fiancé expansion. [addis zemen gazetha, sep 20 2001]
Another factors identified as important for current production and investment is the availability
of raw materials, though this may be related to the lack of working capital insufficient internet
demand, associated with import liberalization, was also considered as an important constraint by
both large and small firms. Medium and large scale firms responds that the regularity of
environment had become more supportive of business and was a significant factor in boosting
private investment (Mankiw, 4th edition).
According to Dixit and pindyck (1994), most investment decision has three important
characteristics
First they are irreversible in that the initial cost of investment at least partially as sunk cost and
cannot be retrieved. Secondly, there is uncertainty over the future records form the investment
hence the best an investor can do is to assess the probabilities of the alternative out comes that
11
can mean greater or smaller profit (loss) for his venture. Thirdly, the investor have some leeway
about the timing of the investment hence he can postpone the investment to get more information
about the future. These three characteristics interact to determine the optimal decisions of
investors. The argument then is that, real world investment seems much less sensitive to factors
such as interest rate and policy changes but move sensitive to the volatility and uncertainty or the
economic environment. The uncertainty may be on future profit fluctuation in production price
input cost exchange rate, text and regulatory policies (Dixit and prindyck, 1994)
2.1.2. FACTOR THAT SHOULD BE CONSIDERED FOR ENHANCING PRIVATE SECTOR

INVESTMENT
2.1.2.1. GOOD INVESTMENT CLIMATE:
The expansion of private investment requires peace and macroeconomic stability. The former is
the key factor for investment attraction and sustained economic development. Investors need free
and fair condition to be pursuing productive capacity. They also need to have conditions where
contracts and property rights are level. While the latter can be achieved though adopting sound
policies that help to lower inflation, lower interest rates and realistic exchange rate and
privatization. (Annual report of MOFAED, 2002)
2.1.2.2. INVESTMENT FINANCE:
The availability of financial management, transparency, efficiency and equitability of access is

the key factors enhancing private sector development. Efficient management or investment
finance concerns both the financial institutions and private sectors operators who use resource
for business development. Beside on transparency and objective evaluation is and essential
element for all players in financial sectors will function of financial intermediaries in the absence
of security market is critical. So as to improve information and skill about credit, collateral
evaluation and cash flow analysis is important (MOFAED, 2002)
2.1.2.3. ADEQUATE INFRASTRUCTURE SERVICE
12
The provision of good quality infrastructure service particularly telecommunication electricity,
water and logistics is essential for the efficient operation of private sector. It also helps to
integrate in to the global market that helps to increase competitiveness of investors. (Ibid)
2.1.2.4. INSTITUTIONS THAT RUN AND SUPPORT PRIVATE SECTOR;
in a country where the private sector development is at its infancy it is essential to establish
public sector institutions that give research and development (R&D) so as to get ride of the
perceived handicaps of the sector. (Ibid)
2.1.2.5. ACCESS TO LAND
Land is an important input for investors so as to implement their project. Since it is fixed asset
and it is not possible to increase its supply, government should adopt sound policy such as
establishing land lease policy and establishing industrial zone that help to improve land provision
process to inventors. (Ibid)
2.1.3. PROBLEMS OF PRIVATE INVESTMENT IN ETHIOPIA
2.1.3.1. LOW LEVEL OF SAVING
The specification of the private investment and saving determinants can be drawn from empirical
literature on investment behavior with appropriate consideration of the structural feature of an
economy. Economic investment necessitates a corresponding level of saving mobilization either
domestic or external. However, in Ethiopia context, the level of domestic saving is necessary for
the level of investments is very low. Hence, owning to the reform program, the private sector
activity in industry, trade and transport have improved considerably. All of which owing to the
removal of major distortions and re orientation in the incentive structure of the economy in favor
of tradable goods and private sector. Hover, the simultaneous under taking of measures to
remove structural and other rigidities that continue to inhibits quick private sector response to
saving and investment (Gulilat, 1994)
13
In the case of Ethiopia, like any other country, determinant of private investment include both
economic and non-economic factors. Domestic credit constraints that are peroxide by credit
availability, problem of infrastructure implied by the low public investment expenditure,
entrepreneurial capacity of the society in the situation of risk and problem of land acquisition,
both establishment of new firms and market place, are some of the economic factors where as
problems caused by administrative bottlenecks and government policies that could not create
confidence among the public mainly because of the experience of bad policies in the past are
non- economic factors. (Adugna. 1996)
2.1.3.2. INACCESSIBILITY TO CREDIT
The main source of found for investment is lands from financial institutions. But the
development of his institutions is not well and adequately available in the country on the other
hand relatively high collateral requirement suppress the incentive of private sectors. In addition
these institutional usually provide shorter loan rather than long term development loan…
(MOFAEd 2002)
2.1.3.3. LAKE OF INFRASTRUCTURAL FACILITIES

The existing development of infrastructural facility in Ethiopia to sustain now economic
activates is not adequate. The availability of road electricity water and telecommunication is not
sufficient. Investors have difficulties to acquire power water and telecommunication service to
operate investment activates. Besides the bureaucratic nature to obtain this service is frustrating
and tremendous (annual report of MOFAED 2002)
2.1.3.4. LACK OF INSTITUTION PROVIDING SUPPORT AND ADVISORY SERVICES.
Absence of institution that provide information about market trends production technology
marketing techniques price of imputes and new investment opportunities makes information to
be scattered and not to be readily available (Ibid).
14
2.1.3.5. ABSENCE OF EFFECTIVE DEMAND
Because of low living condition in the country and low income of the society the demand for
new technology and modern product is low which kill the intention of investors to invest in some
new business area (Ibid)
2.1.4. KINDS OF INVESTMENT
There are two main kinds of investments:
2.1.4.1. DIRECT INVESTMENT

