Professional Documents
Culture Documents
Tsion Paper
Tsion Paper
GUDER CAMPUS
BY ID NO
1. Tsion Adamu. 0124/09
2. Zannuu kumsa 0131/09
3. Kidest Hiribora 0103/08
June, 2019
Ambo, Ethiopia
Acknowledgement
Above all, we thanks to our God a debt of praise for his presence with us in all ups and downs.
Next we would like to express my great thanks to Ambo University College of Agriculture and
Veterinary science particularly Department of Agricultural Economics for preparing such type of
learning activity. Our special thanks also go to our advisor instructor Mr. Fikru T. (MSc) for his
unreserved advice and frequent supervision in the entire work of our research project writing and
my deepest appreciation goes to my family and friends for their moral and material support.
Lastly the special thanks go to Oromia and Ambo town investment authority for their
collaboration in providing the necessary information.
ii
ABSTRACT
Private investment is the main engine of growth in market economies. It plays a great role in
country’s development, especially in developing countries whose capital is scarce and their
government lacks enough capacity to cover all constraints and bring economic change for
development. The general Objectives of this study was to analyses the future prospects of private
investments. The survey was conducted at Ambo town, in Oromia regional state and secondary
data was collected from different sources. Accordingly the total number of investors in this study
area was classified in to groups based on their economic activity. In this study descriptive and
econometric analysis was employed to analyses the main problems of investment in the study
area. The study identify the main factors that affecting investors decision on investment activities
to be: level of education and tax related problems are significantly affecting the investment
activity and intensity of capital allocation. There are also investment incentives given by
government authority for future prospects of private investment that was tried to analyzed by this
study like; ongoing infrastructural facility, population growth and etc. Therefore, the federal as
well as the regional government should give attention up on the prevailing problems of private
investment like supplying adequate credit, access to infrastructure, tax related problems and etc.
iii
Contents
ABSTRACT...............................................................................................................................................iii
List of tables...............................................................................................................................................iv
ACRONYMS..............................................................................................................................................v
1.2. Statement of the problem................................................................................................................2
1.5. Significance of the study...................................................................................................................4
1.6. Scope and Limitations of the study...................................................................................................4
1.8. Organization of the Research...........................................................................................................4
2. LITERATURE REVIEW........................................................................................................................6
2.1. Theoretical Literature Review...........................................................................................................6
2.1.1. Definitions of investment...........................................................................................................6
2.1.2 Types of investment............................................................................................................................7
2.1.3. Importance /need/ of investment................................................................................................9
2.2. Empirical literature review.............................................................................................................11
2.2.1. Empirical finding in determinants of private investment at macro level..................................11
2.2.2 Empirical studies on micro level determinants of private investment.......................................15
3. RESEARCH METHODOLOGY...........................................................................................................17
3.1. Description of the study area.........................................................................................................17
3.2. Types of data and sources..............................................................................................................17
3.3. Sampling techniques and sample size.............................................................................................18
3.4. Method of Data collection..............................................................................................................18
3.5 Methods of data analysis.................................................................................................................19
3.5.1 Descriptive analysis..................................................................................................................19
3.5.2. Econometric model..................................................................................................................19
3.6.1. Dependent Variable.................................................................................................................20
4. RESULTS AND DISCUSSIONS.........................................................................................................22
4.1 Personal information of the respondents......................................................................................22
4.2. Econometric model of regression analysis......................................................................................26
4.2.1. Marginal effect of logistic regression model............................................................................28
5. CONCLUSION AND RECOMMENDATION............................................................................................30
5.1. Summery and conclusion................................................................................................................30
5.2. Recommendation and solutions.....................................................................................................30
REFERENCE............................................................................................................................................31
iv
List of tables
Table 4.1 ;Descriptive output of household characteristics for Continuous variable …………21
Table 4.2 ;Descriptive output of household characteristics for dummy variable …………… .23
v
ACRONYMS
ACSA Ambo central Statistical Agency
UN United Nation
WB World Bank
vi
1. INTRODUCTION
Private investment is the main engine of growth in market economies. It is crucial pre request for
economic growth because it allows entrepreneurs to set economic activity in motion by bringing
resources together to produce goods and services. Rapid and sustained growth is facilitated by
virtuous circle were by entrepreneurship and investment leads to higher productivity making
possible to invest large sums in future ( Reuben kanyua,2014).
Economic growth could be realized through proper development policy. One of which could be
promoting demand countries have shown that growth have come through increased investment.
Thus investment plays a vital role for economic growth and development and improves the welfare
of society. However, investment requires specific policy and institutions aimed at attracting
investment and directions it to key sector in the economic, enhancing the contribution of
investment to skill formation technological change, competitive and economic growth (MOFED,
2011).
Ambo town is one of the favorable areas for the expansion of private investment among the
Oromia regional state. It has also good climatic condition and geographical area. However, the
development of private invest in the town is insignificant. According to Ambo town investment
authority of 2013-2015, there are only 123 amount of investment project in the town with
investment capital of 624607888 including projects at operations.They are participating in
different investment activities,such as trade,industry,hotel and tourism,education service, health
service,agriculture and etc.
It creates 1296 and 905job opportunities permanently and temporary responsively. This is the
small in relative the number of labor force in the town. In light of this study, tries to analyses the
major problems and prospects of private investment in Ambo town. The overall benefit of
investment for developing countries economics well documented. Private investment assists
human capital formation, help individuals to create employment opportunity and enhance
enterprise development (reports of world investment forum 2012). To encourage both DPI and
FDI, Ethiopia has been trying to create an appropriate enabling environment where its economic
policy relies along a development of private sector. (EIA,2009).
