SALALE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
THE DETERMINANTES OF INVESTMENT IN MANUFACTURING
INDUSTRIES IN ETHIOPIA

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ECONOMICS
Prepared by: ID.No
1. MAMUSH DAMTE----------------------------------------EU 0210/12
2. DEREJE MISGANU---------------------------------------EU 0001/13
3. MELESE MENGISTU------------------------------------EU 0211/12
4. TIGIST MISGANU----------------------------------------EU 0232/12
5. SHAMBEL FETENA--------------------------------------EU 0223/12
6. TADESE TAYE---------------------------------------------EU 0225/12

ADVISOR: HAILE GIRMA

FICHE, ETHIOPIA
FEBRUARY, 2015

Table of Contents
Contents page
Table of Contents......................................................................................................................i
Acronyms................................................................................................................................iii
CHAPTER ONE..........................................................................................................................1
1.INTRODUCTION....................................................................................................................1
1.1 Background of the study................................................................................................1
 1.2 Statement of the problem..............................................................................................3
1.3. Research Question........................................................................................................5
1.4 objective of the study....................................................................................................5
1.4.1 General objective.....................................................................................................5
1.4.2 Specific objectives...................................................................................................5
1.5. Significance of the Study...............................................................................................5
1.6 Scope of the study..........................................................................................................6
1.7 limitation of the study....................................................................................................6
1.8 Organization of the Study..............................................................................................6
CHAPTER TWO.........................................................................................................................7
2. LITERATURE REVIEW............................................................................................................7
INTRODUCTION....................................................................................................................7
2.1 Theoretical Review.........................................................................................................7
2.1.1 Basic Concept and Definitions.................................................................................7
2.1.2 An Overview of Investment theory.........................................................................7
2.1.3 Determinants of Industrial growth..........................................................................9
2.1.4 The Determinants of Investment in manufacturing sector...................................10
CHAPTER THREE.....................................................................................................................12
3. RESEARCH METHODOLOGY...............................................................................................12
3.1. Description of the study area......................................................................................12
3.2. Sources and Type of Data............................................................................................12
3.3. Method of Data Collection..........................................................................................12
3.4 Method of Data Analysis..............................................................................................13
3.4.1 Descriptive Method of Analysis.............................................................................13
3.4.2 Econometric model................................................................................................13
3.4.3. Description of variables and expected signs........................................................15
CHAPTER FOUR......................................................................................................................16
4. BUDGETING.......................................................................................................................16
4.1. Budget Setting.............................................................................................................16
4.2 Work Plan.....................................................................................................................17
4.2.1 Time Schedule.......................................................................................................17
REFERENCES...........................................................................................................................18

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3
Acronyms
ADF………………………….Augmented dickey fuller
CSA…………………………..Central statistical agency
CPI……………………………Consumer Price Index
ECM………………………….Error correction model
EIA……………………………Ethiopian investment agency
FDRE…………………………Federal Democratic Republic of Ethiopia
FDI……………………………foreign direct investment
FIF……………………………Variance Inflation Factor
GDP………………...............Goss Domestic Product
GTP…………………………Growth and Transformation Plan
IMS………………………….Investment in the manufacturing sector
MOFEC……………………Ministry of finance and economic cooperation
MOFED…………………..Ministry of Finance and Economic Development
OLS…………………………Ordinary Least Square

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 CHAPTER ONE
1. INTRODUCTION

