FACTORS RESPONSIBLE FOR THE LOW LEVEL OF

INVESTMENT ACTIVITY IN NEKEMTE TOWN

A RESEARCH PAPER SUBMITTED TO THE DEPARTMENT OF

ECONOMICS AS PARTIAL FULFILLMENT FOR THE
REQUIREMNET OF BACHELOR OF ARTS (BA) IN
ECONOMICS

JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

BY: LENSA NIGATU

ADVISOR: HASSEN ABDA

MAY, 2011
JIMMA

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2
 ACKNOWLEDGEMINTS

first and for most I would to thanks the almighty GOD for helping me in
all aspect without the help of him I could never been what I am today.
Secondly my great thanks go to my families and relatives especially Dr.
Hunduma and Kalale in Christ for giving me encouragement and their
ideal support. Next, I would like to express my deepest gratitude to my
advisor Ato Hassen Abda for directing and giving me constructive advise
in my work. I am also heart fully acknowledge social science library
documentation staff member for their consistent and support. And I
want to really thank my secretary w/rit Fantu W/senbet for typing this
paper.

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 ABSTRACT

Investment is very essential to mobilize human and natural

resource to more productive efficient and effective utilization of available
resource by allocating them in investment activity. So the government of
Ethiopia has give much concern to this activity. However, this activity is
in its low level in the country and in one of the urban center, Nekemte
town. For this reason, the purpose of this research paper is to assess the
factors responsible for the low level of investment activity in the town.
The source of data include both primary and secondary method of data
collection. Primary data obtained by conductive structured questionnaire
on private investment in the town and oral questions for the manger of
investment office of the town. To conduct the questions on time 30
respondents have been selected by convenience sampling method. The
questions include information about investment type in the town,
promotional activities on investment opportunities and incentives given
for investors by the governmental bodies, problems faced investors and
possible solutions to alleviate problems in the future. The secondary data
collected from written materials available in investment office.
Finally, the data obtained from primary and secondary source analyzed,
through inferential methods

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 Table of Contents
Contents Page
Acknowledgement ..................................................................................I
Abstract .................................................................................................II
Table of content ...................................................................................III
CHAPTER ONE: INTRODUCTION
1.1 Background of the study...................................................................1
1.1.1 Overview of Nekemte town ..........................................................1
1.2 Statement of the problem..................................................................3
1.3 Objective the study............................................................................4
1.4 Scope of the study.............................................................................5
1.5 Significance of the study...................................................................6
1.6 Limitation of the study .....................................................................7
CHAPTER TWO:- LITERATURE REVIEW .............................................8
2.1 Theoretical Literature .......................................................................8
2.2 Empirical Literature........................................................................13
.3 Methodology.....................................................................................14
.3.1 Source of data.................................................................................14
3.2 Data collection Technique..............................................................14
3.3 Method of data analysis and interpretation.....................................14
CHAPTER THREE:- RESULT AND DISCUSSION................................10
3.1 RESULT AND FINDING OF THE TOWN...................................17
3.1.1 Factors Affecting Investment in Nekemte town..........................17
3.1.2 Institutional Problem....................................................................17
3.1.3 Economical Problems on Investment Activity.............................25
3.1.4 Infa – structural problems on Investment Activity.....................28
CHAPTER FOUR:- CONCLUSION AND RECOMMENDATION ........32
4.1 Conclusion......................................................................................32
4.2 Recommendation...........................................................................33
REFERENCE.......................................................................................34\
APPINDIX...........................................................................................1-2

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IV
 CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The role of investment to the development of a nation is very large.
Investment increases the productive capacity of an economy. It is a very
important to utilize untapped resource to create job opportunity for citizen,
to increase foreign currency through import substitution and export
promotion of anation and facilitate the communication and cultural
exchange of society.
In our country there is huge amount of idle resource which is not
mobilized to investment activity due to inefficient and infective utilization of
resource which results in low level of in come. Because of low level of
income it is difficult for the people to allocate their in come for investment
activity out of their consumption. To develop the investment activities in
urban areas, facilitation of the infrastructure facilities, ownership right
policy, identification of potential investment opportunities, access of
information about investment activity, given incentives and promotion of
investment opportunities for investment are very essential steps to be
undertaken (Fantun Melles, January 2004).

1.1 OVERVIEW OF NEKEMTE TOWN

This research is conducted in one of the urban center, Nekemte town,
which is located in East wollega. the town is established long years ago. But
still the investment activity is in its infancy stage. Nekemte town has the
vast reserve of natural resource and good climatic condition which indicates
the relative advantage for the potential investment opportunities. The town
is considered to be the middle route to almost every districts, town and
regional of Ethiophia. But due to economical, social and political

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constraints, the investment activity has not shown a considerable
development.

