JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

DETERMINANTS FOR THE LEVEL OF INVESTMENT ACTIVITY

IN AMBO TOWN
BY: Abreham Tilaye
ADVISOR: MUHIDIN. (Msc)
A SENIOR ESSAY RESAERCH SUBMITTED TO THE
DEPARTMENT OF ECONOMICS AS PARTIAL FULFILLMENT
FOR THE REQUIREMENT OF BACHELOR OF ARTS DEGREE IN
ECONOMICS

JUNE, 2017
JIMMA, ETHIOPIA
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 my sister w/r Itenesh Eshetu for giving me encouragement by ideal and financial support.
Next, I would like to express my deepest gratitude to my advisor Mr. Muhudihin (MCS) for directing
and giving me constructive advice 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 partners whose helping me through giving me
so many supported ideas.
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 given much concern to this activity. However, this activity is in its low level in the
country and in one of the urban center, Ambo town. For this reason, the purpose of this research
paper is to assess the factors responsible for the level of investment activity in the town.
The sources 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 manager 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.
ACRONOMY
IMF International Monetary Fund
NGO Non-Government Organizations
SSA Sub Saharan African Countries
WB World Bank
Table of Contents
ACKNOWLEDGEMINTS......................................................................................................................I
ABSTRACT...........................................................................................................................................II
ACRONOMY........................................................................................................................................III
CHAPTER ONE.....................................................................................................................................1
INTRODUCTION...................................................................................................................................1
1.1 Background of the study.........................………………………………………………….…....1
1.2 Statement of the problem.............................................................................................................2
1.3 Objectives of the study.................................................................................................................3
1.3.1 General Objective of the Study..............................................................................................3
1.3.2 The Specific Objectives Are:.................................................................................................3
1.4 Scope of the study........................................................................................................................3
1.5 Significance of the study..............................................................................................................3
1.6 Organizations of the study...........................................................................................................4
1.7 limitation of the study..................................................................................................................4
CHAPTER TWO.....................................................................................................................................5
LITERATURE REVIEW........................................................................................................................5
2.1 Theoretical literature....................................................................................................................5
2.2 Theories of investment.................................................................................................................6
2.2.1 Classical theories of investment.............................................................................................6
2.2.2 Neoclassical theory of investment..........................................................................................7
2.2.3 Keynesian theory of investment.............................................................................................7
2.2.4 Accelerate theory of investment.............................................................................................7
2.2.5 Investment and economic development.................................................................................8
2.2.6 Determinants of investment...................................................................................................8
2.3 Empirical literature......................................................................................................................9
CHAPTER THREE...............................................................................................................................11
METHODOLOGY OF THE STUDY...................................................................................................11
3.1 Description of the study area.....................................................................................................11
3.1.1 Location................................................................................................................................11
3.1.2 Climate.................................................................................................................................11
 3.1.3 Population.............................................................................................................................11
3.2 Types and source of data............................................................................................................11
3.3 Method of data collection..........................................................................................................12
3.4 Sampling Technique and sample size......................................................................................12
3.5 Method of data analysis and interpretation................................................................................12
CHAPTER FOUR.................................................................................................................................13
RESULT AND DISCUSSION.............................................................................................................13
4.1 Result and finding of the town...................................................................................................13
4.2 Major Factors That Affect Level of Investment Activity in Ambo Town.................................16
4.2.1 Institutional Factors..............................................................................................................16
4.1.2. Infar–Structural Problems in Investment Activity..............................................................23
CHAPTER FIVE………………………………………………………………………………………….......26
CONCLUSION AND RECOMMENDATION....................................................................................26
5.1 Conclusion.................................................................................................................................26
5.2 Recommendation.......................................................................................................................28
REFRENCE..........................................................................................................................................29
APPENDIX...........................................................................................................................................30
 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 a nation 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 ineffective utilization of resource which results in low level of income. Because of low
level of income it is difficult for the people to allocate their income 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 (FantunMelles, 2004).