Direct investments involve investing in a business or real state. Indirect investment involves
putting money is saving accounts or buying stocks or bonds. (World book. 2001)
Before making may investment people should learn as much as possible about how the money
they are investing will be used people should also assess what the expected retune will be from
an investment. Because Avery investment entails risk or possibility of loss one should carefully
examine the expected retune in relation to the risk involved. Some investments promise high
returns but offer little safety. Others promise Lowe returns but provide almost complete safety. A
person should also consider whether an investment can be liquidated (easily converted in to cash)
if an unexpected expense arises. (Ibid)
People should consider much type of investments such as stocks and bonds only if they are
willing to incur the risk of losses. They should also have enough secure savings to protect
themselves against any temporary loss of income resulting from illness or unemployment. (Ibid)
 Dividend:- is a payment made by a company to its stock holders

 Face value:-of a bond is the amount that the company or government agrees to repay at a
future data.
 Income:- is the payment received for goods or services
 Interest:- is money paid by a borrower to lender for the use of money
 Market price: - of a stock is the price per share at which the stock may be purchased or
sold at a particular time.
 Par value: - is the original value of a stock or bond this amount is printed on the security.
15
 Premium: - of a bond is the difference by which the market price exceeds the face value
of the bond.
 Share: - is one of the parte in to which owner ship of a corporation is divided.
 Stock exchange: - is palace where stocks and bonds are bought or sold for investors.
9world book 2001)
 Direct investments: - examples of direct investment are business investment and real
estate investment. (Ibid0
 Business investment: - buying a small business may be required to work hard to earn an
acceptable return. For this reason the investor must be sure to choose the right business
before making a commitment. If a person buys or opens a restaurant for example he/ she
may need to work long hours to operate it profitably (Ibid)
 Real estate: - people invest in real estate when that buys homes land or rental properties
real estate may increase in value over time and thus be sold for a profit real estate may
also produce in come directly in the form of rent or indirectly in the form of crops
minerals or timber. (Ibid)
Real estate may produce a higher rate of return than many other kinds of investments. Real estate
is an especial goods investment during periods of inflation when property values tend to rise
along with other prices. But real estate prices can fall sharply during time so recession or
depression. (Ibid)
Investing in real estate has some majored draw backs. It typically requires a large payment at the
beginning of the investment period. For most individuals the cost of a home is several times the
buyer’s yearly income many families borrow large portion of the purchase price of a home from
a bank. Most business owner’s finance purchases of stores and other commercial property though
a bank pension fund or insurance company (Ibid)
Another drawback to real-estate investment is that reselling property may take a considerable
amount of time. In other worked such investments are low in liquidity that is the easy with which
an investment can be turned in to cash without loss. (Ibid)
2.1.4.2. INDIRECT INVESTMENTS
16
Involve fund that flow through financial institution in such forms as savings accounts and stocks
and bonds. Though, these types of investment banks and other financial institutions channel
saving in to loans of or direct investment. (Ibid)
Saving accounts: - are common kinds of investments funds deposited in saving account at a bank
credit union or savings institution cairn interest at specified annual rate. (Ibid)
Most banks offer money market accounts certificates of deposited and other special saving plans.
Money market accounts pay other special saving plan. Money market accounts pay a rate of
interest that reflects conditions in the money market where short term government and corporate
securities are traded. Funds deposited in a certificate of deposited cannot be withdrawn without
penalty for a specified period, such as one or two years. Bothe types of accounts typically pay a
higher rate of interest than regular savings accounts (Ibid)
Most banks and saving institutions are privately owned and operated for a profit. (Credit union,
in contrast, is not for profit cooperative organizations operated for the benefits of member. All
net earnings learning’s minus expenses) are passed on to member in the form of lower loan costs
or higher returns on deposits. (Ibid)
Some types of savings accounts yield lower rates of interest than so other types of investment.
Never the less they attract investors with a low income or little investment experience because
they involve minimal risk. In the united states the risk is low because such accounts in almost all
banks and other depository intuition are federally insured up to 10000 (Ibid)
Bonds include government securities and corporate bond government’s securities are issued by
federal state and local government. These investments pay interest at specified rate over a certain
period. (Ibid)
The quantity of investment goods demanded depends on the interest rate which measures the cost
of the funds used to finance investment. For an investment project to e profitable its return (the
revenue from increased future production of goods and services) must exceed its cost (the
payments for borrowed funds) if the interest rate raises fewer investments projects are profitable
and the quantity of investment goods demanded falls.
17
When studying the role of interest rates in the economy economist distinguishes between the
nominal interest rate and the real interest rate. This distinction in relevant when the over rill level
of prices is changing. (Ibid)
The nominal interest rate is the interest rate as usually reported. It is the rate of interest that
investors pay to borrow many. The real interest rate is the nominal interest rate adjusted for the
defects rate is the nominal interest rate adjusted for the effects rate is the nominal interest rate is
8% and the inflation ate is 3% then the real interest rate is 5% that is the difference between the
nominal interest rate and that of the inflation rate (8-35%)
When the above discussion is summarized with an equation relating investment (1) to the real
interest rate (1) investment is the function or real interest rate. It is inversely related to the real
interest rate: i.e.
I-I®
Figure q below shows this investment function.
Its slope is down ward because as the interest rate raises the quantity of investment demanded
falls.
 Investment function:- relates the quantity