1.1 Background of the study

Generally in all over the world the term manufacturing refers to the production of finished
and semi-finished goods for the purpose of use or resale by using labor and machines, tools,
chemical and biological processing, or formulation .The term also refer to a range of human
activity, from handicraft to the practical application of science to commerce or industry.
Manufacturing sector is the physical or chemical transformation of materials or components
into new products, whether the work is performed by power-driven machines or by hand,
whether it is done in a factory or in the worker’s home, and whether the products are sold at
wholesale or retail. The assembly of the component parts of manufactured products is also
considered a manufacturing activity (ISIC, 2007/08).
Ever since the industrial revolution moved of 19 thcentury Europe in to modernity the
significance of manufacturing as vital engine for sustainable growth has been a questioned.
It does not only feed and satisfy domestic demand for products, it also diversity economies,
capture mass employment and earn export driven income. In many LDCs countries, their
socio political and economic characterized by low productivity, low income per capita,
inadequate finance, weak technological progress, and lack of skilled man power results
poor performance of their investment level.Immediately after independence African
countries implemented comprehensive stat directed industrialization policies, establishing
high tariff and subsidizing firms. Because of this manufacturing share of total GDP rose
from 6.3% in 1970 to 15.3 in 1990 for Africa. (African union official publication, 2012)
Even though the manufacturing sector have a strong correlation with the other stalk holders
of the economy and undeniable vivid circumstance by ensuring faster and enhanced
development it began to in Ethiopia during the time of imperial regime in 1950s.but it
starts much earlier than many of the Sub-Saharan African countries. Early l970s, the
governmental adopted industrialization policy included a range of fiscal incentives, direct

1
government investment and equity participation in private enterprises. This government's
policy attracted considerable foreign investment to the industrial sector. For instance, in
1971/72 the share of foreign capital in manufacturing industries amounted to 41% of the
total paid-up capital and many foreign enterprises operated as private limited companies,
usually as a branch or subsidiary of multinational corporations. (Ethiopian industrial
development strategic plan 2013-2025)
The derg come to power with a new ideology, socialism, which emphasizes on a strong
public sector and a weak private sector in 1974.to this effect a decree was enacted in 1974,
which nationalized almost all of medium and large scale industries that were owned by the
private sector. In addition to this the manufacturing industries of the country was
characterized by the revolution included a predominance of foreign ownership and foreign
managerial, professional, and technical staffing; heavy emphasis on light industries; inward
orientation and relatively high tariffs; capital-intensiveness; underutilized capacity; minimal
linkage among the different sectors; and excessive geographical concentration of industries
in Addis Ababa. The economic dislocation that followed the 1974 revolution had a
significant impact on the manufacturing industries. Private sector capital investment ceased
and labor's marginal productivity began to decline. A period of decline from l974/75 to
l977/78 and an average annual growth rate of l8.9 % for l978/79 and l979/80 was followed
by a reduction of about 3.1 % per annum between l980/81 and l984/85 and 3.8% per annum
from 1985/86 to 1988/89( Ethiopian Industrial Development Strategic Plan 2013-2025).
After the fall of the Derg regime in 1991 the new transitional government of Ethiopian
claimed for increased participation of private investment to give new life to socio economic
condition of the country. The economic system has been transformed from command to
market based system through decentralized planning, privatization of public enterprise,
promoting investors and the introduction of market based planning. The economy policy
which adopted and implemented under Structural Adjustment programs(SAP)during the
transitional period and thus followed by Agricultural development–Led Industrialization
(ADLI), in which enhanced agricultural growth and expanding agricultural surpluses
provide the necessary savings for financing structural transformation and rapid

2
industrialization. The industry sector in general and the manufacturing sector in particular
where given due national importance following the formulation of the national industry
policy in 2002 by the FDRE. (Ethiopian investment climate assessment report, 2004)
The central focus of industrial development strategy in Ethiopia is the development of
micro and small scale enterprise. As a result in 2015/16upda comprehensive development
strategy was devised and approved by government in consolation with all relevant
actors .extension services and support were accorded to small business to create productive
jobs in the industrial sector during the fiscal year. In 2010/11, around 542000 jobs were
created of which 53% were accounted for women (MOFED, 2010/11)

The plan has a target of an average growth rate of 20 percent per annum of an industrial
output over the five – year plan period and increase the static share of the industrial sector
in the GDP from 15.1 percent in 2015 to 22.3 percent in 2020.In particular, the
manufacturing sector is expected to grow annually at a rate of 21.9 percent over the five
year period (Ethiopian national planning commission, May, 2016)

1.2 Statement of the problem

Investing in manufacturing sector is very essential over the other sector of the economy in
many world countries because of the manufacturing sector capability to provide important
material support for national economy, huge potential for employment creation, to create
wealthy economy, and to help developing nations to alleviate their balance of payments
problems by generating more foreign currency as compared to the other sector. In addition
if industrial development is directed to use local raw materials, it can create strong linkages
among the different sectors of the domestic economy. Zinabu(2006) as well as to indicate
the effect of growth in manufacturing on sustainable economic development. But many
LDCs lack this opportunity because of low level income, capital deficiency, technological
backwardness and lack of skilled manpower to exploit their resource and many socio
economic and political related problems including Ethiopia.