Less developed countries are facing as great challenge in the way to get poverty or to minimize
its extent .Thus developing countries have been expanding a number at strategies which are
prescribed by international monetary fund (IMF) and World Bank (WB) 2006. In the growth
literature investment has been regarded as one of the primary engines of growth.
Growth theories emphasize the importance of investment in determining the level of
income(Neoclassical theory) and pace economic growth ( Endogenous growth model
theory).Investment defined as expenditure on real capita good . It is the amount by which the stack
of capital of a firm or economy increase. It is a crucial macroeconomic variable which paves the
way for achievement of growth and development. Investment is one of the major contributor to
economic growth and development in both developed and developing countries . This is because
through investment, new technology can be adopted, employment opportunity can be created,
incomes can grow and living conditions of the people can improved. Thus, ultimately lead
alleviation of poverty,(Frederick,2000) and investment is an essential factor in bringing an
economy out of the mud. Sub-Saharan African (SSA) is generally described as the poorest region
of the world .
One that is getting poorer in the face of sustained growth and significant improvement of living
standard in the rest of the world(World Bank) ,2005 and UN (2000).Ethiopia being one of the
SSA countries recorded the lowest investment rate in the 1960’s as well in 1980’s compared
with other developing countries The Ethiopian investment performance has been weak for a long
period of time. It had stagnantly low until the end of socialist regime. Recently, private investment is
being considered as an engine of growth and development. This is because it has a leading role
in job creation, generating income and profit for re-investment and tax for government.

1.2 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 create employment opportunities for the society .The investment function
relates the quantity of investment to the real interest rate. So, investment determines the demand for
goods and services. 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 investors so as to increase the number of participants in this activity.
The growth of an economic output can be attributed to high investment ratio. Empirical studies have
shows in that investments plays a very important role in the growth of both developed and the under
developed economics.

Some researches (Getnet (1992),Workie (1996),Seyoum(2002)) finding on promotion of private

investment is conclude that, , investment is constrained by the macro and micro economic determination,
human capital base weaker and less diversified economies.Getnet, (1992) used descriptive analysis
found that government policy is the major determinants of investment. His study cannot explain the
inadequate and deteriorating infrastructure and poor institution. Additionally there is another problem
come up and no solutions gained.
This study analyzed factors responsible for the level of investment in Ambo town and indicated what
should be done to enhance this activity.

1.3 Objectives of the study

1.3.1 General Objective of the Study
The general objective of this study is to assess the factors that contribute to the level of investment in
Ambo town.

1.3.2 The Specific Objectives Are:

 To evaluate level of investment in the Ambo town.
 To analyze factors responsible for investment activity in the town.
 To suggest possible policy recommendations.

1.4 Scope of the study

In order to collect information by primary and secondary data, the study covered different populations.
This population includes private owners in the town, public investment by the society, governmental and
non-governmental organization.
Ambo town investment office included in the study and supplementary information was collected. It
helps to know governmental supporting for investment activity in the town by giving major incentives
and promotion of investment opportunities through different promotional methods.

1.5 Significance of the study

To improve the living standard of the society, capital allocation on different sectors of economic activity
is important to mobilize the available resources to more productive. For this purpose, Ambo town have
good investment opportunity due to favorable climatic condition and its favorable strategic location
owning to proximity and as a function. 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 may be 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 economic constraints like lack of loan service and high taxation. Identification of these
causes for level of investment is very important to develop this activity in the future.

1.6 Organizations of the study

The research paper was organized and classified in to Five chapter .The first chapter has present the
introduction which contains background of the study, statements of the problem, objectives of the
study , significance of the study, scope of the study, limitation of the study ,and organization of the
study. Chapter two also presents theoretical and empirical review which is related to study. Chapter
three contains the methodology of the study while the results of analysis and presentation contain in
the chapter four and the last chapter contains conclusion of the study and recommendation of the
study.

1.7 limitation of the study

Due to some constraints while conducting this research the study have its own limitations 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 a few selected investors found in the town
 Financial problems to obtain necessary data
 Lack of ample experience in the research
 This study restricted (limited)to ambo town
 CHAPTER TWO