of investment (I) to the real interest rate ®
investment because the interest rate is the cost
of borrowing. The investment function slope
is down ward when the interest raises fewer
investment projects are profitable and vice
Investment function
versa. (mankiw)
Quantity of investment
2.2. EMPIRICAL LITERATURE
18
Empirical studies on determinants’ of investment have been made both in developed and less
developed countries in the last two decades some of the empirical studies are reviewed below. A
study by Fry (1980) on 61 developing countries for the petioles 1961-1979 incites a sign cant
relationship between the growth rate of GDP and private investment. This is because according
to Fry as GDP increase income also increase and causes the domestic market to rise. As the
emphasis the decline in GDP decrease market demand and this low level of market demanded is
the major constraint for private investment in developing countries (Fry M.j. 1993)
The study by oshikoya (1994) macroeconomic determinants of investment in Africa using seven
countries as sample for the period 1970-1988 showed that increase in real output has a positives
impact on investment in low income earner countries. Real exchange rate of countries has been
found to have significant positive impact on investment in middle income countries. On the other
hand the impact of real exchange rate is negative and insignificant in low income countries.
However the impact of inflation (which is domestic) in middle income countries are positive. On
the development report argues that countries that have keep inflation law and that have allowed
sufficient credit to flow have been more likely to have high level of investment as ashore of GDP
and countries with positive real flow of credit such as Colombia Indonesia Korea and Thailand
have stable level of investment has tended to decline in countries however the flow of credit was
negative (world development report 1995). Real currency depreciation has an ambiguous effect
on investment. It reduces investment by increasing the cost of imparted intermediate inputs and
capital goods by reducing the quantity of credit in real terms as price following the supply of
foreign exchange which can be used to pay for additional imports of capital goods (Ibid). real
devaluation might in practice reduce investment in short run respected to lower investment likely
to rise as the result of sustained improvement in the profitability of export.
Empirical evidence made in Korea and India shows that there is relationship between private
investment and public investment. There was a positive relationship between private and public
investment both in short run and long run. In India the positive relationship between them was
very weak due to the fact that the crowding out effect of government investment that is
government finance public investment by raising tax rates which heavily affect private
investment.
19
Similarly for chili and Malaysia, Mexico, Greece and Korea, Taiwan and Hong Kong (1992)
govern was fond to be the most important explanatory factor for private investment in Greece,
Korea and Malaysia for them bank credit become the most important one (world development
report 1999)
Asian in chili and Indonesia investment falls in short term in response to target a real devaluation
but recovered in the medium te,,,,,,,,,,rm with the expansion of trade goods. Recovery book about
five years in chili and there years in Indonesia (World Investment Report, 1990)
When come to our case, private investment in the town has increased dramatically both in
number of projects and number of investors form year to year. To support by evidence this fact
there were only 18 projects in 1998 but there were increased to 67 126186276 and 300 projects
(private investment sector) in the year 1000 2000 2001 2002 and 2005 E.c respectively. This
indicates that private investment in the town rapidly increased due to all almost public
investment changed in to private sector and also the government more emphasis private sectors
activity. The significance of heisted will show possible solutions for the stakes holders like
policy makers who want to engaging private investment activity which is known as inventors
further researcher who want investigated here and related topic.
2.3. EMPIRICAL ANALYSIS OF INVESTMENT CHALLENGES
A number of empirical studies on private investment in developing countries have been done and
these can help to identify factors that influence private investors in their investment decisions
most of these studies have combined the fetus of flexible accelerator neo classical and structural
models in an effort to emphasis the resource constraints faced by the private investors in the
developing countries.
Ghura (1997) and baddies (1999) have conducted an empirical study on the growth performance
of two African countries Cameron and (Zambia and obtained the same result. The private
investment in both cases is more pro-growth than the public investment. Thus biddies obtained a
one percent increase (1%) in private investment raises output growth by 1.36 % while 1.4% for
Cameron. An increase by 1% of public investment resulting 1% increase in output in Gambia
while slightly lower 0.755 in the case of Cameron. Furthermore the coefficient of the growth rate
20
of the labor force is far too high for Cameron than Gambia i.e. since the growth in the output
leads to demand wore market and labor farce therefore capital accumulation in the form of either
private or public investment is an engine of growth since it increases the economy’s productive
capacity (reddies 1999)
Sundarajan and thakur (1980 examined critically the relationship between public and private
investment in developing countries by postulating a dynamic model of savings investment and
growth by testing and simulating if for India investment and growth by tasting and simulating if
for India and Korea. They found that and initial increase in fixed investment by public sector
rises public sector out put the private sector actual and expected output and aggregate domestic
savings. If there are a negative effect owing to a net reduction in the availability of reedit to the
private sector (crowding out put) that more than offset the positive effects of increase in private
sector output and expectations. Private fixed investment falls otherwise, private investment rises.
Therefore investment by the government stimulates and complements private investment rises.
Therefore investment by the government stimulated and complements private investment. The
empirical result also indicates that the direct effect of interest rate in India had a significant and
positive effect one savings where there direct effects were relatively we at in kored. Temitope W.
oshikoy (1994) investigated the determinants of the private investment in selected African
countries.
He regressed private investment on real GDP, public sector investment change in credit to the
private sector, ratio of external debt service payment, change interims of trade, real exchange
rate, domestic inflation, uncertainty and in notability etc. he found that increase in real GDP have
positive impact on private investment. He found real exchange rate to have a positive and
significant impact in the middle income countries like Mauritius, morocco, and Tunisia, while
having negative small land insignificant impact in low in come
Countries like Kenya, Malawi and Tanzania. Inflation rates were found to have a strong and
unambiguous negative impact particularly in the low income countries. Credit availability had
strong effects where as debt service ration had strong negative effects on the private investment.
The IMF working paper (1994) analyzed the determinants of private investment in the Caribbean
region. The paper tested the effects of government expenditure on education, exchanges in real
21
GDP. Ration of external debt and changes in real domestic interest rates on private investment.
The results showed a positive and significant relationship between both public education
spending and growth of real GDP private investment. Areal interest rates and the amount of
external debt were not significant determinants of private investment.
In Ethiopia sied Nuru (2000), found that traditional factors, capital and labor agony don’t explain
the relations in developing countries and he incorporate export and rainfall (non-traditional
actors). He found that out of labor, human capital, physical capital, export and availability of
rainfall, which are assumed to be the determinants of growth in Ethiopia. Capital had little
contribution to the long term growth or it is found to be statistically in significant. He found that
in the short run, only supply shocks in agricultural sector and export earning among the factors
considered in the middle, seen to be the major determinants if fluctuations in output.
Worke (197) found that private investment is determined by the availability of finance, real
exchange rate, investment policy debt service, payments and the debt overhang, a real interest
rate, growth of per capital GDP, public investment and changes in terms of trade did not affect
private investment. He further carried out a survey on a number of firms in region 14 and tigray
and the data collected sowed that the bureaucratic procedures, lack of infrastructure (particularly
poor) and access to finance are the leading constraint to entry, operation and expansion of private
investment in Ethiopia. Political or policy uncertainty and labor regulation were not considered
as important investment constraints in Ethiopia
This study differ from the above study woke 1997) sited: firs it extends the work of workie, by
the period of analysis of additional four years (1998-20010 for secondary data and up to may
2003 for primary data) when some amendment on investment proclamation has been implanted
second, it tries to reflect the impact of tax administration, political or policy un certainty, and
labor regulation (42/1993) that was considered as less constraint in wokies’ study. In general, the
paper intends to shed some light on the effects of the infancies factors on finance, regulations,
uncertainties etc in private investment behavior
The Ethiopian investment agency and regional investment offices licensed some operational
investment projects approved during the review fiscal year of 2007-2008 (2000E.c) to great
22
592,1888 permanent and 1,148,119 causal jobs, (table 1 of the following shows this in a good
ways.
Table 1:- number, capital and expected job opportunities of approved projects:- (capital in
millions of Birr)
2005/06 2005/06 2005/06 Percentage Change