Geographically the town has altitude and longitude of 9.0830 0 N, 36.550E

and an elevation of 2,088 meters. Addittionally the town is at the center of
the road network for south western Ethiopihan. the first major road dates to
the early 1930s, with the road that extended from capital Addis Ababa west
through Addis Alem, although the road was possible only by lories for 225
kms between them. A branch of electric light and power authority began
providing electricity to the city by 1960 BY 1957, phone service extended to
the city.
Based on figures from the central statistical Agency in 2005, this city has
estimated total population of 84,506 of whom 42,121 were males and
42,385 were females. The 1994 census reported this town had a total
population 47,258 of whom 22,844 were males and 24,414 were females.
Now a day the town has its own investment offices to encourage private
inventors and foreign investors through giving major incentives to potential
investors and promotional activities about investment opportunity in the
town. The investment office is also responsible to facilitate infra structural
facility for investment activities, about marketability of project, technical
and advisory service to investors. But due to problems both on prevate
investors and government side, the investment activity in the town is very
limited.

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 STATEMENT OF THE PROBLEM

Investment is very essential to mobilize human and natural resource to

more productive, efficient and effective utilization of available resource by
allocating them in investment activity. It is also important to produce goods
and services and creat employment opportunities for the society.

As investment plays a great role in economic development, the

government of Ethiopia has given emphasis concerning this activity. Its
purpose was to develop the investment activity by giving major incentives
for investors and promotion of investment opportunities both for domestic
and foreign investor so as to increase the number of participants in this
activity. (Befekadu Degefe and Berhanu Nega, 1992). But due to social,
political and economical constraints, this activity has not show a
remarkable development in Nekemte town. (Investment office)

Some research finding on promotion of private investment is concluded

that, investment is constrained that, investment is constrained by the
macro and micro economic determination, human capital base weaker and
less diversified economies. But, his study can not explain the inadequate
and deteriorating infrastructure and poor institution. Additionally there is
an other problem come up and no solutions gained.
This study analyzed factors responsible for the low level of investment in
Nekemte town and indicated what should be done to enhance this activity.

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 OBJECTIVES OF THE STUDY
The research paper has general and specific objectives.
The general objective of this study is to assess the factors which have
contributes to the low level of investment in Nekemte town.

The specific objectives are:

Analyze factors responsible for the low level of investment in the town.
Forward some measures that should be taken to enhance the
investment activity in the town.

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 SCOPE OF THE STUDY

In order to collect information by primary and secondary data, the study

covered different populations. These population includes private owners in
the town, public investment by the society, governmental and non
governmental organization.
Nekemte town investment office are include in the study and
supplementary information had been collected. It help to know
governmental supporting for investment activity in the town by giving major
incentives and promotion of investment opportunities through different
promotional methods.

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 SIGNIFICANCE OF THE STUDY
To improve the living standerd of the socity, capital allocation on different
sectors of economic activity is important to mobilize the available resources
to more productive. For this purpose, Nekemte town has good investment
opportunity due to favorable climatic condition and its favorable strategic
location owning to proximity and as a junction. But due to lack of
significance study to identify this opportunity and to investigate its impact
on economic development, the investment activity in the town is very
limited.
Due to absence of significance efforts to enhance the investment activity,
there are many developmental problems and promotional activities for
investors, corruption and administrative influence; infrastructures problems
like social service, poor and deteriorated roads and inadequate power
supplies; and economical constraints like lack of loan serviceand high
taxation. Identification of these cause for low level of investment is very
important to develop this activity in the future.

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 LIMITATION OF THE STUDY

Due to some constraints while conducting this research the study have
its own limitation. Among the major constraints, the following can be
mentioned.

 Misunderstanding of questions by respondents and lack of giving

correct information
 Unavailable of many written materials related with this topic and
getting other information
 Due to lack of time, the study could not conducted as many investors
as possible so that the study focused only on afew selected investors
found in the town
 Financial problems to obtain necessary data
 Lack of ample experience in the research
 This study restricted (limited)to Nekemte town

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1 THEORTICAL LITRATURE
The term investment refers to a sum of funds committed on the
physical and human cavity by both profit and no profit oriented
individuals and institutions. It is applied to production of goods not
meant for immediate consumption but further production of goods such
goods are called, investment goods. The investment of business firms
usually comprises of capital goods and inventories (Baddely 2005).
Many scholars defined investment in different way. Herfert (1997)
has defined investment as afixed and initial operating resource used for
the production of goods, the provision of services and the development of
science and technology capacity. Gitman (1997) defines it as a sizable
out lays of funds that commit afirm to some course of operation, the firm
lies on specific procedures to analyze and select those investments
properly. In economics, investment can be defined as the purchase of
plant, equipment or inventory. In lay terms investment is the acquisition
of an asset such as a stock or a bond (Hprnet B.Mayo).
Once an individual receives in come, there are two choices: to
spend or to save it. regardless of how you use your in come, investment
can be defined as post – pond consumption (R.stephen sears, 1993).
Individuals may postpone their current consumption to accumulate for
the sake of accumulating. For any or all of these reasons individuals save
part of their in come rather than spend all of their in come.

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 The above analysis shows that investment has a strong relation
ship with saves in come. But the extent of investment also depends on
the level of consumption. As mayradl abserves “there are no other road of
economic development than a compulsory rise in the share of the nations
income which is with held from consumption. In an economy where
living standard of the masses are too low, to curb consumption, it is
difficult to moblize and allocate resource in to investment activity.