1
Private investment is an engine for creating innovation, economic growth and poverty reduction. It
paves the way for scale production and technical progress, creates employment opportunities,
enhances specialization and helps to have more diversified economy. Investment is one of the most
important macroeconomic variables because the capacity of production of any economy depends
not only on labor but also on the capital available to produce goods and services (Nghifenwa,
2013).
Private investment is a primary contribute or of gross investment although both private and public
investment are necessary for economic growth and development. Many researchers have found
that the private investment plays much more significance role than public investment. Because of
this most African countries began to introduce economic reform program with the aim of
strengthening the private sector. Ethiopia is one of those countries and gives more emphasis to
private sector in its development plan.
Even if public finances are considered as central to investment in SDGs, they cannot meet all
SDG-implied resource demands. So far, various studies were conducted to identify the
determinants of private investment. In view of that, the primary aim of this systematic review is to
investigate the main factors affecting private investment in developing countries, in Ethiopia
particularly in Ambo town. This review may helpful in providing relevant information about
policy options for concerning body such as government, policy makers, and other institutions
working to improve private investment.Investment is the hope of most countries to increase this
level of income .It increases the level living standard of people. Moreover investment is vital of
every nation economic development. Always investment is come with different benefit or both
investors and the invested countries ( world forum 2012).
Research works have been under taken from different angles to contribute for the development of
private investments in the country in different location. For instance, AyeleBelete
(2011),Fayerasima(2009) and AsmelashBezabeh (2007) have tried to analyze challenges and
prospects of private investment in different areas of the country . Furthermore,
seyoumAklile(2007) worked on how macroeconomics factors affect private investment in
2
Ethiopia. On the other hand, MengistuBessir(2008) has tried to examine whether private
investment has contributed for the economic growth.
Majority of these works have been done at national level and the year emphasis are not at regional
and zonal level. Those studies which have been under taken to identify challenges and prospects of
private investment have not adequately assessed the major cause for poor performance of those
investment .Further more studies have not yet been conducted both in Ambo town and zonal level
where there are a number of problems of private investments are observed.
There are many problems that affects the growth of private investment in Ethiopia in general and
Ambo town in particular. These problems included low level of education ,in adequate
infrastructural facility, high level of interest rate; tax related problems, etc are the major problems.
The general objective of the study is to assess the factors that affecting participation of private
investment in Ambo town.
What are the factors that affecting participation of private investment in the study areas?
What are the possible solutions of private investment problems in the study areas?
The information gained from this study contributes for identifying the different problems of private
investment and find out the possible solutions. It can benefit private investors in many ways. Study
finding is important for further studies to be carried out by the other persons. The lack of capital
and absence of attractive investment opportunities are considered to be important reasons behind
3
inadequate economic development in many developing countries. This is why an attempt is made
formation as well as the supply of financial means in the form of credit through official financial
institutions.
Although there are many problems of private investment to be studied in Ethiopia, this study was
limited only to specific area: Ambo town. This is because of lack of financial and lack of enough
skill. It will also limit to specific geographical area to make the study more manageable.The term
investment is broad concepts. It includes both public and private investment .It also needs to be
analyzed deeply .However due to financial constraint to collect efficient data, and even lack of
sufficient data, this study is taken in to consideration only private investment in particular areas,
Ambo town .It concerns only with problems and prospects of private investment. It does not
involve indicators of investment climate of other areas. It focuses only in Ambo town. Thus the
result and recommendation of this study made only for this study area.
4
2. LITERATURE REVIEW
Economic literatures prove that investment is, both empirically and theoretically, the key
determinant to economic growth. Economic growth refers to an increase in a country’s production
or income per capita. It is usually measured by gross national product (GNP) or gross national
income (GNI), used interchangeably, an economy’s total output of goods and services. Investment
is the source of manufactured goods that will be used to produce other goods. It is the major
foundation of enhancement in the level of literacy, improvement in technology and increase in the
capital stock (Hashmi et al 2012).
Private investment is a major driver of economic growth. In LDCs, increasing the growth rate of
private investment would be a desirable target to achieve post 2015 development agenda. For this
purpose policymakers need to find the right balance between creating a climate conducive to
investment and removing barriers to investment. It is important to examine the main determinants
of private investment. Based on the literature review, this study has identified both dependent and
independent variables. It is expected that dependent variable is affected by multiple factors like
economic, social, political, institutional, cultural, geographical and etc. This study, however,
focuses on macroeconomic factors affecting private investment. They need to find mechanisms to
attract private investors (UN, 2014a and UN, 2014b).
5
In Ethiopia, the economy has undergone series of reforms i.e. from a liberalized economy (till
1974) to command type (from 1974-1989/90), and again liberalized after 1991(following the fall
of military regime).Since 1991, a comprehensive structural adjustment programs (SAP) such as
macroeconomic stabilization, privatization and public sector development, decentralized
governance and other reform packages have been implemented in line with the free market ideals.
However, deviations from such ideals became evident since recently due to changes in government
policy and strategy in favor of developmental state ideology. Hence, important sectors like postal
services (with the exception of courier services), transmission and distribution of electricity
through the integrated national grid system; and air transport services (using aircraft with seating
capacity of more than 50 passengers) and the like are still exclusively reserved for government,
while manufacturing of weapons and ammunition, and telecom service can be undertaken jointly
by government and private investors). And, a considerable portion of the remaining investment
areas are also exclusively permitted for domestic private investors (Investment Proclamation
769/2012).
