CHAPTER ONE

1 .INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Investment is a decision made at today to be justified by the outcome of tomorrow. However, future
outcomes are not fully predictable investment decision in uncertain climate entails the option of waiting
for additional information to the extent that incentives lag behind the risk premium of uncertainty the
decision to invest is likely to be postponed (Pondyck,1988 and Barotola,1989).
There are two types of investment. Those are private investment and public investment. Private
investment is that investment which changes in outcomes or the rate of the profit, private investment
increase and highly income elastic where as public investment is an investment to determine by
expected rate of return and market rate of interest. It also show how externally determine level of
investment is affected aggregate of expenditure and independent of income (Byres and Weston, 1993).
In many developing countries the reduction in aggregate demand is often borne disproportionally by
investment, especially in the public sector rather than by consumption which may be already low level.
The recovery of private investment particularly in the tradable good sector is critical for resorting over
all capital formation and economic growth (EEA, 1996).
In Ethiopia, investment was started in a modern form with identified polices in the imperial regime. But
since the feudal regime was not bringing a better economic growth revolution of socialist changed the
economic policy in 1974. It was real case to productive force for raped economic growth. The financial
resource for investment comes from reduced consumption of the former ruling class, profit from
nationalized industries and the increased saving that from peasants who were the direct beneficiaries of
land (EEA, 1999).
Private investment is an important part of the economy and has major aspect on employment
situation. Because a business that expand usually more workers, when private investment goes away
down, unemployment tends to go up. It involves a large scale production and technical progress,
increase specialization, creates employment opportunity and helps to have a more diversified economy.
Its rate and efficiency are the dynamic element in economic development endeavor that is why many
economists agree on the fact that every country should invest a good deal of its income or gross output
so as to have a sustainable growth (Lewis, 1956).

1.3 Research Question

The researchers try to address the following research questions.

1. What are the factors that influence private investment?
2. What is the current situation of private investment in the town?
3. What are the factors that should be considered for enhancing private investment?
4. What are the constraints and problems hinder the implementation of private investment in the
town?

1.4 Objectives of the study

1.4.1 General objective of the study

The general objective of the study is to assess the determinant of private investment in
kombolcha town.

1.4.2 Specific objective of the study

The researcher wants to achieve the following specific objectives.

1. To assess the factors influencing private investment in the town.

2. To assess the current private investment in the town.
3. To assess factors that should be considered for enhancing private investment.
4. To identify a major problem that holds back the implementation of private investment in
the town.

1.5 Significance of the study

The study was providing certain significances to investors to show possible investment areas. For
scholars and researchers who want to use the study a reference to further study. It also used to
governmental and nongovernmental organization to determine related with taxation system. It was
providing awareness for private investor to invest without misrepresentation of information.

1.6 Scope of the study

The researcher was restricted to private investment in kombolcha town, from (2003-20070 Ethiopian
calendars. The study was a target population of 52 from these populations the researcher select 20
sample respondents and the study was not cover the whole private investment due to transportation
cost, budget constraints or deficiency of capital land and less skilled manpower in the town.

1.7 Limitation of the study

To do this study was faced by limitation like lack of well organized information to provide answers with
interest from sample respondents. If this were so occur, it may not accurately reflect the options of the
whole population.

1.8 Organization of the paper

The study was organized in to five chapters. The first chapter was consists of introduction, background
of the study, objective of the study, significance of the study, scope of the study, and limitation of the
study. The second chapter was stated the related theoretical literature review. The third chapter was
concerned research methodology of the study. The fourth chapter was concerned data analysis,
presentation and discussion part. Finally, the fifth chapter was stated the conclusion and
recommendation.