Total Number 5839 6472 8961 52.94 38.46
Investment Capital 80036.01 93579.01 170378.5 112.88 82.07
Permanent job 211112 302598 582188 180.51 95.70
Cause/jobs 3397532 461341 1148119 237.95 148.87
Private Number 5853 6472 8956 53.05 38.41
investment Capital 61821.2 93579.01 170116.9 175.18 81.79
Permanent job 211071 302598 592117 180.53 95.68
Cause/jobs 334682 461341 1148084 243.04 148.86
Domestic Number 5100 5322 7307 43.27 37.30
investment Capital 41841.14 46630.06 7786816 86.10 66.99
Permanent job 256063 330899 646209 152.36 95.24
Cause/jobs 140347 200595 263785 8754 31.21
Foreign Number 753 1150 1654 119.26 43.57
investment Capital 19980.06 46948.95 92248.78 361.7 96.49
Permanent job 707224 102006 328912 365.06 222.44
Cause/jobs 78619. 130352 501875 538.36 285.02
Public Number 6 - 3 50.00 -
investment Capital 18215.08 - 261.56 98.56 -
Permanent job 41 - 71 73.17 -
Cause/jobs 5050 - 35 99.31 -
Annual report of national bank of Ethiopia. 2007 (2008 Ethiopia investment agency)
23
Office)
CHAPTER THREE
DATA ANALYSIS AND INTERPRETATION
This section presents some of the key finding of the study concerning to the determinants of
private investment.
The study has covered several issues relating to the determinants of private investment. As
elaborated attempted was made within individual capabilities to identify the determinate factors
through primary and secondary data studies.
While the first part of the study attempted to identify the determinate of private investment in
Debre Birhan town by an extensive review of the existing literature. The second part
incorporated more important issue to identify the determinant of private investment like: slow
process of privatization program, problem of land association, bank credit to the private
investors, lack of infrastructure which is providing by the government like water, electricity,
road, administrative system and incentives which is provided by the government to investor so as
to motivate the investors to invest in Debre-Birhan town.
The data pertaining to this issue were collected by using questionnaire and key informative
interview. The questionnaire and key informative interview delivered to investors and managers
respectively.
Even though 80 questionnaires has been distributed to private investors who has engaged in
seven different projects, only 73 questionnaires has collected. This shows that about 91.25% of
the questionnaires which were distributed have given appropriate answer by respondents and
return to the researchers. The remaining 8.75% questions have not returned to the study due to
various reasons which is raised by the respondents.
24
1.1. DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS
Table 1 :-Percentage distribution of respondents with respect to sex.
No Category Basis Respondents

Number Percentage
1 Sex
-male 60 82.19%
-female 13 82.19%
17.80%
17.80%
Total 73 100%
Source; Collected questionnaire 2005
As it shown the above table, 60(82.19%) of the respondents were males where as the remaining
13(17.80%) of the respondents were females. From this analysis, it is possible to infer that
males are dominant in investment area.
Table 2 :- Percentage distribution of respondents with respect to age.
Respondents
No Category basis Number Percentage
2 Age
-Below 20 5 6.84%
-20 -25 15 20.54%
-26-30 18 24.65%
-Above 31 35 47.94%
73 100%
Source: - Collected questionnaire 2005

25
As it is clearly shown in the above table, the majority of private investors 35(47.94%) were
belongs to the age group of above 31 years whereas, 18 (24.65%) were belongs to the age
bracket between 26 and 30, and 15 (20.54%) belongs to the age group between 20 and 25, but
the remaining 5 (6.84%) found in below the age of 20 years .So it is possible to infer that even if
the private investors were categorized under all age groups the minority of private investors were
bellow 20 years.
Table 3 ;.Percentage distribution of respondents with respect to marital status.
Category basis Respondent
No
3 Marital status Number Percentage
-marriage 27 36.98%
-un marriage 22 30.13%
-windowed 11 15.06%
-divorced 13 17.80%
Total 73 100%
As it is clearly shown in the above table the majority of respondents 27(36.98%) were marriage.
This implies that those individuals who has engaged in private investment activity have managed
their ways of life successfully by establishing family, Where as 22(30.13%) un marriage , even
though 13(17.80%) were divorced ,but The remaining 11(15.06%) were windowed so, it is
possible to infer that the minority of respondents engaged in private investment areas .
Table 4 : Percentage distribution of respondents with respect to educational level
No Category basis Respondents