Harrod-Domar growth model can be used to predict the role of

foreign capital inflows on growth. The model assumed that saving
depends on income via the marginal propensity to save and that
investment is a constant ration of capital. The positive difference between
investment and saving equals current account defecit. Harrod – Domar
model predicts a positive relation ship between the foreign aid and
investment. That is to supplement the internal resources through foreign
aid, investment should be increased to under developed economy.

As investment activity is affected by social, political and

economical condition, there are some criteria have to be considered
before starting investment activity. Shamunis (1998) said that before
starting investment activity, one investor must know and analyze in what
area he is going to invest, the available funds he/she has for investment,
the economic and political situations and profitability. In addition, an
investor should know the advantage for the society. That is the quality

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and quantity of goods and service to be produced, employment, export
and utilization of natural resources.

2.1.1 THEORIES OF INVESTMENT

There are many theories of investment that discussed such as
classical, keynessian, Neoclassical, Accelerate and other theories of
investment.

2.1.2 CLASSICAL THEORIES OF INVESTMENT

The classical school argued that capitalist make investment
because capitalist make profit in the future depends on what profit are
now. For example, Adam smith in his book “ the wealth of nation “
elaborated this fact by arguing that, investment were made be cause the
capital expected to earn profit on invested capital depending up on the
present climate of investment as well as actual profit. However the rate of
profit tends to full with economic progress, when the rate of which
capital accumulated increase completion among capitalist, raise wages
and tends to lower profit and hence investment (Jhingon, 1988).

2.1.3 NEOCLASSICAL THEORY OF INVESTMENT

For the neoclassical theories, the marginal benefit of investment
can be represented as addition to future expected out put that will be
accured, with investment capital stock, the marginal cost can be
represented by the cost associated with buying and renting an additional
unit of capital. The desired level of capital is positively related to the

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rented cost of capital which is inturn depend on real interest rate.
(Dornush, 1994).

2.1.4 KEYNESIAN THEORY OF INVESTMENT

The theory of investment behavior goes back to Keynesian (1936)
General theory who first called attention to existence of an independent
investment decision function in the economy. He observed that
investment depends on the prospective marginal efficiency of capital
relative to some interest rate that is reflective of the opportunity cost of
investment fund. He further there pointed out that because the rational
assessment is volatile. He described this volatality of expectation by
saying that investment decision depends on the private investors or
entrepreneurs optimism or pressurizing about the future, (serven L and
Andres soliano, 1992).

2.1.5 ACCELERATE THEORY OF INVESTMENT

The accelerator theory postulated linear relation ship between
investment and out put. According to this theory, given an investment
requirement associated with a given target for out put growth. that
means a change in the rate of growth of income produced a magnified
change in investment. As in come falls, investment falls quite
significantly and arise in income result in arise an absolute level of
investment (Dornbush and Fisher, 1994)

2.1.6 INVESTMENT AND ECONOMIC DEVELOPMENT

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 Investment activity is central to promotion of economic well being
because it is one of the most important economic activities that
consumers, producers and business can undertake. Investment also has
an important influence an employment and today determines economic
activites of tomorrow by building up resource of capital that will be used
to produce goods and services (Mc Baddely, 2003)

2.1.7 DETERMINAT OF INVESTMENT

What determine the level of investment is highly continuous and

emphasized topics in economics. Investment spending depends on the
economic, social and political situation of a country that affect the return,
but such a favorable condition is often lost for most developing countries in
realizing this, there is agorwing interest in the countries on the factors that
influence the pattern and level of the private investment activities and the
same factors is identified.
According to Samuel son (1989), Investors invest more that will enable
them to earn profit. According to him there are three (3) main determinants.
These are revenue that is an investment will bring more product which
leads to encourage investors less and other wise it discourage. The second
one is cost which is interest rate and government taxes. As it is obvious
investors invest by borrowing of funds and if the interest rate is higher it
discourage investment. The third one is execrations were the investors
predict about the future return of investment and if its prediction is positive
this will encourage him or if its prediction is negative on its return this leads
to discourage.

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 2.2 EMPLRICAL LITERATURE

The empirical research on investment has invariably been limited in the

developed country. However many studies have been made in developing
country recently and have been conducted about the low level of investment
activity in different countries.
The research study which is prepared by Lemessa Tadese for the partial
fulfillment of the requirement of BA degree in Economics program on the
economic impact on one hand and social and political constraint of
investment town in 2007 conclude that, activity in the town is rather small
town that recently gained a higher administrative status. This low level of
investment is due to absence of well qualified workers to study investment
opportunities in the town and promote to investors who has a potential to
investors who has a potential to invests, bureau critic system of land lease
policy, high competition among investors.

Corruption can also deter investment and there by lower the economic
development (Mauro, 1995). Comrruption is a specific measure of illegal

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activities with in the political system. The opportunity for corruption occurs
when public officials are the gatekeeper of public goods and services.