3
The Ethiopian economy is dominated by the agriculture, services and industry sectors.
during the last five years (2010/11_2014/15) with respective annual average value added
growth rate of 6.6% agriculture ,10.8 % service and 20.2% industry. The manufacturing
accounts for about 14.6% during the same period.
The share of agriculture, service and industry in GDP averaged 41.5%, 45.6% and12.9, in
2014/15, respectively. Generally the share of the manufacturing subsector was remained
below 5%. This showed that the contribution of Ethiopian manufacturing sector to the
economy is still at low level (Growth and Transformation Plan II, 2015/16_2019/20)
The stagnation of manufacturing sector could be attributed to less than optimal investment
levels in manufacturing sector. The reason for this will be credited to Ethiopian business
environment being suitable for investments in the service sector. Both the government and
the private sector invest in the service sector. The reason for low concentration of
investment in manufacturing can be attributed to lack of access to finance due to bank
policy. In addition investors are happy to engage in making easy money which contradicts
with manufacturing sector which has high risk. Manufacturing sector is also susceptible to
fluctuations in prices and exchange rates which make it less attractive to prospective
investors (Berihu Assefa, 2010).
Therefore, the studies on the determinant of investment in manufacturing industries of
Ethiopia, comparative analysis of the effect of investment in manufacturing variables
among small, medium and large sized industries are scant. In their analysis small scale
firms are not included while the Ethiopian manufacturing is mainly covered by cottage and
handicraft industries most of which considered as small scale firms and they also focus
mainly on the determinants of firm size rather than to identify variables which affect the
investment in manufacturing industries in Ethiopia. As far as my review this paper is the
first attempt to analyze firms with greater than 10 employees and will help the existing gap.
So the main determinants of investment in the manufacturing sector in Ethiopia are tried to
be explained with relevant and update data.
Research gap while the investment in the manufacturing sector is important in economic
transformation from agriculture to industrial in LDC. However little has been done

4
regarding the determinants of investment in the manufacturing sector in study area. So this
study of plan to fill this research gap by studying determinants of investment in the
manufacturing sector in Ethiopia.

1.3. Research Question

In order of the achievement of the above research objectives, the following question will be
answered.
1. Why investment in manufacturing g industry is very low in Ethiopia as compared to
other developing countries?
2. Why investment in manufacturing industry is important for economic development?
3. How can investment in manufacturing industry aid economic development?
4. What are the determinants of investment in manufacturing sector?

1.4 objective of the study

1.4.1 General objective

The grand objective of the study is to examine the determinants of investment in
manufacturing industries in Ethiopia

1.4.2 Specific objectives

The specific objectives of this research are:

1. To investigate the status of investment in manufacturing industries in Ethiopia

2. To assess the challenges that investors in manufacturing industries of the country
encounter
3. To identify factors/determinants the affect investment in manufacturing industry
Final

1.5. Significance of the Study

It is not new for all that investment in manufacturing industries would provide an important
role for economic growth which further leads to development. In addition to this the need of
this study is to give current and relevant information about the determinants of Investment

5
in manufacturing industries in the country. The paper will attempt to address the factors that
determine in manufacturing sector relative to other sectors. Thus, the paper hope that the
result will help to formulate policies that facilitate the investment in the manufacturing
industries, attracts investors from domestic and foreign.

1.6 Scope of the study

The study will focus on the determinants of investment in the manufacturing industries in
Ethiopia by using the determinate variable of investments manufacturing Real interest rate,
inflation rate, the real GDP, Real Effective Exchange Rate, drought and identifying factors
that affect investment directly or indirectly in the manufacturing industries in the period
from 1991/2-2016/17 by using secondary data.