Investment has been defined by researchers differently though the central theme is almost similar.
In ordinary sense, investment refers to buy shares, stocks, bonds and securities which already exist
in stock market which is called financial investments
6
FDI and the portfolio investments are undertaken by foreigners in the host country though the
nature of investment differs. FDI is an investment undertaken by individuals or organization of one
country in another country in intention to gain profit over their invested resources. Furthermore
private domestic investment refers to gross fixed capital formation plus net changes in the level of
inventories whereas public investment includes investment by government and public enterprises
on social and economic infrastructures, real estate and tangible asset. The foreign investment when
it is on tangible asset is referred to as direct foreign investment otherwise it is called portfolio
investment when it is on shares, bonds and securities etc (Akoko 2011).
At the theoretical level, the effect of public investment on private investment is ambiguous. On the
one hand, public investment activity may be complementary to and thus support private
investment, particularly where public investment involves useful infrastructure. It includes
telecommunication facilities, transportation system, school, and water and sewerage system and to
like. Projects in these areas tend to raise the expected rate of return on private investment. On the
other hand, public sectors investment may detract from private investment activity to the extent
that it substitutes or “crowds out” private investment. (Jhiggan, M.L, 1997).
Investment can also be private investment or public investment. Private investment is on private
account i.e.by private individual and public investment is by the government. Private investment is
influenced by marginal efficiency of capital (i.e. profit exposition and the rate of interest is profit
elastic).Public investment is by the state or local as there such as construction of roads, irrigation
project, school building, public parks, electricity works etc. In the public investment profit motive
does not inner into consideration. It is undertaken for social good and not for private gain.
Investment can be classified into autonomous and induced investment.
7
Induced investment:-Investment which varies with the changes in national income is called
induced investment. Change in national income brings about change in aggregate demand which in
turn affect the volume of investment. For example, when national income increases, aggregate
demands too increase. Investment has to be undertaken to meet these increases and vice versa. It
includes investments not only in fixed capital but also inventories which is under taken to enable
the economy to produce a large output in order to meet the increased demand.
In the Keynesian system investment depends up on effective demand. There are two major
constituents of effective demands; investments and consumption. Investment is more volatile and
unpredictable as well as more strategic variable. A fundamental principle is that as the income of
the community increases ,consumption is also increase but by less than increase in income, hence
in order to have sufficient demand to sustain an increase in employment there must be increase in
real investment equal to the gap between income and consumption out of income. In other words,
employment cannot increase unless investment increases.
8
to him investment depends on prospective marginal efficiency of capital which is the expected
field from new investment relative to some interest rate reflecting the opportunity cost of the
invested funds. According to keyness, investment can be increased either by decreasing interest
rate or by increasing marginal efficiency of capital along with the above variable.
After keyness the evolution of investment theory was linked simple growth model on
HarrodDomar tradition. These models are used to determine the rate of saving and hence
investment required to achieve a given target of income with available technology.
For developing countries like Ethiopia the basic question in their economy is increase the
production and hence improve the standard of living of their people so that there will be dramatic
change in their economic, political and social conditions. For this purpose different alternatives are
on the table. Investment promotion is one key instrument and primary engine of economic growth
(Mustefa, 2014). As a result due attention has been given to development of private sector in
developing countries to help improve economic growth (Ouattara, 2004). Reliable and continuous
increase in domestic private investment also helps in reduction of poverty
Investment has been identified as key to economic growth given the egregious nature of the
economy. Private domestic investment can be seen as a propeller that can move the economy.
More importantly because institutional and structural factor existing in most developing countries
such as the absence of well function financial market the relatively large role of government in
capital formation distortion created by foreign exchange constraints and other assumptions and
underlying the standard optimizing investment model typically are not satisfied in each
countries(Agu,2015).
Recent but rapidly growth literature has focused on the impact of uncertainty and instability on the
adoption of investment projects in simplest that the economic and political instability suffered by
many developing countries can bring many obstacles to private investment take off. John
maynardkeyness had broadly introduced and analyzed the interdependent relationship between
income, consumption and saving. In this analysis, he wisely able to explain the concept of
marginal propensity to consume (mpc) which is the response of consumption to change in income.
Jhingon(1982) also stressed the importance of saving for capital formation that saving, investment
and economic growth are interdependent. According to him saving depends up on the size of
9
income since agricultural industry and other sector are backward in under developed economy the
national output is low and so it is national income as a result per capita income is also low.
Developing country also faces lack of adequate and efficient infrastructure i.e. transport, power
and telecommunication. Similarly, the availability of credit is also important for private investment
in country like Ethiopia. Bank credit is an important for private investors to undertake investment
activities. Hence what has been happening to private credit is expected to reflect on private
investment.
In private economies most investment is of the real variety, where as in modern economy much
investment is of the financial variety. Low investment leads to lower rate of growth and job
creation, and fewer opportunities for the poor to improve their livelihoods (Batu,2016).
GDP is one of the most influential variables affecting private investment. GDP/real
GDP/Economic growth/Real Income are positively contributes for private investment
development. As of Augustine (2014) and Assa and Abdi (2012), GDP contributes to promotion of
private investment. The GDP shows an increase in sales and profits. This would enhance private
investment expansion in the economy. According to Basha and Debela (2015), Jalloh (2002),
kaputo (2011), Ouattara (2004), Molapo and Damane (2015) and Mbaye (2014), private
investment is positively and significantly affected by real GDP/income. Adugna (2013) also
identified that real GDP per capita positively affects private investment. The higher real GDP per
capita is assumed increase effective demands for goods and services and thereby inspire private
investors. Therefore, in all studies, national output or income positive stimulates private
investment.