Shaum’s (1999) has set the process for evaluation and selecting
long term investment in long term asset such as property, plant and
equipment or resource commitments in the form of new product
development, market research, refunding and replacement decisions such
as replacement of existing facilities with new facilities.

Daniel (2004) has tried to model the determinant of investment in

Ethiopia following the argument that investment is externally constrained in
developing countries and it is affected by risk and un attained variables. The
model tries to capture the effects of external financial constraints domestic
and international risk variables, public investment of infrastructure and out
on the private investment. In his thesis he concluded that private
investment is determined by availability of finance, the real exchange rate,
investment policy, debt service payment and the debt over hanging.

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 2.3 METHODOLOGY
SOURCE OF DATA
To achieve the general and specific objectives of the study, both primary
and secondary data was collected. Primary data was collected through
structured questionnaire distributed to individuals engaged in investment
activity in the town and oral questions for the manager of investment office.
The secondary data was obtained from written materials available in the
investment office of the town.

DATA COLLECTION TECHNIQUES

To answer the questions 30 investors were selected by random sampling.
That is all random samples are based on randomly procedure (methods).

METHOD OF DATA ANALYSIS AND INTERPRETATION.

The study variable about investment activity that are collected through
the above methods of data collection are important to investigate their
impact on investment level of the town. These include information about

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opportunities and types of investment, economic incentives given for
investors (access of land to invest, exemption from taxes, advisory service
etc) and promotion of investment opportunities in the town for local and
forging investors through advertising, massmedia, news paper, magazine by
governmental bodies to promote the investment activity in the town.

CHAPTER THREE

RESULT AND DISCUSSION

3.1 RESULT AND FINDING OF THE TOWN

The role of investment to be the development of a nation is very

large. It is important to improve the living standard of the society
through investing capital in various economic activities. These include
investment in agriculture, industry, trade and commercial activities,
social services like education and health service. Allocation of capital in
these activities helps utilize the available human and natural resources
in to more productive way and bring economic development particularly,
investment in urban areas helps to utilize the available human resource
through creating job opportunities in various activities.
However, the investment activity in Nekemte town is still in its low
level due to various constraints. New business activity is concentrated in
commercial sector. The questionnaire conducted on private investors
about the type of investment activities give the following information.

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 Type of investment Number of Percentage (%)
activity investors
production of goods 12 40
and service
service giving 18 60
Source: primary date, 20011

From the total of 30 respondents 18 of them has answered that their

investment activity is service giving while the remaining 12 investors is
production of goods and services. This shows that most of the investment
activities in the town an related to the type of service giving activities.

The twon is an important transport mode which can develop a

regional distribution center in the east wollega part of oromia. This
ownes to its location afunction point for roads that leads to Bedele,
Asosa, BahirDar and DambiDolo. The town’s relative proximity to Addis
Ababa enhance the town’s role as a distribution center for commodities
to be produced in and around Addis Ababa or those to be imported from
elsewhere.

There is no large – scale industrial activities in the town, even

there are some wood and metalwork, grain mills, bakeries and pastries
which the local Department of industry and Handicrafts recognizes as
small scale industries. The dominant manufacturing activities are grain
mill and woodworks taken account for about the percent of the total
number of manufacturing enterprises in the town. There are also a

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significant number of hotel facilities exist in the town ranging from mini
bars to those with relatively higher service capacity. It is worth that most
of these facilities located in the town are poor in service and below the
standard.

Currently the major constraints, which hinder the development of

the investment activities in the town can be categorized in to
institutional, economical and infrastructural problem. Institutional
problems include lack of advisory and consultation services or
information related to service, lack of promotional activities and
incentives, corruption and administrative problem (low level of qualified
workers in offices) and problem which is related to land lease system.

Economic problem include lack of capital loan, low level of market

activity due to lack of diversity and high level of tax. Infrastructural
problem include transport service, health service, educational service,
water supply, telephone, electricity limited to recreational centers, It is
very important to analyze these problem to understand their impact on
investment activity in the town.

3.1.1 FACTORS THAT AFFECT INVESTMENT ACTIVITY IN NEKEMTE

TOWN
3.1.2 INSTITUTIONAL PROBLEM

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A. PROBLEM OF LAND LEASE HOLDING POLICY

Land lease holding policy has a major impact on investment

activity in the town. Due to high competition among investors to get land
for construction purpose, currently a small plate of land has high
amount of price. The questionnaire conducted on private investors show
that among 30 respondents 24 investors replied that land lease policy as
a major cause on investment activity. i.e what do you think the cause for
low level of investment activity in the town?