4 Education level Number Percentage
-illiterate 4 5.47
-grade 1-8 11 15.06
-grade 9-12 14 19.17
-Graduate in collage 14 19.17
-graduate in university 20 27.39
-educated 10 13.69
Total 73 100%
Source; Collected questionnaires 2005
26
As it is clearly shown in the above table, the majority 20(27.39%) of them has found in the
category of university graduate, Where as the remaining were as follows 19.17%, 15.06%,
13.69% and 5.47% in grade 9-12 graduate collage, grade 1-8. educated, and illiterate
respectively. Therefore it is possible to say that the majority of private investors were enough
literate and a few number of investors were illiterate. This implies that so as to involve and to
be successful in investment activity it is advisable to be educated.
Table 5 :- percentage distribution of respondent with respect to monthly income.
No Category basis Respondents

Number Percentage
5 Monthly income
Below 1000 3 4.10%
1000-2000 8 10.95%
2000-3000 20 27.39%
3000-4000 14 19.17%
4000-5000 16 21.91%
Above 5000 12 16.43%
Total 73 100%
As it is clearly shown in the above table, the majority (27.39%) of investors monthly income
were found in between 2000 and 3000 whereas, the monthly income between 4000 and 5000
were 21.91% of those investors. But the monthly income below 1000 were only 4.10%. Here it is
possible to say that individuals who have involved in private investment have got a moderate
monthly income.
1.2. MAJOR QUESTIONNAIRE ANALYSIS

Table 6 :- percentage distribution of respondents with respect to their own investment project.
No Raised questions Respondents
Number Percentage
Which one is your investment project
Education 4 5.47%
Agriculture 7 9.58%
Health 1 1.36%
27
Trade 1 1.36%
Hotel and tourism 24 32.87%
Construction 27 36.98%
Industry 9 12.32%
Total 73 100%
As it is clearly shown in the above table, from the total respondents of the project, construction
were contains 36.98%. The remaining 32.87% 12.32%, 9.58%, 5.47%, 1.36% and 1.36% in
hotel and tourism industry, agriculture, inductions, trade and health respectively. This shows that
construction was taken high percentage because of expansions of urbanization in the town.
Table 7 : Percentage distribution of respondent’s responsibility
No Raised equations Respondents

Number Personage
What is your responsibility in the project
Project manger 10 13.7%
Only owner of the project 9 12.32%
Act as an employee in the project 52 71.23%
Advisor for the project manager 2 2.78%
Other responsibility 0 0%
Total 73 100%
Source; collected questionnaire 2005
From this analysis the researchers infer that most respondent who have filled and return the
questioner were employees of the project who covers about 71.23% of the total respondents.
The remaining 13.7%, 12.32% and 2.73% were engaged in the project as a project manager, only
owner of the project and advisor for the project manger respectively. There are no other
responsibilities from sample respondents.
Percentage distribution of respondents answer regarding the government emphasis

Table 8 :
to the project.

Number Personage
Which investing areas have given more emphasis by government?
Education 12 16.45%
Health 8 10.95%
Hotel and tourism 9 12.32%
Agriculture 21 28.76%
Construction 6 8.22%
Trade 7 9.59%
28
Industry 10 13.7%
Total 73 100%
Source, collected questionnaire 2005
As it is clearly described in the above table there were projects which have given more emphasis
by government. This evidence show that government has given special emphasis to agriculture
projects which contain 28.76% and followed by education, industry, hotel and tourism, health,
trade and construction which contains 16.43% 13.7%, 12.32%, 10.95%, 9.59% and 8.22%
respectively. From this analysis it is possible to infer that government has given a special
attention or emphasis to agricultural investors, because of government policies and strategies
focus on agricultural lead -industrialization. The implication of this analysis is that the special
attention of government is not equal for all projects, so government emphasis is considered as the
determinants of private investment. As the findings on literature review infer that varieties of
infrastructures provided by government are vital for the development of private investment, but
here government has given special attention for some projects than the other. So as to sustain the
development of private investment, the researchers infer that the government has to provide
emphasis and infrastructure for all projects fairy.
Table 9 : Percentage distribution of respondents answer regarding personal capital.

Number Personage
Before starting the project do you have your personal
capital?
Yes 59 80.82%
No 14 19.18%
Total 73 100%
Source ;collected questionnaire 2005
As it is clearly shown from above table, the researchers known that the majority of investors 59
(80.82%) of them had their own personal capital.
The remaining 14(19.18%) of those investors have gained from other sources which will be
presented in the following questions. Therefore the study concludes that the majority of investors
29
have fulfilled their own capital to begin their project. The implication of this analysis is that there
were collateral requirements to gain loan from government and other financial institutions.
Table 10 ; Percentage distribution of respondents answer with regarding to financial fund .

Number Personage
If your answer is “No” in question No 4 where did you get
finical fund to be began your project?
From government 0 0%
From your family 7 50%
From bank 5 35.71%
From other financial institution 2 14.28%
All 0 0%
Total 14 100%
As it can be indicated from the above table, those respondents who responded no were start the
project by their own personal capital have gained financial fund from different sources. Among
the respondents 14 (19.18%) of investors who gain financial fund from their family (50%), from
bank (35.71%) and from other financial institutions (14.28%). The implication of this analysis is
that financial fund and loan which is gained from government and other institutions is low when
compared to that of loan gained from their family.
Table 11:
Percentage distribution of respondents answer with regarding to conducive for
environment .