Chapter Two
Literature review
2.1 Definition and concept of Investment
Many economist defined investment in many ways. According to F.Amiling investment may be
defined as the purchase by an individual /institutional investors of financial or real estate that produce
are turn proportional to the risk assumed over same future investment period (Gangadher and
Babu,2003;2).
Investment means real investment and not financial investment .Real investment implies the creation
of new machinery, new factory buildings, roads, bridges and other forms of productive capital, which
directly generates new jobs and increase production. Real investment does not include the purchase of
existing stocks, shares, and securities, which constitute merely on exchange of money from one person
to another. It involves the additions of existing capital, which result in the increase in employment (R.R
Paul, 2003, part 67).
As R.R, poul (2003) explained there many definitions of investment defined by different economists.
According to Stonier and Huge, investment do not meant the purchase of existing paper securities,
bonds, debentures, or equities but the purchase of new factories, machineries, and the like.
In other words of Mr. John Robinson investment meant an additional to capital such as occur when a
new house is built. According to Peterson Investment expenditure increase in expenditure for
producers durable equipment construction and the change in inventory.
The term investment has different concept and meanings. Gangadhar and Babu explained three
important concepts of investment as follows.

1. Economic Investment means the net addition of the capital stock of the society, which consist of
goods and service that are used in the production of other goods and service. Addition to the capital
stock on increase in building, plants, equipment and inventories over the amount of goods and service
that existed.
2. Commitment Investment-refers to money commitment to satisfy personal desire, since no rate of
return is involved in such neither investment nor capital growth is expected. For example, a
commitment of new car is certainly an investment for an individual point of view.
3. Financial Investment-It involves the investment of fund in various assets, such as stocks, bonds, real
estate, mortgage etc. Investment is the employment of fund with aim of achieving additional income or
growth in value. It involves the commitment of resource that have saved put away from current
consumption in the hope of some benefit and it involves long-term commitment of funds waiting for a
reward in the future.
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2.2 The theory of the determinants of private investment

The literature has proposed several hypotheses concerning the key macroeconomic variables
that play a decisive role in explaining investment behavior in a country.
A first candidate is activity level. Samuelson stressed the reciprocal relationship between
investment and production, and proposed the accelerator hypotheses. Similarly, in Jorgenson
(1963), as cited by PABLO ACOSTA & ANDRES LOSA, 2004).The value of the desired capital stock
for a typical firm depends positively on the demand level. The output of the country (GDP)
would be a reasonable proxy to aggregate demand as a determinant of private investment in a
country. Another possible determinant is the rate of return on investment. The literature
usually approaches this through a real interest rate as representative of the cost of capital.
However, as suggested by Jorgenson, real interest rate would have a negative impact on the
desired capital stock but not on investment flows, as early empirical approaches seemed to
suggest (i.e. the Tinbergen approach). Instead, another approach for controlling for the
opportunity cost of investment is by looking at the relative price of capital goods with respect to
consumption goods. It is natural to expect that in periods characterized by relative lower cost of
equipments agent should be investing relatively more.
The theory of investment irreversibility suggests that the cost of investing in machinery and
equipment is usually not recovered by a future resale. This sector specific characteristic of
investment would imply that the higher degree of uncertainty that usually prevails in
emerging countries is relevant in investment decision in those nations, since any abrupt fall in
aggregate demand would generate an unsustainable excess in installed capacity see Caballero
1991, Caballero and Pindyck 1996, and Bloom et al. 2001 as cited by ACOSTA & ANDRES LOSA,
2004).
The restrictions on investment financing are a problem broadly documented in the literature
on the determinant of investment. Just as suggested in Louganis and Rush (1995), as cited in
ACOSTA AND ENDRES LOSA, 2004 page 393, and the basic idea is that some agents, typically
small and medium enterprise (SMEs), are unable to get financing directly through open market
debt. These agents are strongly dependent on bank credit, a market that is characterized by
imperfections due to asymmetric information between lenders and borrowers. In developing
countries like Argentina, this problem of access to credit is critical, due to the absence of
futures markets and poor access to long term financing. The evaluation o f the credit amounts
destined for the private sector would be a good indicator of the restrictions operating in the
domestic financing of investment.
On the hand, the external debt level (as a share of GDP), is a variable that can represent the
evaluation of external credit in investment financing. A higher external debt level could be an
indicator of over- indebtness, signaling the lack of viability and sustainability of current
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macroeconomic policies in the long term, and most likely negatively impacting investors
expectations due to the increase in the degree of uncertainty on the future policies. However, a
country can have a large debt for a good reason, as a good credit rating, hence signaling a
higher level of credit availability. Finally, it is also interesting to distinguish between public and
private investment. Changes in the economic environment usually affect in a different way the
investment decision of both companies and workers that operate in markets with different
types of regulation, or government groups whose decision made in normative environments
outside of market mechanisms.
Here, public investment can also have differential impact and one of the following effects are
expecting to arise the crowding out effect, in which the state displaces the private sector,
when the public investment increases in a country and competes for the appropriation of scarce
(physical and financial) resources and the crowding in effect that emphasizes the positive
externalities (such as investment in infrastructure, ant cyclical policies and public goods
provision) and the complementarily that public investment has inducing higher level of private
investment ( see Everhart and Sumlinski 2001 as cited in ACOSTA & ANDRES LOSA, 2004 page
393).