10
Exchange rate, like GDP and public investment, is important in the promotion of private
investment. According to Augustine (2014), exchange rate is positively related to private
investment. In the same way, Assa and Abdi (2012) and Mbaye (2014) stated that real exchange
rate is positively associated with private investment. According to them devaluation of the
exchange rate is costly. It might cause the cost of imported capital to increase. Thus appreciation
of the real exchange is beneficial for private sector in this regard. On the other side Hailu and
Debele (2015), Naa-Idar et al (2012) and Kaputo (2011) found that exchange rate is inversely
related with private investment in Ethiopia, Ghana and Zambia respectively. In the same manner,
identified that real exchange rate negatively affects private investment in Sierra Leone. This is
because; appreciation of the local currency makes private sectors products less competent in the
international market.
According to Economists interest is the cost of investment. The results from the studies show that
interest rate is inversely related private sector performance in Sierra Leone and Zambia.. As of
Kaputo (2011) real lending interest rate has a significant negative effect in the long-run. This is so
because the high cost of investment capital discourages investment by local firms. On the other
hand, Agu (2015) found that real rate of return on bank deposits has a statistically significant
positive effect on investment behavior in Nigeria. Reasonable level of interest rise saving and
hence investment.
In two out of three cases, credit to private investment negatively affects private sector
performance. As of Ouattara (2004), credit to the private sector is negatively related to private
investment. This implies that increases in credit to the private sector will not enhance private
investment. Weak institutional environment and lack of experienced personnel and expertise were
few reasons. In support of above evidence, Mbaye (2014) stated that funds to the private sector do
not go to finance new investments because of poverty most people would borrow to finance other
matters like education, healthcare and basic necessities. As a result private sector credit is
11
negatively related to private investments. Kaputo (2011), however, suggested that credit plays a
significant role in improving private investment.
As regard to international trade two issues were considered: terms of trade and trade openness.
Ouattara (2004) pointed that the impact of the terms of trade on private investment is negative.
Private investment in Senegal is highly sensitive to external shocks. Naa-Idar et al (2012), on the
other hand, indicated that trade liberalization plays a positive role in boasting private investment.
The relationship between broad money expansion and private investment is found positive. Hailu
and Debele (2015), in Ethiopia, got that broad money supply is statistically significant. Enterprises
and industries are subject to liquidity constraints as a result they are more dependent on bank loans
and on short-term debt. Mbaye (2014), in the same token, identified that broad money supply is
positively related to private investment and has a significant effect on private investments.
It is one of the factors that affect the level of investment especially in developing countries, there is
high problem regarding the availability of finance. Because of segmented capital markets and non-
flexible regulatory roles in developing countries, the level of private investment is adversely
affected.
In most developing countries the rate growth of real output (GDP) per capita should be positively
related to the private investment, as is common in industrial countries. Investment promotion is
one key instrument and the primary engine of economic growth (Mustefa,2014). Empirically,
however the postulate does not work well because it is unlikely that the economy’s output ratio is
fixed over time as it is influenced by such factors like cost of capital and labor, technological
progress etc.For greater relative rate of investment, there must be appropriately faster rate of
output.
Macroeconomic stability indicates important signals to the private sectors about the direction of
economic policies and credibility of the authorities’ commitment to manage the economy
efficiently. The key macroeconomic stability indicators are described below:
Income per capita is hypothesized to effect of private investment positively. Positively correlation
is due to the ability of high income countries to devote much more income to saving, so that
investment.
12
Large external debt burden, which is proxies by the ratio of external debt to GDP or debt service
ratio, adversely affect private investment activity. It reduces funds available for investment due to
debt service payments and hence make important of capital goods difficult. It also reduces the
incentives for investment. Since much of the forthcoming returns from investment must be paid to
re pays the existing debt. Therefore, acting as a tax on domestic investment (Tochukwu, 2012).
Most developing countries are subject to foreign exchange constraints. Indeed, this is the origin of
the debt crises and the central focus of adjustment polices. In the same vein, attempt to correct
external imbalance by reducing aggregate demand have led to further decline in investment
expenditure, thus aggravating the problem of sluggish growth and declining saving and investment
rates (Tochukwu,2012).
Devaluation affects investment through several channels, i.e. by alerting the real supply price of
capital goods, by raising the price of imported inputs, by alerting product wage and there by
affecting profitability, by producing changes in real income that affect the demand for
domestically produced good, and by affecting nominal and real interest which affects the supply
prices of capital (Tochukwu,2012).
The terms of trade are one of the most important indicators of external shocks. Adverse
movements of trade will increase the cost of imports relative to income and also will reduce the
purchasing power of exports. By alleviating the foreign exchange constraints, an improvement in
the term of trade should lead to an increase in imports of capital goods and private investment;
while the opposite result can be expected from deteriorating terms of trade.
Uncertainty lays in impact on private investment decision. Change in uncertainty are usually
associated with unpredictability, instability of the incentive structure as well as lack of
sustainability and imperfect credibility of macroeconomic policy reforms. Thus, private investor
will be reluctant to commit large expenditure on fixed investment when they are uncertain about
the future political, social and economic environment.
Public Investment expenditure is also another influential variable that determines affecting private
investment. The role of public investment is seen from two aspects. On one hand public
investment, in the form basic infrastructures, is a complement to private investment and hence
promote private sector expansion and development. On the other hand, public expenditure is a
13
competent of private sector and hence, reduces the amount of money available for them. As of
Adugna (2013), Hailu and Debele (2015), Jalloh (2002), Ouattara (2004), and Molapo and
Damane (2015), Public investment expenditure directly contributes for private investment.