LITERATURE REVIEW
2.1 Theoretical literature
Investment is the volatile components of GDP when expenditure on goods and services fall during a
recession, much of the decline is usually due to a drop in investment spending. Economists study
investment to better understand fluctuation in the economy’s output of good services. Investment fall
is the great causes for the fall of expenditure on goods and services during the recession. Both firms’
house hold purchase investment goods firms buy investment goods to add to their stock of capital and
to replace existing capital it wears out. House hold buy new house, which are also parts of
investment. The quality of investment goods demanded depend on the interest rate which measures
the cost of the funds used to finance investment (N.GreogoryMankiw)
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 a fixed
and initial operating resource used for the production of goods, the provision of services and the
development of science and technology capacity. Gateman (1997) defines it as a sizable out lays of
funds that commit a firm 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.
Once an individual receives income, there are two choices: to spend or to save it. Regardless of how
you use your income, 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 income rather than spend all of their income.
The above analysis shows that investment has a strong relationship with saves in come. But the extent
of investment also depends on the level of consumption. As mayrad observes “there are no other road
of economic development than a compulsory rise in the share of the nation’s income which is with
held from consumption. In an economy where living standards of the masses are too low, to curb
consumption, it is difficult to mobilize 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 defect. Harrods – Domtar model predicts a positive relationship 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 economic condition, there are some criteria
have to be considered before starting investment activity. 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 and quantity of goods and service to be
produced, employment, export and utilization of natural resources.

2.2 Theories of investment

The theories of investment behaviors’ are varied immense. There exists a considerable variation in
though among economist as to what determines investment behaviors. One reason can be the complex
nature of the subject itself. Another reason can be setting which makes the developments of universal
theories is difficult. Theories of investment behaviors are developed for industrial countries because
of we may find limited relevance in such theories to study investment behaviors in less developed
countries. Theories of investment are one of the most important issues in economic development.
There are different approaches which are used in explaining investments behaviors . For instance
investment is defined in different ways by different economist. Investment is capital formation or
creaton resources that are used in the production (Ccoen and Fisher, (1992).
There are many theories of investment that discussed such as classical, Keynesian, And Neoclassical,
Accelerate and other theories of investment.

2.2.1 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 because the capital expected to earn profit
on invested capital depending up on the present climate of investment as well as actual profit.
According to classical economists the capitalist make investment because they expect to earn profit in
the future depend on a good deals on what profits are know. Among the classical economists the
founder one is Adamsmith. For example Adamsmith in his book the wealth of nation he elaborates
this fact by arguing that investments were because the capitalist expected to earn profit and depend up
on the present climate of as well as the actual profits(T.N.Hajila,16 revised edition

2.2.2 Neoclassical theory of investment

For the neoclassical theories, the marginal benefit of investment can be represented as addition to
future expected output that accused, 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 rented cost of capital which is in turn depending on real
interest rate (Dornush, 1994). The underling restrictive assumptions of the accelerator theory initiated
Jorgenson(1969) and Hall and Jorgenson(1971) to formulate the neoclassical theory of business fixed
investment in which net investment is proportional to the gap between actual and desired capital
stock.

2.2.3 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 volatility 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).

2.2.4 Accelerate theory of investment

The accelerator theory postulated linear relationship between investment and output. According to
this theory, given an investment requirement associated with a given target for output growth. That
means a change in the rate of growth of income produced a magnified change in investment. The
theory asserted that the investment spending is proportional to be changed in output and is not
affected by the cost of capital This means rate of growth of income producers as magnified change in
 investment as income falls, investment falls quite significantly and rise income results in magnified
rise on the absolute level of investment(Dorbush 2004).

2.2.5 Investment and economic development

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 activists of tomorrow by
building up resource of capital that will be used to produce goods and services (Mc . Baddely, 2003).

2.2.6 Determinants of investment

What determine the level of investment are 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 a growing interest in the countries on the factors that influence the pattern and level of the
private investment activities and the same factors is identified.
Investors invest more that will enable them to earn profit (Son1989). 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 otherwise 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. Investment spending depends on the economic ,social and political
situation of the country under taken that effects the rate of returns. Mobilization of resources from
external resources is needed when the domestic resources are not enough to finance investments. Capital
from such resources can be used to raise the level of economic activities in developing countries and
hence economic development From the external sources, the inadequate domestic sources of capital
formation can be supplemented by the capital assistance from foreign economic aid and the private
investments of foreign capital. Investment is to be increased from domestic sources their must be
growing surplus above current consumption that can be tapped and directed into productive investment
channels. This involves abstinence from present consumption for future use. The importance of financial
institution that make suitable condition for domestic saving is important. It means the existence of more
developed market and financial intermediaries will in the collection and distribution of inevitable
funds(Meier 1995). In any developing economy the accumulation of capital requires mobilization of
economic surplus which can be financed from internal of external sources basically the sources of
investment can be categorized into the above domestic and foreign sources.