Cause of problem No of respondents Percentage %

Land lease holding policy 24 80
Other problem 6 20
Source: primary date, 20011

As it is also suggested by investment office workers, land lease

holding policy is the major problem which affect the investment activity
negatively. Nekemte urban local administration has power to give land
for necessary business activity, land is acquired on lease hold bases in
the form of auction agreement depending an the type of project
submitted. An investor who wants lands for construction purpose, has to
submit a proposal about his business activity in the first case. Then the
authority of land for construction will be presented for auction among
many investors. During this time there will be high competition on the
price of given plote land.
At present time, price of a given plote of land is expensive. This has
negative impact on investment activity in the town. Due to this fact an

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investor who submits his proposal in order to get land may not get land
and incur losses. The land lease holding policy has also some problems
related with longer time to get land for business activity and an investor
can not facilitate time value of money.
The above analysis shows the impact of land lease holding policy
on investment activity. Due to difficulty to obtain land for construction
and problems of affordability associated with the decline of urban
economy and the increasing cost of construction materials.

B. LACK OF ADVISORY AND CONSULTATION SERVICE

Before starting an investment project, an investor should know the

social, economical and political situation to operate his or her business
activity in an efficient manner. For these reasons the institutional
workers should give for an investor information related to profitability of
his business activity, availability of resource in that area and their
utilization in effective way, study about the demand of goods and service
produced from that activity by the society, employment opportunity for
the society are some of the advisory and consultation service for an
investor to operate his business activity in effective and continuity way.
The questioner conducted on private investors has serve the following
information i.e Do you get consultation and advisory service from the
town’s investment office when you start your business activity/
Respondent Frequency Percentage %
yes 10 33.4
No 20 66.6
Source: primary date, 20011

If yes is it adequate?

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 Respondent Frequency Percentage %
yes 10 33.4
No 0 0
Source : primary date, 20011

Is it continuous?
Respondent Frequency Percentage %
yes 10 33.4
No 0 0
Source: primary date, 20011

The data collected from the interview questionnaire shows that from 30
investors about 20 of which did not get advisory and consultation
services. This shows that only 33.4% get advisory and consultation
service when they start their activity, while the remaining 66.6% did not
get any information. Due to this fact, there are some businessmen who
stopped their activity due to incurring of loss. The data also shows from
the 30 respondent 10 of them say the service is adequate and also
continuous. This show only about 33.4% is adequate and continuous.

C. LACK OF PROMOTIONAL ACTIVITIES AND INCENTIVES

I/ PROMOTIONAL ACTIVITIES

The investment office has a function of collecting and analyzing

data the list of property in the town, investment opportunities and
information about projects land resources and report is to the regional
investment bureau. This information is essential to know the investment
opportunities and promote it for investors through different promotional
methods (seminars, media) and there by develop investment activities in

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the town. In addition, such communication between the town’s
investment office and the regional investment bureau helps the region to
be competitive in attracting foreign investment in the region in general
and to the town in particular. Considering this, the questionnaire on
private respondents has given the following results. Is there any activity
done by the investment office of the town and other governmental
agencies in promoting investment opportunities?

Respondent Frequency Percentage %

yes 8 26.7
No 22 73.3%
Source: primary date, 20011

If yes how?
Method of promoting No. of respondent Percentage (%)
Advertising 3 37.5%
seminars 4 50%
other methods 1 12.5%
Source: primary date, 20011

But the Nekemt investment office have weak capacity in promoting

investment activity as suggested by private investors. From 30
respondent 22 private investors said that there is no activity done by the
investment office of the town and other governmental agencies in
promoting investment opportunities. This shown that 73.3% of the
respondents said that there is no promotional activity by the office due to
absence of well qualified workers to study about investment

22
opportunities in the town, financial constraint faced by the office. The
remaining 26.7% of respondents said that there is promoting of
investment through seminars (newspaper, magazine) (50%), by
advertising through radio television which is about 37.5% and the
remaining 12.5% through other methods like creating of social
awareness about the investment activity.

In general, do you think the promotional activity of the town is

adequate to attract potential investors?

Respondent Frequency Percentage %

yes 5 16.7%
No 25 83.3%
Source: primary date, 20011

The above analysis shows that the promotional activity of the town
is not adequate to attract potential investors as 25 respondent said while
only 5 respondents answered as it is adequate to attract investors. It is
due to low levels of promotional activities that the participants of
domestic and foreign investors are low in Nekemte town compared to the
newly developed towns like Adama and Bishoftu in the region.

II/ LACK OF MAJOR INCINTIVES FOR INVESTORS

According to investment proclamation No 3711996, the following
types of incentives shall be approves in full or inpart, taking in to
consideration the type of project and their location of establishment,
these includes:-

23
 - In come tax holiday and exemption from payment of custom duty
for import
- Carrying forward to losses incurring during tax holiday period.
- Deduction from taxable income of expenditure on research and
training
- Right to choose calculation of annual depletion allowance either on
the basis of straight line or accelerated methods.
- Giving of incentives to investors by the government encourage
them to participate in investment activity.
- The right of exemption from payment of custom duty on export
products (except coffee)
But as most of the respondents suggested that giving of incentives
to businessmen is simply put in theoretical manner to develop
investment activities. To know whether there is adequate incentive or not
the data from questionnaire has given the following results. Is there any
support (incentive) for investors in the town?
Respondent Frequency Percentage %
yes 9 33%
No 21 70%
Source: primary date, 20011

If yes, which one?