According to them public extensive investments on basic infrastructures-such as roads, energy and
telecommunication - creates conducive environment for investment. The relationship between
public and private investment takes on greater importance in developing world than in industrial
countries because of the large role played by the government in the overall process of capital
accumulation.
Mbugua (2000) analyzed the micro and macro determinants of private investment in the
manufacturing sector in Kenya, using OLS the technique, for macro level determinants and
descriptive statistics for micro level determinants of private investment. His finding showed that
high interest rate, inefficient infrastructure, corruption, insecurity, weak institutional framework
and inefficient and bureaucratic public serves are the greatest hindrances to investment.
In analysis of macro level determinants and descriptive statistics for analysis of micro level
determinants found out that several constraining factors to private manufacturing investment were
sets of markets, financial, infrastructure, policy, technology and input related. He further noted that
the root cause for these problems was many and interdependent. Moreover, the degree of severity
of these problems was found to be independent of location of the enterprise. William Naude et al.
(2000 ) conducted as study on determinants of investment and exports of south African
manufacturing firm that utilized data from 61 manufacturing firms using Tobit model. Their
findings showed that labor costs were found to be high in comparison to other African countries
were similar surveys were conducted. The capital intensity for large firms is comparable to the
capital intensity of large firm in Zimbabwe, but significantly higher than those observed in Ghana
or Mauritius. Given that labor productivity is comparable ,but capital intensity and monthly wages
are significantly higher those observed for Mauritius ,this suggests that south African firms faces a
cost advantage via successfully exporting firm located in Mauritius.
14
Moreover, it was believed that manufacturing perceive their environment to be less uncertain that
counter parts in the Kenya and Zimbabwe, suggesting that uncertainty is less of a deterrent to
investment in south Africa other African countries and credits constraints are even less of problem
of the present sample of south African firms than they are for some of other African countries. The
fact that the financial markets are much better developed in South Africa than elsewhere on the
continent may explain this difference. However, it was found that firm efficiency firms. Thus,
improving firm efficiency and overcoming labour cost disadvantageous are serious firm level
constraints facing South African manufacturing firm in their adjustment to globalization.
Kaputo (2011) also conducted study on determinants of micro and macro factors on private
investment by using Tobit model. His findings at micro level showed that education, access to
land, access to credit, infrastructure facilities, investment incentives, corruption and bureaucratic
red tape were the most important determinants of private investments in this study area.
Moreover, the micro level study result in indicated education, access to land, access to credit,
infrastructure facilities, and investment incentives were positively significantly related with private
investment. Corruption and bureaucratic red tape were negatively and significantly associated with
private investment. The result of this study revealed that most of the problems encountered by the
private sector were institutions.
Generally, the above summarized review of empirical literature on micro level factors affecting
private investment revealed that are different factors that affect private investment at operational
levels. Thus, this study attempted to identify major problems that affect private investment at
micro level to the oromia regional state, Ambo town.
15
3. RESEARCH METHODOLOGY
The name of the town has changed to Hagerehiwot during the Hailesellasie regime and gained its
original name in 1974 when the Derg came to power. The town is one of the few favored towns of
its name as it had much capital administration and master plan in 1931. Owning its strategy, its
location has been serving as administration, transportation and commercial center of west shoa
zone. Ambo town has three kebele’s and now the town is expanding outwards and included a
certain farmers kebele’s such as Awwaro and Illamumuja in the east direction, sankallefarise in
west,Gosukora in the south and Libankisose in the north direction( Ambo town city administration,
2012).
Geographical location of Ambo town is 08 59’ E longitudes. The average elevation of the town is
2090 meters above sea level and it varies from 2060 meters to 2140 meters above sea level. The
town and its surrounding have meant annual precipitation of 912 millimeters and the mean annual
temperature of the town is about 17.6 centigrade. The town is an administrative capital for west
shewa zone. The master plan covers different aspects such as development plans road network
plans, drainage and land use plan etc. (Ambo town city administration, 2012).
16
selected as a sample of study area. The secondary data on the other hand also gathered from
different brochure, Ambo town investment office monthly, quarterly and annual reports,
newspapers and different publications.
It is a combination of quantitative and qualitative types of research. These studies will have both
primary and secondary sources will be employed. Primary source will be based on data collection
through focus (target) group discussion .The secondary data will also be collected from annual
reports, internets, published and unpublished documents. Different data methods will be employed.
These include; questionnaire and interview. Questionnaire was prepared in the form of structured
and open-end questions. Interview will tries to be carried out to get detailed information on the
investment, factors that affect participation in investment.
This section is mainly concerned with descriptive analysis result of the survey data and
interpretation of analytical findings about the problem and prospects of private investment. In
using this analysis, meaning full information and conclusion was drawn by using table, percentage
and others.
17
3.5.2. Econometric model
The econometric analysis was used in this study to estimate the participation of investment in the
study area by using binary logit regression model. In logistic regression model the relationship
between the dependent variable and the independent variables are not linear. The dependent
variable was set up as a 0 and 1 dummy, taking the value 1 if the respondent participates in
investment activity and 0 if not participate. Logistic regression is used when the regressed or the
dependent variables are either binary or dichotomous variables or multiple categories.
given Xi;
Logit model could be written in terms of the odds and log of odds, which enables one to
understand the interpretation of the coefficients. The coefficient of the logit model therefore
represents the change in the log of the odds associated with a change in the explanatory variables.