1.7 limitation of the study

When the researcher conducts, this study faced several challenges, like lack of internet
access, financial problems, and the shortage of data collection. This study also had the
limitation of lack of organized and full information about the determinants of investment in
manufacturing industries in Ethiopia and lack of experience for the study of research. It
would also be unable to get sufficient and reliable data from the respondent, the lack of
awareness of the respondents. In case of this, most of respondents the true information likes
wages, income or other gives false information.

1.8 Organization of the Study

The paper will be organized into four chapters; the first chapter will include the
introduction, statement of the problem, objective of the study, significance of the study and
scope of the study. The second chapter will contain review literature which includes
theoretical and empirical literature studies .The third chapter will include research
methodology, method of data analysis, budgeting and work planning studies.

6
 CHAPTER TWO
2. LITERATURE REVIEW

INTRODUCTION

this chapter will be include literature review, basic concept and definition, an over view of
different investment theory, role of manufacturing sector in economic growth, determinant
of investment manufacturing sector and determinants of industrial growth and empirical
literature review like determinants of investment in the manufacturing sector in developing
country, determinants of manufacturing sector in Africa and determinants of manufacturing
sector in Ethiopia, will be included in the chapter two.

2.1 Theoretical Review

2.1.1 Basic Concept and Definitions

An investment can be defined generally as spending for the production and accumulation of
capital and addition to inventories. In economics, investment is the value of all goods
produced during a period for use in the production of other goods and services. So all the
things that go in to the production process of consumer goods, such as the manufacturing
equipment at a product factory or buildings that house business along with the equipment
that businesses use to supply goods and services to consumers (Jon Nash ,2015)

2.1.2 An Overview of Investment theory

A. Keynesian Theory of Investment
As Keynes stated in his book, entitled as “the general theory of employment, interest and
money, 1963” (as cited in encyclopedia of economics, 1982) he was the first to call
attention to the existence of independence on the prospective marginal efficiency of capital
which is the expected yield from new investment and some interest rate reflecting the
opportunity cost of investment funds. He suggested that investment could be raise either by

7
increasing the marginal efficiency of capital or by reducing the rate of interest. In addition
to the above variables, he introduce expectation of future demand for firms output, violating
of investment, uncertainty and other non-economic variables such as political environment
as possible determinant of investment. These factors determine investment decision because
rational assessment of them is impossible.
Keynesian analysis is the observation that although savings and investment must be
identical ex-post, different decision makers in general, take savings and investment
decisions and there is no reason why ex-ante savings should equal ex-ante investment.
B. The Neoclassical Theory
Jorgenson (1971) and others have formulated the neoclassical approach, which is a version
of the flexible accelerator model. In this approach, the desired or optimal capital stock is
proportional to output and the user cost of capital (which in turn depends on the price of
capital goods, the real rate of interest, the rate of depreciation and the tax structure).
C. The Harrod Domar Model
Theory of investment after Keynes was linked to simple growth model based on Harrod
Domar growth model (a model used as economic analysis to project some macro variables)
and he accelerate the theory of saving and investment. These models are used to determine
the rate of saving and hence investment required to achieve a given target of economic
growth rate with a given technology. In these theories, investment is simply made to
ascertain proportion of changes of output. These models therefore sail to have much
relevant for developing countries because they do not have cost of capital and profitability
of investment decisions (Mankiw, 2007).
D. Structural Change Models
Structural change theory focuses on the mechanism by which underdeveloped economies
transform their domestic economic structures from a heavy emphasis on traditional
subsistence agriculture to a more modern, more urbanized, and more industrially diverse
manufacturing and service economy. It employs the tools of neoclassical price and resource
allocation theory and modern econometrics to describe how this transformation process
takes place. This section will discuss some of the renowned structural change models which

8
can be helpful in understanding how a country transforms itself from agrarian into
industrialized nation.