Incentive Frequency Percentage %
Exemption from tax 5 55.6%
Access of land 2 22.2%
Land from abank 2 22.2%
Source : primary date, 20011

From the total of 30 respondents 21 explained as they did not

getany support or incentive. The remaining 9 (nine) which accounts 30%

24
said they got incentives during their engagement. This include exemption
from tax (5 respondents), access of land and loan from abank on behalf
of the investment office (from two (2) respondents.)

D. CORRUPTION AND ADMINSTRATION PROBLEM

CORRUPTION:- It affect investment development by misallocation of
human and natural resources which result under utilization of
resources. The negative effect of corruption on investment activity in the
town can be proved from data obtained.

Was there any difficulty in getting investment license and permission

from local government when there is investment opportunity in the
town?

Respondent Frequency Percentage %

yes 16 53.3%
No 14 46.7%
Source: primary date, 20011

Some respondents (16 from 30) have explained that the cause of low level
of investment activity in the town is due to corruption by the investment
workers. The respondents said that there were difficulties in getting
investment license and permission from local government when there are
investment opportunities in the town due to personal behavior and over
taxation of some businessman activities beyond their capacity.

ADMINSTRATION:- Currently Nekemt is the administrative capital

of East Wolega Zone of oromia region. It has aworeda states with in the
Zone and Kebeles under it. One of the function of the town
administration to the promote public private partnership and attract

25
investment to the town that would create employment and improve the
life quality of the residents. This can be achieved by providing urban
socio-economical service and expanding infrastructure, promoting
investment activities , providing effective and efficient public service,
ensuring greater public participation in all important matters of the
town, ensuring good governance and development so as to make the
town suitable for investment activity.

But due to weak administrative problem some investor suggested that its
negative impact on this activity. What do you think the cause of low level
of investment activity in the town?

Negative impact on investment Frequency Percentage %

Administrative low level of skill 17 56.7%
of workers, frequent turnover of
workers
Other causes 13 43.3%
Source: primary date, 20011

Due to constraints on administration system in the town, the investment

activities did not show any development as it expected. From the 30
respondents 17 of them have given information on administrative
subdivision include weak municipal capacity which mainly owns to the
generally low qualification of its staff. There is also a significant staff
turnover which has an important implication on the municipality’s
institutional capacity. The continuation of this will make difficult to
pursue a well- defined urban development agenda at local level. Due care

26
therefore, be taken in order to appoint strong and committed
personalities that would lead the administrative system in a more
responsible manner.
3.1.3 ECONOMICAL PROBLEMS ON INVESTMENT ACTIVITY
A. Lack of capital (loan service)
Currently there governmental banks to facilitate loan service to
their customer in the town. These are commercial bank of Ethiopia,
Bank of Ethiopia and construction and Business Bank of Ethiopia. There
are also private banks such as Awash Bank

It is worth nothing that the presence of these banks would contribute the
town’s commercial role as they provide short –term loans to
businessmen. But the importance of these financial institution to
facilitate the investment activity is limited as following data shows. What
is the source of income to start your investment activity?

Source of income No investors Percentage (%)

Loan from a bank 5 16.7%
Loan from individual 13 43.3%
Personal saving 12 40
Loan from NGOS 0 0

The data obtained from interview questionnaire shows that from

30 respondents only 5 respondent get loan from a bank to start their
investment activity. The remaining 13 got loan from an individual which
12 investors use their income which is saved for investment purpose.
This shows that even though there are enough financial institutions in

27
the town, the number of investors who got loan service are very limited.
This is due to absence of collateral assets to get loan from financial
institutions, failure of banks to have sufficient information reporting
their customers to give loan service. Private owners have also problem
related with poor saving system, failure to make investment bases on
market studies which leads losses, low level of educational and
functional training how utilize and manage their funds are also some
problems prevailing the town.

B. HIGH LEVEL OF TAXATION

Due to high level of tax an business activity in the town some

investors have faces problem during their engagement. During taxation,
tax collectors over valued their capital assets and they levy high amount
of tax on their business. Even during low level of profit due to low level of
market activities and it is difficult to continue their activities in
sustainable way. On the other hand there is a policy set by the
government to exempt from taxation on private owners to enhance their
activities from market failures. The table below shows the support
incentive for investors including exemption from tax. Is there any
support incentive for investors in the town? If yes, which one.

Incentive No. of Investor Percentage %

Exemption from tax 5 55.6
Loan from a bank 2 22.2
Access of land 2 22.2
Market for your goods 0 0
and service

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 Source: primary date, 20011

But as 25 respondents from the total of 30 respondents explained

that this policy is simply put on paper without practical and they do not
get tax payment advantage as an incentive during market failure.

3.1.4. INFA–STRUCTUREAL PROBLEMS IN INVESTMENT ACTIVITY

Nekemte has better infrastructure facilities like transportation

service, finances service (private and governmental) telephone, social
service (education and health centers). But the currently available
infrastructure service do not correspond to the exact supply and demand
condition to facilitate business activity in general and for investment
activity in particular due to poor quality and quantity of these services.
With regard to this issue the following data has been obtained from
interview questionnaire.
To develop the investment activity more rapidly, is there
infrastructure services for this activity?