The odds ratio implies the ratio of the probability (P i) that an individual would choose an
alternative to the probability (1-Pi) that he/she would not choose it.
1
(1-pi)= zi ……………………………………………………………………….2
1+ e
zi
pi 1+e zi
( = −zi )= e …………………………………………………………………3
1− pi 1+ e
Or
Therefore, to get linearity, we take the natural logarithms of odds ratio equation (4), which results
in the logit.
zi
pi 1+e
( = )=e (α +∑ β ixi)………………………………………………………………...…………
1− pi 1+ e−zi
4
18
pi
z i=ln ( ) =α+β1x1+β2x2+β3x3+……..+βmXm……………………………….………………5
1− pi
If the disturbance term (ui) is taken in to account, the logit model becomes
m
Zi=α+∑ Bixi+ui ……………………………………………………………...…………....6
i=1
In addition, the marginal effect of each explanatory variable on the dependent variable was used
for model output interpretation of this study. Marginal effects can be an informative means for
summarizing how change in a response is related to change in a covariate. For categorical
variables, the effects of discrete changes are computed, i.e., the marginal effects for categorical
variables show how P(Y = 1) is predicted to change as X k changes from 0 to 1 holding all other Xs
equal. This can be quite useful, informative and easy to understand. For continuous independent
variables, the marginal effect measures the instantaneous rate of change (Williams, 2017).
Age: It is a continuous variable represented by the number of years that the respondents stay with
or without investment. Pertaining to this, many have already witnessed a positive relationship of
the household heads age with participation in investments. So, this variable was expected to have
positive relationship with participation in investment activities. So, this variable was expected to
have positive relationship with participation in investments.
Sex: This is a dummy variable that takes a value of “1” if the respondent is male and “0” for
female respondents. Sex of the respondent has been believed to be one of the leading determinants
of investment rationing in the literature. Male respondents are expected to have positive relation
with investment status than female.
19
Level of education: is sub division of formal learning typically covering early childhood
education, secondary education and tertiary or higher organization. By using dummy variable 1 if
the respondent is literate and 0 if the respondent is illiterate
Infrastructure facilities: the basic system and services that is necessary for country or an
organization, for example buildings, roads and etc. It is dummy variable, 1 if access and 0
otherwise.
Lending Interest rate: the amount of interest due per period as a proportion of the amount lent,
deposited or borrowed. By using dummy variable, 1 if it is high and 0 otherwise.
Access to finance: is the ability of individuals or enterprise to obtain financial services. I t is also
dummy variable 1 if access and 0 otherwise..
Tax related problem: is the problem arise related to the collection of tax. This can be analyzed by
giving the value 1 if there is problem and 0 if there is no problem.
Family size: ): It is continuous variable that shows the total number of family members. Poor rural
households are believed to have larger household size than the non-poor. With the already high
pressure of being poor, larger households would require extra resources to survive is number of
persons living together in one house.
Lending Interest rate: ): It is a dummy variable refers the user cost of capital and it helps to
analyses the feelings of the borrowers towards the interest rate of the loan. The borrowers express
their feeling on the interest rate level by comparing the cost and benefits of the credit. It takes the
value “1” if respondents perceive interest rate as a constraint, otherwise “0”. The higher the
interest rate, the lesser will be the investments.
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4. RESULTS AND DISCUSSIONS
Age of respondents; The average age of the respondents was 42.39 years, with minimum and
maximum ages of 25 and 72 years, respectively. The average age of for investments participants
and non-participants was 34.9 and 52.5 years, respectively. For example, in Pakistan, Shah et al.
(2008) found that participation in investments use was positively influenced by age of the
respondents. The t-test revealed that the mean difference between investment participants and non-
participants with respect to age of household head was statistically significant at 1% significance
level.
21
Family size; Accordingly, the average family size of the sample respondents was found the
largest family size was 12 and the smallest was 1. The result from t-test revealed that the mean
difference between investment participants and non-participants with respect to family size was
statistically significant at 5% probability level. This is because of respondents with larger family
size requires more capital for their daily activities such as home consumption.
Sex ; With regard to sex the sample was composed of 38.36.% male and 61.64% females .Among
these from males 75% are participated in investment activities and 25% are non participants. And
also from female 22.22% participants and 77.78% of females are non participants. This means
male respondents are more participating in investment activities. Or male respondents are expected
to have positive relation with investment status than female
Marital status; About 58.9% 0f the sample respondents are married and the remaining of 41.1%
are separated and unmarried. Of the total sample respondents 37.21% of non-participants and
62.79% of investment participants were married .And from unmarried respondents 86.67% are non
participants and 13.33% of respondents are participants. This may probably mean that married
respondents have more participate investment activities than unmarried and separated respondents.
22
No 14 28.57 35 71.43 49 67.12
Infrastructure Yes 24 64.86 13 35.14 37 50.68 15.407***
No 7 19.44 29 80.56 36 49.32
Source: Own computation, 2019! (***) 1%, (**) 5% significance level
Education level; Education or human capital development is considered as the basic instrument in
fighting poverty. The education level distribution of respondents shows that among these 73
respondents 45(61.64%) are liberated and 25(55.56%) are respondents who participate investment
activities and 20(44.44%) of respondents are non participants.And also 28(38.36) of respondents
are illiterated and from these illiterated persons 6(21.43%) are participanted in this activity and
22(78.57%) of respondents are non participants in investment activity. This indicates the majority
of participated in investment activities are educated respondents by (55.56%).and from illiterated
person participants are only 21.43%. So the reality shows that as the level of education increase
from illiterate to literate, the awareness of society to investment increase and viceversa .From these
we can say that education can be the main cause for less developed and expansion 0f private
investment in Ambo town. Therefore education was the main factors that affect the growth of
private investment in the study area.