2.1.3 Determinants of Industrial growth

The central core of economic growth of any nation is influenced by the growth rate of the
industrial sector specially manufacturing industries. The major components of this activity
involve labor productivity, capital formation, improvements in technology and the market
environment (UNIDO, 1996). (As cited by Hannibal Birhane)
Labor productivity: Labor productivity in economic growth refers to how much output
per hour, week and so on, results from labor-input. Labor productivity depends upon a
number of factors including the population size (quantity) and degree of education and
skills (quality) of labor supply, the capital stock other resources; each laborer has to work
with and the technology available for production.
Capital formation: The promise to invest capital on some activity. It is the initial stage of
accumulation of money either through savings domestically or borrowing from financial
institution. Capital formation is one of the integration of growth in size and quality of
capital stock and the quantity of fixed assets consisting of building, machineries, inventories
and equipment use in production. Labor productivity is enhanced when capital stock
available to labor growth faster than the labor supply. This capital is said to be deepening
capital. (Urgaia, 2007)
Improvements in technology: Technological growth and invention, improvements in
methods by which goods and services are produced and sold is another key to economic
growth. The contemporary high living standard of the developed world is unthinkable
without the invention of items such as steam engine, assembly line production and etc.
globalization has enabled the developed countries to access new idea and technological
which improve living standard, but many African countries still have not exploited it
because of structural barriers and other factors such as poor education and infrastructure.
Technology and invention have been responsible for nothing less than the modern world.
(Olu Ajakiaiye and John Page,2012)
The market environment: Most economists believe that the market environment

9
surrounding the growth in natural resources, labor productivity, capital formation and so
on, are a large contributing factors to economic growth. A competitive market system may
encourage invention and rapid innovation. All private and public restraints on competition,
including excessive or unnecessary regulation or tariffs or quotas on goods exchanged in an
international and trade, will trend to reduce the rate of growth in real per capital GNP.
(Urgaia Rissa Worku,2007)
Industrial Policy: Industrial policy concerns with the effective and coherent
implementation of all policies, which enhance the structural adjustment of industry to
promote competitiveness. Then after, the infant industries (like Ethiopian manufacturing
case) can develop and prosper by remedying the structural deficiencies and addressing areas
where the market mechanism alone fails to correct. Though industrialization in Ethiopia
was initiated three -quarters of a century ago, manufacturing sector is still in an incipient
stage characterized by unbalanced and distorted internal and external structural linkage,
backward technology and lack of technological capability (Kibre and Worku, 2003/04).
Infrastructural provision: Easy access to quality infrastructure is vital for the development
of the manufacturing sector. But many LDCs are lacked this opportunity such as provision
of electricity, transport etc. that are affecting the performance of manufacturing sector.

2.1.4 The Determinants of Investment in manufacturing sector

There exist a lot of studies on what to determine investment in manufacturing sector. Some
are controversial while others give a clear cut answer to the problem. Here, it is tried to look
the major factors which have been investigated by many research paper repeatedly.
Interest rate; there are computing views about the effect of interest rate on investment.
such as some researchers say that there exist negative relationship between investment and
interest rate while others say relationship is positive .the first group, negative stat that, lower
interest rate makes funds available through low cost of borrowing while the second group
(positive) states if there is no high interest rate savers are not motivated and fund for
investment cannot be easily obtained.
Obtained all price of capital: Mankiw 2007, analyses the relationship between rental price
of capital and output produced from the renting firm. the firm rents capital at a rental rate R

10
and sell its output at price P, the real cost of a unit of capital to the production firm is
R/P .the real benefit of a unit of capital is the marginal product of capital MPK the extra
output produced with one more unit of capital. The more capital the firm uses the less an
addition capital will add to its output.
Limited to access to raw material: Raw materials are the main ingredients in the
production of any economic activity .the availability of wide alternative of raw materials are
the primary question of firm to produce and supply their output timely. In other word the
presence of well-functioning input market and early access to imported raw materials help
for the growth of private investment.
Inadequacy of infrastructural facilities: infrastructural facilities in Africa are the main
barriers for computation, intercontinental trade and others. Infrastructure access indicators
rose between 1990 and 2000s.but this was mainly in communication technology led by
cellular revolution and water supply and sanitation (Jhon Page, 2012)
Exchange rate devaluation: exchange rate fluctuation are not favorable to economic
activities in the manufacturing sector specifically and the whole economy in general.
Exchange rate can adversely affect the ability of import and therefore manufacturing output
fluctuation in exchange rate will result the instability of purchasing power and
hence .negative impact on manufacturing inputs. (Opaluwa, and others, 2010)
High inflation rate: high rate of inflation adversely affect (but not necessarily) investment
activity by increasing the risk of long term investment project, reducing maturity of
commercial lone, and distorting the information conveyed by price in the economy.
( http://www.pimcoetfs.com/SiteCollectionDocuments/BAS087-Inflation.pdf)