Respondent Frequency Percentage %

yes 23 76.7
No 7 23.3
Source: primary date, 20011

If yes, which one?

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 Infrastructure facilities Respondent Percentage %
Power supply 22 73.33
Banking and loan service 14 46.7
Telephone 20 66.7
Transportation 17 56.7
Source : primary date, 20011

A. TRANSPORT SERVICE
Nekemt town has both intercity and regional transport service.
Asphalted, grave surfaced and all weather roads of different width
exist in the town.
The existing main urban center would continue to serve as regional
and urban level centers with unique feature of specialized and
higher oreder facilities and service. The different modes of
transport that give transport that give transport services in the
town include horse –drawn cart, city bus, taxi, and bicycle.
City Bus – Nekemte is one of the very few town in Ethiopian
with bus transport service. While some buses overlap on the same
route, there are many large unserved areas. On the other hand the
number of city bus users has been declining due introduction of
more efficient and comfortable taxi transport and obsolescence of
the buses. The city buses are old and frequently sent to grage for
maintenance and hence the service is not provided smoothly and
regularly.
Taxi – There are large number of the passenger along from
Bake Jama to university. However, the existing number of taxis are
not adequate. The major problem observed on the road condition of
the town include.

- Deterioration and lack of proper maintenance of roads

30
- Sharing of the same route by different modes of transport (by foot
and by different types of vehicles) which caused over crowding.

HEALTH AND EDUCATION SERVICE

HEALTH SERVICE:- The existing health facilities in the town
include one health center, one referral hospital, some clink and
pharmacies (drug stores). the burden on the health institutions
located in Nekemte town is high as the town serve those coming from
other urban and rural areas. So, there is a need to construct
additional health institutions in the area to relieve the burden on the
health institutions.

The various health service data indicate that HIV/AIDS is

increasing of alarming rate and it is one the problem that post threat
to the town. the rate of infection is mostly observed among the youth.
The prevalence rate of the disease is currently estimated over 50% of
the town’s hospital bed is occupied by AIDS patients. The social and
physiological decay the illness and community break down has made
relative impact on development endeavors.

EDUCTION SERVICE:- The availability of higher education and

training institutional has a potential role in development activities of
private sector. Currently one university, which consists of various
faculties, is undertaking undergraduate and postgraduate programs.
Besides there is one teacher training college and four private college
primary which provide distant education program in Nekemte town.
Despite the fact that the educational access has risen, it has faced
with high quality problem. The existing schools are facing problems
like poor physical state of buildings, shortage of furniture, shortage of

31
classroom, low level of teaching process and absence of capable
teachers are among few problems to be mentioned.

C. POWER SUPPLY
Water supply: Until recently Nekemtes water supply has been
obtained from ground water source. Currently, the water supply of the
town is obtained from Hadiya water source. the existing water supply
situation does not reflect the exact supply demand conditions.

ELECTRICITY SUPPLY:- Nekemte has got hydroelectric power supply

which has a maximum capacity of 4.8 MW from finchaa. There are
transformers that step down the higher power in to low voltages for
household consumption. Most of the users are domestic users
followed by commercial and government institutions. But there is
shortage of electricity for private consumers. Besides, there is no light
for some roads and it is difficult for movement at night.

32
 CHAPTER FOUR
CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION
Allocation of capital on different sectors of economic activity is
essential to move the available resources in to more productive. To
increase the development, allocation of human and natural resources in
effective and efficient manner on investment activity is very crucial
aspect. With out investment it is impossible to have any development
rather it remains in poverty. This is mainly seen in developing countries
like Ethiopia. If there is unemployment, if there is unemployment, there
will below productivity which results in low level of in come, there is
poverty.
This research is conducted in Nekemte town to investigate the
factors responsible for the low level of investment activity. Data was
collected through primary and secondary method. The data obtained was
analyzed through inferential method. According to data obtained shows

33
that the investment activity was found in its low level to activity due to
various an constraints. However, the town has good opportunity to
become an important distribution center in East wollega zone, owing to
its strategic location due to its proximity to Addis Ababa and as a
Junction point for roads that head to various directions.
Yet the level of investment activity in the town is rather small
particularly when compared with the level of the investment in other
small towns that recently gained a higher administrative status.
Bureaucratic system of land lease policy has a great impact on
investment activity.

Due to high competitions among investors, a small unit of land has

high price in the town and it is difficult to get land easily for
construction purpose.
Low level of in stitutional capacity due to absence of well qualified
workers to study investment opportunities in the town and to promote
it to potential investors, to give advisory and incentives for private
investors have its own limitation on this activity. The town’s low level
of infrastructure facilities like deteriorated and over croweded roads,
unbalance educational and health services with the town’s population
have also negative influence on investment activity.