Number Personage
Is the environment conducive for investment?
Yes 40 54.79%
No 33 45.20%
Total 73 100%
As it is clearly shown the above table most respondents stated that the major motivational factor
that lead to engaged in private investment in Debre Birhan town is that the existence of
conducive environmental for their project. Therefore it is possible infer that the weather
condition and other environmental situations were suitable for the majority of investors
40(54.79%) of them, But the remaining 33(45.20%) there is no conducive for environment to
30
investors because there is no enough to much industry center for exchange products and services
, and long process of land provision to start investment activity after getting land .
Table 12 :
Percentage distribution of respondents answer with regarding to factors
motivating private investment.

Number Personage
Which factor motivates private investment here in Debre
Birhan town?
Easily access to land allocation 12 16.43%
Financial incentive by government 8 10.95%
Society attitude 15 20.54%
Infrastructure 13 17.80%
All factors 25 34.24%
Total 73 100%
 As it is clearly shown in the above table, the major motivational factor that leads to
become in private investment were their easily access to land allocation (16.43%)
financial incentive by government (10.95%), society attitude (20.54%), infrastructure
(17.80%) and all of them factors (34.24%).The implication of this analysis is that almost
all factors which have been listed above were responsible for investing in Debire berhan
Town.
Table 13 :
Percentage distribution of respondents answer with regarding to project support
about society.

Number Personage
Is your project is supported by the society?
Yes 60 82.19%
No 13 17.80%
Total 73 100%
Source ;Collected questionnaire 2005
The above table shows that most respondents 60 (82.19%) of respondent were encouraged by the
society. The remaining 13 (17.80%) have no positive attitude to the project because the society
were considered the investors as they stand only for the sake of profit rather than customer
31
satisfaction. It is possible to infer that 60 (82.19%) of respondents supported the project
because, to accommodate raw material availability, to advice the project ideally or financially, to
create a good customer relation with regarding to their services or products, to lend finance and,
to display promotional task for the project
Table 14 : Percentage distribution of respondent answer with regarding to beneficial for the
society.

Number Personage
Is your project is beneficial for the society?
Yes 65 89%
No 8 11%
Total 73 100%
As it is clearly shown the above table the majority of respondents were said the project will
benefit the nearby society in the way that by creating job opportunity, by acting as supplier for
availability of market, act as supplier for product and service at the right time and price and other
similar opportunities. Whereas 8(11%) of the respondents were responded the project will not
provide benefit the nearby society, because there is no use or utilize full capacity.
Table 15 : Percentage distribution of respondents answer with regarding to current challenge

of investors .

Number Personage
Which of the following problem has challenged the current
status of the investors?
Related with infrastructure 10 13.7%
Government support 12 16.43%
Finance 11 15.06%
Licenses problem 8 10.95%
System of administrative 13 17.80%
All 19 26.03%
Total 73 100%
32
It is clearly shown that most private investors currently have faced with different challenges.
From those investor’s problem 13(17.8%) of system of administrative, 12(16.43%) of
government support, 11(15.06%) lack of finance, 10(13.7%) of related with infrastructure,
8(10.95%) percent of license problem, and all of them combine factors were more challenged for
investors to run the project, means that from the total respondents (73), 19 (26.03%) of them
have faced with all problems.
Table 16 :
Percentage distribution of respondents answer regarding to opportunities for
investors .

Number Personage
Which opportunities attract private investment in Deber
Birhan town?
Suitable for environment 14 19.17%
Is nearest to Addis Ababa 12 16.43%
Raw material availability 15 20.54%
Enough to much land allocation 10 13.69%
All 22 30.13%
Total 73 100%
As it can be shown, according to opportunity attract private investment in Debere Birhan town,
the major opportunities that lead to penetrate in investment areas were their suitable for
environment 14(19.17%), nearest to Addis Ababa 12(16.43%), raw material availability
15(20.54%), enough to much land allocation 10 (13.69%), and all of combined factors 22
(30.13%).So ,the implication of this analysis is that raw material availability the leading once
opportunities .
Table 17 :
Percentage distribution of respondents answer with regarding to impact of
taxation system for the project.

Number Percentage
Does the tax system have direct impact on your project?
Yes 52 71.23%
No 21 28.77%
Total 73 100%
33
As it is clearly stated in the above table, taxation has influenced majority of respondents
(71.23%) of the investor’s project. This shows that, there is unfair taxation system in the town.
The remaining (28.77%) of the investors said that there is fair taxation system in the town. Since
there is the presence of unfair taxation system, investors were discouraged to invest.
1.3. ANALYSIS FOR INFORMATION OBTAINED FROM CONCERNING

BODIES THROUGH KEY INFORMATIVE INTERVIEW.
Since the questions were prepared through key informative interview, no need for presenting
those questions. For the study purpose interview has been conducted to head of concerning
body primarily from Debre Birhan investment office. The overall sum of their response was
summarized below. Since the establishment of the office which was in1996; the office has
played a great deep roles in Making to create the investment environment favorable for investors
accordingly this gives investment license after evaluating project proposal of investors;
monitoring investment activities and taking measures on investors who do not respect rules and
regulations; in addition to this the office gives some professional advice to investors about
profitable investment area. Continue this role of the office; the investment condition for the last
year up to now has Shown Increasing trends that there were only 18 projects in 1998;but there
were increased to 67;126;186;276 and 300 projects( private investment sectors) in the year
1999;2000 2001;2002; and 2005 E.C respectively. This indicates that private investment in the
town rapidly increased due to all most public investment changed in to private sector and also the
government More emphasis to private sectors activity even though continue this trend; some
problems faced the Investors toward private investment like; lack of finance on investment; lake
of proper know how in the area they are investing; long process of land provision to start
investment activity after getting land.
The region has greater potential for expansion of investment activities. This is fact but they were
not using their resource properly. But based on some observed facts; there are historical places
and near to afar region. It is profitable for investors; if they engaged in hotel and tourism and
34
health. In addition, the existence of high water supply; communication service, electricity and
banking are greater opportunities for investors to select the best environment area. but regarding
infrastructure such as transportation (road) the town has deep rooted problem that will be
expected to be solved with in short period of time in the near future.
CHAPTER FOUR
CONCLUSION AND RECOMMENDATION