Lending interest rate: the demand for investment depends up on the level of interest rate because
interest rate is a measure of cost of finance for financing investment. When the interest rate is high,
the cost of financing the projects is high, as this time the level of demand for investment coming to
down ( Mankiw, 2000).
Given the Neoclassical model interest rate come up with a conclusion of negatively related with
private investment. However some arguments are there the cost of money to investors is less
important than other major costs like cost of machinery, labor and other raw materials. Moreover
some studies suggested that in developing countries which have repressed financial markets like
Ethiopia, its interest rates are not affected the level of investment rather it is affected by credit
policy. (Husain 1993)
As it can seen from the above table, 49(67.12%) of the respondents said that interest rate of the
loan was high, 24(32.88%) of the sample respondents revealed interest rate of the loan was low.
23
According to 24 respondents, the problems that hinder their investment participation are not
lending interest rate rather other problems. But 49 of the respondents responds that lending interest
rate affect their investment participation. So as we observe from the table the interest rate is also
one of the problems of private investment in Ambo town.
Access to finance: finance is the core element of any investment project. Most investors relay on
bank finance for their investment project. However, access to bank finance is not easy for investors
in Ethiopia in general and in Ambo town in particular. One of the major problems associated with
the finance is limited and huge collateral requirement. Currently, the only acceptable (by bank)
collateral properties are buildings under urban municipalities and vehicles registered by the road
transport authority of Ethiopia. So any investor who wants to get bank loan should own such
properties. This is more severe problem for those specially invest on agricultural sector. There are
also other financial institutions like microfinance institutions in Ambo town. However, their
supply of fund to the potential investors is not much enough. That means, they do not have enough
fund to give loan to the investors. The following 4.3 table shows the investors perception about
access to finance in their investment activity.
As seen from the above table, 24(32.88%) of the total sample respondents have access to credit, 49
(67.12%) of the total sample respondents did not have access to credit. Even though small numbers
of respondents are access to finance, still there are majority of respondents who have the problem
of access to finance. Therefore, we can say that access to finance become the main problem for the
expansion and development of private investment in Ambo town. It means that access to finance
was the main factors that affect the growth of private investment in the study area.
24
According to the above table, among the total sampled investors, 37(50.68%) of the respondents
respond that infrastructural facility is good. The remaining respondents, which is 36(49.32%)
responds the facility is poor. Generally, the above table indicates that most of the respondents said
that infrastructure facility is good. So lack of sufficient infrastructures was the main problems that
affect growth and development of private investment activity.
As we can see from the above model, we have 10 variables such as investment participation, age,
sex, marital status, family size, level of education, access to finance, interest rate, infrastructure
facility, and problem of taxation. From these variables, investment participation is the dependent
variable and the rest of the others are independent variables. The value of z can be calculated by
the coefficient of the variable divided by standard error.
To check whether the independent variables affect the dependent variable, we consider the value of
p> [z] corresponding probability. If the probability is <10% that particular variable is significant
variable to affect dependent variable. In the case of the above model, four variables are significant
i. e sex, age, access to finance, and infrastructure. since their probability value is less than10% or
0.1. For age, 0.038, for sex, 0.003, for access to finance, 0.028, and for infrastructural facilities,
0.044 which is <0.1. But The other variables are statistically insignificant since their p values is >
10%.
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Table 4.3:-Logit output of marginal effect
From the above table sex of respondents, the significant variable and its coefficient is positive and
its siginificant level is 5% .And this indicates there is positively relation between sex and
investments.
Age of respondents: The sign of this variable is consistent with that of the prior expectation and it
positively and significantly influence the probability of respondent participation in investments.
Age of respondents was found to be statistically significant at 1 percent significant level, indicating
those older households are more likely to get investments than.
When we look the access to finance, it is coefficient is positive sign and its significant level is 5%.
implying that the availability of finance and investment participation is positively related. As the
availability finance increase, the investment activity of society also increases and vice versa. If
financial institution that lends money is absent, it may be difficult for most investors who want to
borrow in the time of shortage of cash. Therefore investment and availability of finance are
positively related.
26
The coefficient of infrastructure facility is also positive and at 5% siginificant level. This indicate
that, if infrastructure facility like road, electricity, water supply, building etc are available,
investment activity also increase unless investment participation decline. From this we can
conclude that availability of infrastructure facility and investment activity are positively related.
As we can see from the statistical analysis in table above, our model yielded a high value of
pseudo R-squared of 0.5. The R- squared statistics gives the proportion of total variation in
independent variable that is explained by the model, a measure of the overall goodness of fit of the
model. These results indicated the model explained a high percentage of the variation in private
investment in Ambo town. In other way, we can say that 0.5% fluctuation on investment can be
explained by family size, level of education, access to finance, interest rate, infrastructure facility
and problem of taxation. The other remained percentage which is around 0.5% is fluctuation by
other variables which is not mentioned in this model. This 0.5% is called error term or disturbance
term or stochastic term.
R squared quite high mean that the independent variable can influence the dependent variable. So
we can say that model fitted very nicely.