2.3 Types of Investment

When you invest, the organization in which you invest whether it is a company or a government entity
offers you can expect future benefit in exchange for the current use of your funds. Organizations
compete for the use of your funds. The one that will get your investment dollars is the one that offers a
benefit you judge benefit differently As a result investment of every type are available from sure
things such as earning 1% interest on your bank saving account to the possibility of tripling fast by
investing in a new issued biotech stock .The investment you choose will depend on your resource, goal
and personalities. We can differentiate type of investment on the base of a number of factors.

Security or property; Investment that represent debt or ownership or the legal right to
acquire or sell an ownership interest are called securities. The most common types of security
are stocks, bonds, and options. Property on the other hand consists of investment in real
property /tangible personal property. Real property is land, building, and that which is
permanently affixed to the land. Tangible personal property includes items such as gold,
artwork, antiques, and other collectable (GITMAN, JOEHNK 9th editions).

Direct or Indirect; A direct investment one in which an investor directly acquires a claim on
a security or property. If you buy a stock in order to earn income or pensive value, you have
made a direct investment. An indirect investment is an investment made in a portfolio, or
collection of security or properties. Typically, construct to meet one or more investment goals
(GITMAN, JOEHNK 9th edition).
Debt, equity or derivative securities; debt represent fund lend in exchange for interest
income and the promised repayment of the loan at a given future date. Equity represent
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engaging ownership in a business or property. An equity investment held as a security or by

title to a specific property. The most popular type of equity security is common stock.
Derivative security is neither debt nor equity. They drive their value from and have
characteristics similar of those of an underlying security or asset.
Short or Long term The life of an investment can be described as either short or long
term. Short-term investments typically mature with one year. Long-term investments are
those with longer maturities like common stock with no maturities at all (Ibid).
Domestic or foreign As recently as 15 to 20 years ago, individuals invested almost
exclusively in purely domestic investment; the debt, equity and derivatives security of U.S
based on companies. Today, the same investors routinely also look for foreign investment
(both direct and indirect) that might offer return that is more attractive or lower risk than
purely domestic investment (Ibid).

2.4 Participants in the investment process

Government, business, and individual are the three key participants in the investment
process. Each may act as a supplier and a demander of funds for the economy to grow and
prosper; funds must be available to qualified individuals, government, and business. If
individual began suddenly hidings their excess funds under floorboards rather than putting
them in financial institution or investing them in the financial market, then government,
business and individuals in need of funds would be difficulty obtained them. As a result,
government spending business expansion, and customer purchase would decline economic
activity would slow (GITMAN, JOEHUK 9th edition).

2.5 Private Investment in Public Equity (PIPE)

Occur when private investor takes a suitable investment in publicly traded corporation. This usually
occurs when equity valuations have fallen and the company is looking for new sources of capital. This
means by which public company gets additional access to the equity markets in express mode, they all
ready have public shares trading and this is an additional offering to investors under a securities
purchase agreement. The issuer promises to register the shares typically via are sale registration
statement with so many days after the closing. PIPE is the investment by a private equity fund in publicly
traded company. It is usually takes forms of preferred stocks at a discount (www.nasdaq.com).

2.6 Factors that should be consider for enhancing private sector investment

2.6.1 Good investment climate

The expansion of private investment requires peace and macroeconomic stability. The former is the
key factor investment attraction and sustained economic development. Investor need free and fair
condition to be pursuing productive capacity. They also need to have condition where contracts and
property right are level; while the latter can be achieve through adopting; sound polices that help to
lower inflation, interest rate and realistic exchange rate and privatizations (Annual report of MOFED,
2003) .