In general, Nekemte,s strategic location as a middle route with

favorable climatic condition can be seen as an opportunity for
development of new investment activity,. And due to economical,

34
infrastructures and political hindrances this activity in its low of stage
in the town.

4.2 RECOMMENDATION
To enhanac the investment activity in the town in the future, the
following recommendations are suggested by the researcher.
- The main constraint for business activity in the town is the
difficulty to easily obtain land for new investment. In this regard
the land lease policy which is being used by the local authorities
for implementation in the town should be handled in a manner
that will contribute to the reification of local urban economy.
- Development of infrastructure facilities plays a major role for the
development of investment activities. In order to facilitate
transportation service, deteriorated roads should be maintained,
gravel surface roads should be asphalted and the construction of

35
 additional inner roads which can help for fast movement of goods
and service with in the town.
- To diversify the business activities, it is essential to provide
sufficient information to private investors about alternative
investment opportunities. In this regard investors before starting
their investment activities by seeing only others doing if should
identify new investment activity in the town.
- The institution capacity of the town should strengthen to give
advisory and consultation service for potential investors.

REFRENCE

 Abraham, William F,Jecffery, 2nd Eduitian, Fundamentals of

Investments, 1993, New Jersey
 Baddely M.C (2005), Investment Thcories and Analysis, Groveland
College Cambridge.
 Befekadu Degefe and Berhanu Nega, Ethiopian Investment
Commission, 1992, Addis Abeba
 Daniel Zerfu (2004) Macroeconomic Determinant of Private
Investment in Ethiopian.

36
  Fantaun Melles, Investment Guide to Ethiopia, January 2004,
Addis Abeba, Ethiopia
 Fisher (1994), Macroeconomics, the world bank and department,
6th eduition, Newyork University and population council.
 Samuel Son (1989) Consumption and investment economics 13 th
ed.
 Serven L. and Anders solimano (1991), Economic Adjustment and
Investment performance in developing countries.

APPENDIX
JIMMA UNIVERSITY COLLEGE OF BUSINESS AND
ECONOMICS
DEPARTMENT OF ECONOMICS
QUESTIONNAIRE

DEAR Respondents;

The purpose of this questionnaire is to collect information

from the private investors, for research purpose. The

37
information you provide will be used for academic research
purpose any and all your response will be secret, Hence I
kindly request you to fill this questionnaire, I am forward my
thanks for you are going to do use ‘” “ in the box.

1. (i) sex : male (ii) Religion Christian

Female muslim
Other
2. age -18-25 -46-65
-26-45 -above 65
3. Educational Status
 Illiterate - 7-10
 1-6 - vocational
4. Marital status
Married single others
5. What is the area of your investment?
Agriculture trade
Industry serve other
6. What is the major source of ford to start your investment
activity?
Loan from a bank personal saving
Loan from individual other source
Loan from NGOS
7. Did you get any information about private business
investment areas of participation from the regional investment
promotion center before you started your activity?

38
 Yes No
If yes, was it adequate by the office?
Yes No
If No, what is the reason?
Did you get consultation and advisory service from the town’s
investment office when you started your business a activity?
Yes No
If, was it adequate?
Yes No
8. Are there means to get information about areas of
participation in the investment activity other than the to long
investment office?
Seminars
Media
Others (specify)
9. Are there investments opportunities open for domestic
and /or foreign investors in the town?
Yes No
If, which one? Banking
Hotel and tourism
Insurance
Transportation
Trade
Agriculture

39
10. Was there any difficulty in getting investment licensee and
permission from local government when there is investment
opportunity in the town?
Yes No
If the above question is yes, please specify
11. is there any activity done by the investment activity office
of the town and other government agencies in promoting
investment opportunities?
Yes No I don’t know
If yes, how? By advertising (video, television)
By seminary (Newspaper, magazine)
Other methods (specify it)
If No, why?
12. Generally, do you think the promotional activity of the
town is adequate to attract potential investors ?
Yes No
If No, what should be done and how?
13. Is there any support for investors in the town?
If Yes, which one? - loan from a bank
- Accede of land
- Exception from tax
- Market for your goods or service
Others (specify)
14. To develop the investment activity more rapidly, is there
infrastructural facilities for this activity? Yes
Yes No

40
If yes, which one?
Power supply (electricity, water supply)
Banking and loan service
Telephone
Land and aire rate
15. Have you ever faced problems during your engagement in
investment activity?
Yes No
If yes, in what way?
- social (lack of public co-operation, cultural influence)
- Governmental (absence of incentives, consultation and
advisory service)

- Economical (low level of market activity high level of tax

rate )

16. What is the level of investment in the town?

Low medium high

17. What do you think the cause of low level of investment

activity in your opinion?

18. What do you suggest in general to chances the investment

activity in the future in the town?

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 -

DECLARATION

I undersigned declared that this student research proposal is my original

work and has not been presented for a degree in any other University.
And all the materials used for these studies have been duly
acknowledged.

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_____________________ _________________
Name of student Signature
This student proposal has been submitted for examination with approval
as a university advisor.

_______________________ _________________
Name of Advisor Siognature
______________________
Date.

43