11
 CHAPTER THREE
3. RESEARCH METHODOLOGY

3.1. Description of the study area

Ethiopia is one of the most beautiful and attractive under Africa sky, a destination with
variety of fascinating to show off is very popular destination because of its geographical
structure: unique collection of wild animals, birds, and plant life (being a land of extreme
endemism): ancient historical background, with much less fovea ancient relics and different
nationalities with their different languages, cultures, living in harmony. In geographically,
Ethiopia is located in the north eastern part of Africa bounded north east by Eritrea and
Djibouti, East and south east by Somalia, south west by Kenya and North West by Sudan. It
is known as roof of Africa because in the northern part and south eastern extended mountain
Stranger associated with plateaus (Goodo, 2012)

3.2. Sources and Type of Data

The main source of data will be secondary data source. The use of secondary data is valid
for this study for the purpose of gathering back ground information and comparing the past
experience with the current. The data obtained from (CSA) central statistical agency, and
World Bank (WB), as much as reliable source of data for the determinant and I will be use
world bank source of data and the other is if it’s important like, Ethiopia economic
association (EEC), Research department of national bank of Ethiopia (RDNBE), Ethiopia
investment cooperation (EIC), Ethiopian Economic Association (EEA), International
Monetary fund (IMF)

12
 3.3. Method of Data Collection

The researcher will be collected through secondary data sources. The secondary data
collected from different published and unpublished document like journal, book, magazine,
articles, website, research finding, policy document, manual and other relevant materials.
The reason why the researcher was providing these methods of data collection is to acquire
the accurate and reliable data directly from the organization and its worker.

3.4 Method of Data Analysis

3.4.1 Descriptive Method of Analysis

To show the effect of different factors on investment manufacturing, a descriptive analysis
will be use. In here the graphical relationship of the factors and investment manufacturing
and trend of investment manufacturing, distribution of investment manufacturing and
output and employment contribution of investments manufacturing will be discussed. In
order to explain this; graph, tabulation, ratio and percentage will be used. And the
descriptive statistics that were included in this study are quantitative measures such as
graphs.

3.4.2 Econometric model

The econometrics part of my study used econometrics model to show the relationship
between investments in manufacturing sector with different determinant relevant variables.
The model estimation technique will be estimated by Ordinary least square (OLS)
estimation technique using STATA econometric software. Model specification refers to
mathematical demonstration of the relationship between variables that is dependent variable
and independent variable. One approach to identification of the basic forces influencing
investment is to start with the firm level neoclassical model of optimal capital accumulation
(Jorgenson) where net worth (N) of the firm is given by:

∞ -rt
N= [p(t)Q(t)-w(t)l(t)–q(t)i(t)]
∫e
o

Where: p= price of production

13
Q= quantity of output produced W= price of variable inputs L=quantity of inputs
used q=price of capital i=investment in durable goods
r=discount rate
Since investment is based on expected future income streams which are not known with
certainty, expected income is probabilistic in nature. To reflect the fact that operators may
value non uniform probabilistic income streams differently, the model must be placed in a
utility framework. Thus, the utility of expected income becomes a basic factor which may
influence investment. From this model, it is clear that investment is a function of the prices
of output, inputs and capital, the production function which establishes the level of output
as a function the amount of inputs and capital used and the time value of money or discount
rate. This model is theory of optimal investment capital (Jorgensen, 1966).
This model is very helpful in explaining the working of the economic environment
especially the investment environment. But this doesn’t mean I am totally depending up on
this model to explain the entire real world phenomenon on investment. In addition to this,
the paper is not concerned with the decision to invest or not or how much to invest. My
concern is more related with which sector to invest in the economy to promote economic
growth. This means this paper will not use the model as it is. There will be changes to the
optimal investment theory of Jorgensen in this paper. Some variables will be rejected and
other variables are added. Therefore, the model estimation technique will be estimated by
Ordinary least square (OLS) estimation technique using STATA econometric software will
be as follows
IMFG =F (RLIR, REER, INFR, GDP, BD, RIR, DR) stands for…………………..1
Investment in the manufacturing sector = function of (lending rate, Real Effective
Exchange Rate, inflation rate, gross domestic product, budget deficit, real interest rate
drought) Hence, the model is specified as follow:
IMFG=αo+β1RLIR+β2REER+β3INFR+β5RGDP+β6BD+β7RIR+β8DR+Ut ………………2
Where IMFG=investment in the manufacturing sector
RLIR=lending rate REER = exchange rate INFR = inflation rate
DB = budget deficit GDP = gross domestic product RIR=real interest rate
α= constant β’s=coefficient of the variable Ut=error term