2.6.2

Investment Finance

The availability of financial management, transparency, efficiency, and equitability of access is the
key factors enhancing private sectors development. Efficiency management or investment finance
concern both the financial institution and private sector operators who use resource for business
development. Beside in transparency and objective evaluation is an essential element for all players in
financial sectors will functions or a financial intermediary in the absence of security market is critical. To
improve information and skill about credit, collateral evaluations, and cash flow analysis is important
(MOFAED, 2013).

2.6.3

Adequate infrastructure service

The provision of good quality infrastructures service particularly telecommunication, electricity,

water and logistics is essential for efficient operations of private sectors. It also helps to integrate in to
the global market that helps to increase competitiveness of investors (Ibid).

2.6.4 Access to land

Land is an important input for investors, to implement their project. Since it is a fixed asset and it is
not possible to increase its supply, government should adopt sound policy such as establishing land and
establishing industrial zones that help to improve land provision process to investors (Ibid).

2.7 Determinant of private investment in Ethiopia

In Ethiopia, various economic and political reforms, which is expected to stimulate the role of private
sector in the economic, have been made over the last couple of decades. The regression results show
that public investment real GDP per capital, an external debt have significant positive long run effect on
private investment, while lagged private investment (proxy for investment climate) has significant
negative long run effect. In the short run, real GDP per capital and external debt have significant positive
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contributors to private investment, while inflation has significant short run negative effect on private
investment after two lags. Hence, to promote the performance of private sector in the country, it is
essential to take measure that can improve real income of people and make public investment in basic
infrastructure and institutions that are crucial to attract private investment. Beside, ensuring stable
investment such as consistent investment policies, requirements regulatory framework, macroeconomic
and political stability, addressing bureaucratic inefficiencies and poor governance problem are necessary
to build lasting confidence of private investors (www.iista.org).

2.8 How investment is important

Consider any job you have ever performed. Your productivity in that job largely determined by the
investment by the investment choices that have been made before you began to work. If you worked as
a clerk in a store, the equipment used in collecting money from customers affected your productivity. It
may have been a simple cash register, or a sophisticated computer terminal that scanned purchases and
linked to the stores computer, which computed the stores inventory and did an analysis of the store
sales as you entered in each sale.
If you have worked for a lawn maintenance firm, the kind of equipment you had to work with
influenced your productivity. You were more productive if you had the latest mulching power lawn
mowers than if you struggled with a push power. Whatever the work you might have done, the kind,
and quality of capital you had to work with strongly influenced your productivity, and that capital was
available because investment choices had provided it (Catalog flat world knowledge.Com).
An increase in capital shifts the aggregate production function outward, increase the demand for labor,
and shift the long run aggregate supply curve to the right. Investment therefore affects the economy
potential output and thus its standard of living in the long run. Investment is a component of aggregate
demand. Changes in investment shift the aggregate demand curve and thus change real GDP and the
price level in the short run. An increase in investment shifts the aggregate demand curve to the right; a
reduction shifts it to the left (catalog flat world knowledge.com).