The change in probability for one instant change in family size decreases by 1.9 percentage points
or -0.019. The change in probability for one instant change in interest rate decreases by 6.5
percentage points or -0.065. And also for sex the probability for one instance change is increase
by 18 percentage point or 0.18. The change in probability for one instant change in marital status is
increase by 0.8% or 0.008. For age the change in probability for one instant change is increase by 1
percentage point or 0.01 points. And for access to finance, the change in probability for one instant
change is increase by 18.8 percentage points or 0.188.
27
For infrastructural facilities, the change in probability for one instant change is increase by 16
percentage points or 0.16. Finally for problem of taxation, the change in probability for one instant
change in problem of taxation leads to decreased by 6.8 percentage points or -0.068
None of the effects here are significant (see column p>|z|, for significance at 95% values should be
< 10%.
In this study, problems and prospects of private investment in Ambo town was analyzed. The
survey was conducted in the area through structured questionnaire. This study employed simple
random sampling method; Random samples are used to avoid bias and other unwanted effects. In
this study descriptive or qualitative data analysis and econometric model was used as the main aim
to explore the perception of respondents in relation of study under investigation. The data was
collected and analyzed by using table and percentage in descriptive study and by regression
analysis in Econometric model.
The study was identified the main problems that affecting investor’s decision on investment
activities like: educational level, access to finance, access to infrastructure facilities, interest rate,
family size and tax related problem. The study was also tried to identify the future prospect of
private investment based on different investment climate and incentives like, population growth,
existence of different natural resource, and other different incentives given by government
authority.
The finding of this study could be used to recommend for future intervention that can boost private
investment in city, which is one of the specific objectives of the study.
The analysis also shows that the lending interest rate is also the main bottleneck of private
investment in Ethiopia in general and Ambo town in particular. Therefore, the government
should correct the interest rate on loan as much as possible that can attract and encourage
28
potential investors in the future. It is also important that tax rate imposed on investors
should not be randomly, there should be efficient tax administration systematic, and
corruption systematic etc. Federal government and regional government should give
attention on the awareness of society towards importance of family size control and
importance of education.
REFERENCE
Agu, O. C. and Mbah S.A.(2013a) African firms manufacturing and economic development: Is
Africa Effectively Competing in Manufacturing in world market IOSR Journal Of
humanities and Social Science (IOSR-JHSS) Volume 12, Issue 3, PP 36-46
InAgu, O.C. and Basil C.O.(2013b) Credit Management and Bad Debt In Nigeria Commercial
international Financial Statistics Yearbook Washington, D.C.
MoFED, (2011). Annual Report on Macroeconomic Developments for 2009/10, Addis Ababa,
Ethiopia MoFED, (2011). National Account Abstract, Addis Ababa, Ethiopia.
MoFED, (2012). Ethiopia’s Progress towards Eradicating Poverty: An Interim Report on Poverty
Analysis Study (2010/11), Addis Ababa, Ethiopia. MoFED,(2013).
Federal Democratic Republic of Ethiopia, Annual Progress for F.Y2011/12, Growth and
TransformationPlan,AddisAbaba,Ethiopia[online]available:http://www.mofed.gov.et/
English/Resource/Documents/GTP 2004 English.pdf (Decemer-01/2013).MoFED
WB,(2013).DevelopmentIndicators[online]available:data.worldbank.org/indicators/
N.Y.GDP.PCAP.CD/Countrie s/ET?display=graph(December 10/2013).
29
Hailu, D. B. and Debele, F. (2015). The Effect of Monetary Policy on the Private Sector
Investment in Ethiopia: ARDL Co-Integration Approach. Economics. Vol. 4, No. 2, 2015,
pp. 22-33. doi: 10.116s48/j.eco.20150402.12.
an sol
30
APPENDIX
AMBO UNIVERSITY
DEAR: RESPONDENTS
This questionnaire is prepared Ambo university student, department of Agro economics under
graduating student in an attempt to conduct a survey on Challenges and prospects of private
investment: The case of Ambo town. Know that it is only for academic purpose and your response
will be kept confidential, hence I kindly request you to fill this questionnaire, I am forward my
thanks for you are going to do use ‘’ in the box.
HOUSEHOLD CHARACTERISTICS
31
8. If your answer is yes in question number 6 above, your initial capital is how many when you
start the business?------------------------------
10. What is your perception about lending interest rate? A. low B. high
12. Did you get any information about private business investment areas of participation from the
regional investment promotion centre before you started your activity?
A. no B. yes
13. Was there any difficulty in getting investment licence and permission from regional
government when there is investment opportunity in the town? A. Yes B. No
A no B yes
15. To develop the investment activity more rapidly, is there infrastructural facility for this
activity? A. no B. yes
A. no B. yes
18. Your investment is profitable after your enter this investment activity?
A. no B. yes
19. If your answer is ''yes'' for what purpose do you use this profit?
.............................................................................................
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20. If your answer for question no.15 is ''No'' why not?
.........................................................................................
21. What opportunity are there for you to expand your business in the future?
Appendixes-stata
AGE 1 0.999959
FAMSIZ 1 0.999959
Mean VIF 1
SEX 1
-
MARITSTA 0.3615 1
EDUC 0.2167 -0.2781 1
LENDINRA -
TE 0.2522 0.0195 0.0723 1
ACSSTOFI
NC 0.2875 -0.093 0.3122 0.0553 1
INFRASTR
UC 0.1582 0.0505 0.2926 0.0096 0.0487 1
TAXPROB 0.035 0.01 0.2025 -0.1364 0.1978 0.0965 1
33
Breusch-Pagan / Cook-Weisberg test for heteroscedasticity
chi2(1) = 0.02
Prob>chi2 = 0.8
34