4.1. CONCLUSION
On the basis of major findings of the study; the following conclusions were drawn by the
researchers. Different authors in the area of private investment argue that; private investment is
relevant to Economic growth in developing countries. However; there are different factors which
affect the private investment activities such factor are both in the government side and in the
investors Side. That means even if private investors has involved in deferent investment
activities such as agriculture; construction, health, trade, education, industry and hotel and
tourism, It is not smooth due to different factors. Those factors were come from both on
government Side and on private investor’s side. Lake of finance was found to be one of the
challenges for the investment activities from Private Investor’s side. Some private investors did
not have an intention to solve this problem by asking and taking loan from banks and other
financial institutions; due to the existence of high collateral requirement. The other factor which
has serious influence on the efficiency of the activity is that, some Investors have invested their
capital in the project where they did not have proper know how. The taxation system has also
direct influence on investment activity. Even if the country has followed progressive tax
collection system, tax collectors could not know the situation of market and profitability of each
individual investor. From the government side, there is also absence of strong coordinating;
monitoring and evaluating organ which made private investors to be reluctant about their activity
is one major factor for investment activity. Due to fragmented nature of land and non-
35
applicability of lease policy, there is shortage of Land bureaucratic nature to get it. Generally
even if the town is suitable for investment it is challenged by lack of government Support, lack
of finance, lake of infrastructure, difficulty of administration system, license and other related
problems. Therefore one can conclude that the town is suitable for investment, but due to the
existence of problems which come from both government and investor’s source, the investment
activity is not smooth. In addition to those conclusions, there could be infer that almost all
projects were identified providing various opportunities to the society in the way that by creating
job opportunity, by act as supplier of raw material at the right time and price as well as by
providing other direct and indirect benefits for the society. Due to the existence of historical
places near to the town and the nearness of the town to Afar region, investors could be profitable
if they engage in hotel and truism
4.2. RECOMMENDATION
On the basis of major findings of the study, the researchers would to forward the following
recommendations. Since finance is skeleton for any investment activities, it is essential that
lending institutions including bank should make desirable rearrangements on their process, such
as reducing their collateral requirement and charged interest rate on borrowers. So as to score
efficiency among investors, it is better that consistent professional advice should be providing to
those investors with the settled regular time interval. Since unfair tax is an obstacle for the
efficiency of investors, the government have to spread out fair taxation system by considering
and identifying the income and profitability of those investors. So as to solve the shortage of
land in the town, the government should practice with the Implementation of lease policy.
Generally the integration between investors, government ,society and other concerning bodies,
that support, monitoring and evaluate investment activities should be strengthen as to encourage
investment activities.
36
;
REFERENCE
 Debre Birhan investment office report (2012)

 Deation Angus (1990) “saving in developing countries: theory and evidence”
proceedings of the world Bank annual conference on development Economics, 1980
 Dorn bush and fisher, (1994) macro economic theory and policy, New Delhi.
 Elisabeth Asiedu, (2003), foreign direct investment to Africa: the role of government
policy, governance and political instability, university of kansa
 Fry M.J (2993), foreign direct investment in macroeconomic, framework finace
efficiency. Incentives and distortion, the world bank. Domestic private investment in
Africa an empirical analysis
 Giovannin, Alberto, (1983) “the interest elasticity of saving in developing countries: the
existing evidence” world development, vol. 11, 7, PP, 01-07
 Gulilat Kebede, (1994), the new investment law: Basic features and limitation with
reference to the industrial sector”, in Mokenon Teddese and Abdul Hamid Bedri
Kello(Eds),
 Ikhidek, S.I.(1994), “Eternal shocks, savings investment, and credit availability: the
evidence from Nigeria. “African journal of economic policy, vol.1, No 2:45, December.
 Khans, mohasin and Carmen M. Reinhart, (1990), “private investment and economic
growth in developing countries, world development. Vol 1.18, No 1, pp: 19-27
 Mankiw, macroeconomics, 4th edition. PP, 197 and 463
 Ministry of finance and economic development (MOFAED), 2002 “sustainable
development and poverty reduction program”, page: 108-112
37
 Nemal shatic, (1992), “reviving private investment in developing countries empirical
studes and policy lessons, “north Holland, Amsterdam
 Oshikoya J, (1994), macro economics determinant of private investment.
 Rem, rati, (1985), “ Export and economic growth: some additional evidence”, economic
development and cultural change, vol, 33, No 1, PP 415-425, January.
 Serven and solimano, (1993) “saving and investment: paradigm, puzzle, and policies.
The world bank observer, vol 11,1, PP 87-117. February.
 Shumidit Hebbel, -Klaus, servenluis, and solimano Andress (1996), “saving and
investment: paradigm, puzzle, and policies”. The world ban observer, Vol 11, 1, PP 87-
117. February
 Serven. L and andress solimano (1992),private investment and macro-economic
adjustment: a survey, the world bank research observer.
 Shumidt-Hebbel and Tobin’s muller, (1991) private investment and macro ecomic
adjustment in morocco,” World Bank woking paper.
 World Bank, (1994), Adjustment of Africa
 World investment report (1999)
 Workie mitikue. (1994), “determinant and constraints of private investment in
Ethiopia”, master thesis thesis (Addis Ababa university)
38
39
Debre Birhan University
College of Business and Economics
Department of Management
RESEARCH QUESTIONNAIRE
Dear respondents:
The purpose of this questionnaire is to collect accurate and relevant data and information about the
determinants of private investment in Debre Berhan Town.
The study will conduct for academic purpose only, so you are requested to attempt all the questions and
give your own best answer freely.
Part I
Demographic questions
Dear Employee
Instruction: Fill in the blank space based on your own personal detail and put “x” in the involved box.
1. Sex Male  Female 