2.9 Uncertainty and investment

The poor empirical performance of deterministic investment models has kindled a growing interest in
the role played by uncertainty (Abel and Blanchard (1986) as cited by Jan Dehn).Once uncertainty
becomes a potential determinant of investment, attitude to risk on the part of investors become
important, because firm investment decisions can only be viewed in isolation of the consumption
decision of households when there is access to a perfect market for arrow securities. In their absence,
firm owners may be averse to taking risks at firm level for fear of the repercussions such decisions have
for the households consumption. Risk aversion, however, has an unambiguous negative impact on
investment; it is arguably more interesting to assume risk neutrality on the part of investors in order to
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illustrate other avenues where by uncertainty may affect investment. The profit function convexity thus
ensure that the return to capital in a good state outweighs the loss of investing in the bad state,
provided the firm is able to adjust variable cost. Convexity can also result from the ability of the
monopolistic firm to vary output.
The Harman / Abel models suggest that the Marshallian condition of determining when to invest should
hold on average, but actual investment typically does not occur until price exceeds long run average cost
by a factor of three or four (Pindyck and Solimano (1993) as cited by Jan Dehn). Dixit and Pindyck (1994)
as cited by Jan Dehn, show that this hurdle rate feature follows directly from the three premises: First,
there is ongoing uncertainty about feature outcomes, and waiting for additional information can reduce
this uncertainty. Secondly, firms can postpone investment without foregoing the investment
opportunity, because there is not free entry to the industry; by implication there is imperfect
competition. Thirdly, investment decisions are irreversible.
Jointly, these assumptions imply an opportunity cost of immediate investment over and above the long
run average cost, which is the value of waiting for additional information (Bernanke (1983) as cited by
Jan Dehn). For example, affirm which invests waits and then cannot reverse its investment in the event
of a downturn in the following period is stuck with an excessive capital stock. On the other hand, a firm
which waits until the next period can avoid this predicament. The firm which waits will, however, incur
an opportunity cost in terms of forgone current profits by operating with a capital stock which is below
optimum size. The value to waiting arise when this opportunity cost in current profit terms is low
compared to the cost of carrying out the irreversible investment and then being stuck with excessive
capital in the event f a downturn. This opportunity cost, it is argued, is low compared to the cost of
excessive investment. Therefore, the net value of the waiting is large and positive (Caballero (1991);
Abel and Eberly (1994) as cited by Jan Dehn).
While the combination of uncertainty and irrepressibility can account for hurdle rates, it is not in itself
sufficient to secure a negative link between investment and uncertainty, which requires additional
assumptions about imperfect competition or decreasing returns or both. These assumptions have the
effect of making the marginal product of capital a decreasing function of the level of the capital stock in
conditions of irreversibility, such that the rise in profitability under uncertainty due to the convexity of
the product function is outweighed by the rise in the profitability threshold, which itself rises with
uncertainty, such that the overall effect is negative (Caballero (1991) as cited by Jan Dehn).

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CHAPTHER THREE
REASERCH METHODOLOGY
Research Methodology is the heart of any research proposal. This is because research methodology was
planned to specify the type of research procedure, design, data collection, and data analysis. So as to
make successful its study, the necessary methodology of the study was present the following subtitles.

3.1 Research design

This study was used to descriptive type of research design tool was conducted in combolcha town investment
office. The researcher was to select descriptive research design tools, because of it describes events, situations,
problems and solutions in a sample, clear precise and easily understandable by users or readers.

3.2 Types and Sources of data

In conducting this research, the researcher was used to both primary and secondary data in order to
increase the reliability of this paper.

3.2.1 Primary source of data

The study was used to primary source of data that is open ended and close ended questionnaires. The
reason for primary data was used to get current, reliable, clear and precise information about the study.

3.2.2 Secondary source of data

The study was used to secondary source of data, which is organization source document, previous
research study done by experts and literature concerning on the topic of research paper. The reason for
secondary data was used to get detail information data that is helps the research work done easily.

3.3 Method of data collection

From his study data was collected from both primary and secondary data types. Primary data collection
method includes structured type of questionnaire and interview. While secondary data collection
method includes Annual report, Books and relevant document which are important for the research
paper.

3.4 Sampling technique and sample size determination

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There are a total of 76 investors in the town which are involved in different project like hotel tourism,
construction, industry, service and agriculture; from these strata the researcher was taken only three
strata such as hotel tourism, industry and service. The number of investors in each sector described as
follows.
Hotel tourism =9
Industry = 25
Service = 18
Therefore, the target population was 52.
The researcher was used to simple random sampling for the selection of item the sample from each
stratum method of proportional allocation was used under which the size of the sample from different
strata are kept proportional to the size of the strata.
Total target population = 52
Sample size = 20

Ni = H/N n where

H =subgroup of population
N = total population
Ni = sample size of each strata
n = sample size (Kothari, 2004).

Hotel tourism = n1 =H/N n = n1 =9/52 20 =3

Industry = n2 =H/52 20 = 10
Service = n3 =H/N 20 =7
So the researcher was taken 20 sample respondents .

3.5 Method of data analysis

After gathering all required quantitative and qualitative information data analysis was to perform and
present through tables, percentage and frequencies. Then the data was too analyzed by using
descriptive analysis methods

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CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION

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