14
DR=drought

3.4.3. Description of variables and expected signs

The data for the analysis the paper covers about 25 years ranging from 1992-2017.
Time serous data is collected on the variable. Precise discussions on the variables are given
below.
A. Dependent Variable
It is a single variable which its entire values depends on other explanatory variables. In this
model the dependent variable is the investment in manufacturing industries (IMS).it
includes a range of human activity, from handicraft to the practical application of science to
commerce or industry. Although there are many variables which affect IMS in this study the
Main factors tried to be raised. While some of the variables have positive relation with IMS,
others will have negative relation with it.
B. Independent Variables
The real GDP; it will be collected from the national bank of Ethiopia (NBE) will be used
in the regression analysis. the coefficient of the term real GDP is expected to have positive
relation with investment in manufacturing industries .this is because ;as real GDP increase
aggregate demand will increase there by stimulating an increased production of goods and
service by undertaking investment activities.
The Inflation Rate; it is growth rate of price. The general inflation obtained from national
bank of Ethiopia will be used in the regression analysis. According to Mundel-tobin effect it
is pointed that higher expected inflation leads to lower interest rate, which will result to
portfolio adjustment away from real money toward real capital.
Real Effective Exchange Rate; Real Effective Exchange Rate (REER) is a measure of the
trade-weighted average exchange rate of a currency against a basket of currencies after
adjusting for inflation differentials with regard to the countries concerned and expressed as
an index number relative to a base year. REER is also defined as the average of the bilateral

15
Real Exchange Rates (RER) between the country and each of its trading partners, weighted
by which measures the cost of the funds used to finance investment. For an investment
project to be profitable, its return or the revenue from increased future production of goods
and services must exceed its cost or the payments for borrowed funds. Another distributive
share that Marshall considered is interest.

CHAPTER FOUR
4. BUDGETING

4.1. Budget Setting

Throughout the investigation each activities as and shop will be under take according to
their relevance for the success fullness of the study. Each activities under associated with
current and market condition of our country, it describes by the table as follows:

No. Item description Unit Unit price Amount of Total price

required

1 Paper Packet 1 800 800.00

2 Pen Number 30 4 120.00

3 Flash(SanDisk 8GB) Number 480 1 480.00

4 Printing Page 100 3 300.00

5 Internet 300.00

6 Total budget 2,000.00

16
4.2 Work Plan

4.2.1 Time Schedule

The research will takes six months to complete. It will be conducted with including
preparation of studying proposal, writing literature reviews, questionaries’ design,
collection data, data analysis and interpretation rule and preparation of final reports of the
resulting the following table forms

Activity Months

Jan Feb Mar Apr May Jun

Specifying the area of 

the study

Title selection 

Literature review 

Preparing the proposal 

Data collection  

Data analysis and 

17
interpretation

Write research 

Submission final 
research
Presentation of final 
research

REFERENCES
Addis Ababa Chamber of Commerce and Sect oral Association (AACCSA)( 2015), ‘an
overview of Ethiopian manufacturing sector’’ ,Addis Ababa ,ETHIOPIA
Arne B. et.al (1997), “Investment in Africa’s manufacturing sector”: a four country panel
data analysis.
Bezawork Hailu (2007),’’the determinants of investment in manufacturing in Ethiopia’’,
Addis Ababa University
Belayneh B. (2010), “Reimagining Ethiopian manufacturing timely” published by Hibret
bank of Ethiopia.
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