2. Age 18-25  31-45 
26-30  46-60 
3. Educational level (Academic qualifications)
Certificate  Degree 
Diploma  Master 
40
4. Marital status
Married  divorced 
Single  widowed 
5. Educational level
Illiterate  Elementary  Degree 

College  High school 
6. Monthly income
Less than 1000  1000-2000  2000-3000 
3000-4000  4000-5000  above 5000 
Direction: Choose the best answer and put “x” mark in the box provided.
Part II
General information
1. Which one is your investment project?

Education  Hotel and tourism 
Health  Construction 
Trade  Industry 
Agriculture 
2. What is your responsibility in the project?
Project manager  Project adviser 

Project owner  Other responsibility 
Employee in the project 
3. Which investing areas have given more emphasis by government?
Education  Hotel and tourism 

Health  Construction 
Trade  Industry 
Agriculture 
4. Before starting the project do you have your personal capital?
41
Yes  No 
5. If your answer is No in question number 4 where did you get financial fund to begin your
project?
From government  From other financial institutions 
From family  All 
From bank 
6. Which one is the factor for motivating private investment in Debre Berhan Town?
Easy access to land allocation  Society attitude  All 
Government financial incentive  Infrastructure 
7. Is your project supported by the society?
Yes  No 
8. In question number 1, if your answer is yes, what kind of support given by the society? Specify it.
__________________________________________
9. Is your project beneficial for the society?
Yes  No 
10. In question no 11 if your answer is yes, what benefit given for the society. Please specify it
__________________________________________
11. Which problem has face the current status of the investors? While investing which problem did
you face?
Related with infrastructure  All 

Government support  Others 
Finance 
License problem 
System of administrative 
12. Which opportunities attract private investment in Debre Berhan Town?
Suitable for environment 

Nearest to Addis Ababa 
Raw Material Availability 
Enough land allocation 
All 
13. Is the tax system has a direct impact on your project?
42
Yes  No 
14. In question no 13 if your answer is yes what is the impact? Please specify
__________________________________________
15. How your point of view show process of privatization program affected?
__________________________________________
16. What is the source of your project problem?
__________________________________________
17. What are the solutions of your project problems?
__________________________________________
43

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THE DETERMINANTS IS OF PRIVATE

INVESTMENT (IN CASE OF DEBRE BERHAN TOWN)

A SENIOR ESSAY SUBMITTED TO THE DEPARTMENT OF MANAGEMENT,

DEBRE BIRHAN UNIVERSITY COLLEGE OF

Advisor: Brihanu Moltot

DEBRE BERHAN UNIVERSITY

Researchers Name Signature

Advisor’s Name Signature

Examiner’s Name Signature

Table 1 :-Percentage distribution of respondents with respect to sex.........................................................29

GDP- Gross Domestic Product

R&D- Research and Development

MOFAED- Ministry of Finance and Economic Development

LDC’S- Least Developed Countries

NPV- Net Present Value

IMF- International Monetary Fund

Generally investment particularly private investment is relevant to economic growth in

1.2. STATEMENT OF THE PROBLEM

1.3. OBJECTIVE OF THE STUDY

1.3.1. GENERAL OBJECTIVE OF THE STUDY

1.3.2. SPECIFIC OBJECTIVE OF THE STUDY

1.4. RESEARCH QUESTIONS

 What are the determinants of private investment in the town?

1.5. SIGNIFICANCE OF THE STUDY

1.6. LIMITATION OF THE STUDY

1.7. SCOPE OF THE STUDY

1.8.1. POPULATION, SAMPLE SIZE AND TECHNIQUE

Sample size determination table

Population size Low Medium High

1.8.2. SOURCE OF DATA

1.8.4. METHOD OF DATA ANALYSIS

ORGANIZATION OF THE STUDY

2.1. THEORETICAL LITERATURE

Thus sufficient amount of saving is required to finance investment, especially in infrastructures

2.1.2. FACTOR THAT SHOULD BE CONSIDERED FOR ENHANCING PRIVATE SECTOR

2.1.2.1. GOOD INVESTMENT CLIMATE:

2.1.2.2. INVESTMENT FINANCE:

The availability of financial management, transparency, efficiency and equitability of access is

2.1.2.3. ADEQUATE INFRASTRUCTURE SERVICE

2.1.2.4. INSTITUTIONS THAT RUN AND SUPPORT PRIVATE SECTOR;

2.1.2.5. ACCESS TO LAND

2.1.3. PROBLEMS OF PRIVATE INVESTMENT IN ETHIOPIA

2.1.3.1. LOW LEVEL OF SAVING

2.1.3.2. INACCESSIBILITY TO CREDIT

2.1.3.3. LAKE OF INFRASTRUCTURAL FACILITIES

2.1.3.4. LACK OF INSTITUTION PROVIDING SUPPORT AND ADVISORY SERVICES.

2.1.4. KINDS OF INVESTMENT

There are two main kinds of investments:

2.1.4.1. DIRECT INVESTMENT

 Dividend:- is a payment made by a company to its stock holders

2.1.4.2. INDIRECT INVESTMENTS

Figure q below shows this investment function.

 Investment function:- relates the quantity

2.2. EMPIRICAL LITERATURE

2.3. EMPIRICAL ANALYSIS OF INVESTMENT CHALLENGES

2005/06 2005/06 2005/06 Percentage Change

DATA ANALYSIS AND INTERPRETATION

No Category Basis Respondents