2.3 Empirical literature

There are empirical words on the determinants of investment in both developed and developing
countries(Akpalu,Pablo Acosta, 2005).The result of their study shows as applying time series
techniques in long run credit availability to private investors and real GDP had positive effect on
private investment and the real lending and public investment had negatively effect.

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 Ambo town in 2007
conclude that, activity in the town is low than 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. Corruption is a
specific measure of illegal activities within the political system (Mauru 2004).
The opportunity for corruption occurs when public officials are the gate keeper of public goods and
services.

Daniel(2004) has tried to model the determinants 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.
The other studies conducted in Ethiopia shows their results indicated the factors that influence
investment activities decisions are various. Esuballew (2011) studies the determinants of private
investment in Ethiopia in using both descriptive and regression methods of analysis. He found that
the real government investment Rear GDP real private sector credit has a positive impact on private
investment in both short and long run.
Mignot Tesfaye (2009) attempt to investigate the determinants’ of investment in Ethiopian economy
using correlation of quantitative analysis. He found that the GDP affecting private investment
positively whereas the inflation has negative effect on private investment in Ethiopian economy in
long run-real exchange rate indicates the negative of devaluation in investment
 CHAPTER THREE

METHODOLOGY OF THE STUDY

3.1 Description of the study area
3.1.1 Location
Ambo is a town in central Ethiopia and is a capital city of the of west shewa zone in the
Oromia national Regional state of Ethiopia . The town is bordered on the Eastern direction by
Ilamu Muja, on the West by Sinkale faris, on Northern by OdoLibankisose, on the Southern by
Gosukora. The town is located at 114kms to the west of Addis Ababa and to North west of
Weliso town at 60kms as well to the East of guder town at 12kms and is the larger town in the
zone . This town has a latitude and longitude of degree of 8 o 59’N 37o 51’E and89o 83’N 37 37o 85’
E respectively with an elevation of 2101 meters above sea level.

3.1.2 Climate
Ambo town is characterized by sub-tropical climate condition. At measured at an elevation 1500 -2500
meter above sea level. Mean annual temperature 14c in march with arrange of 16.2c in June and
August to 14c in march annual total rainfall is 1500mm more than 75% of the total rain fall is
in the month of June , July ,August and September . The driest month are November, December,
January and February

3.1.3 Population
According to the central statics agency of Ethiopia national census condition in 2007 is 48,171,
of whom 24,634 were men and 23,537 were women. The majority the inhabitants said that they
observed Ethiopian orthodox Christianity, with 65.18% of population reporting they observed this
belief ,while 27.45% of population were protestant and 7.37% of them are Catholics and others belief.

3.2 Types and source of data

To achieve the general and specific objectives of the study, both primary and secondary data collected.
Primary data collected through structured questionnaire distributed to individuals engaged in investment
activity in the town and oral questions for the manager of investment office. This contains both open
ended and close ended questions and the other source of data is secondary data.
The secondary data obtained from written materials available in the investment office of the town.
 3.3 Method of data collection
A structured schedule developed for the collection of necessary primary information. Structured
questionnaires was prepared and the interview schedule was pre-tested before going to actual field
work and make necessary modifications .To make study more effective, focus group discussion was
conducted in every primary multipurpose investment cooperatives members in the town to gather
qualitative information.

3.4 Sampling Technique and sample size

The study was focuses on the main determinants of level of investment in the Ambo town. The
sample size was determined by a convenience sampling method .Even there are a numbers of investors in
the town some of them were not voluntary to gives the response in different cases and others said also as
they are busy in work.
So to get the necessary response for the qoustioneries provided and to conduct the research on time as
well as to minimize time consumed and limitation of budget allocated for research 30 investors was
selected by convenience sampling.

3.5 Method of data analysis and interpretation

The study variables about investment activity that was through the above methods of data collection are
important to investigate their impact on investment level of the town. Descriptive statistics such as
percentage, average, ratio, tables the like was used during data analysis. The analyzation part considers
these include information about 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, mass media,
newspaper, magazine by governmental bodies to promote the investment activity in the town.
 CHAPTER FOUR

RESULT AND DISCUSSION

4.1 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 Ambo town is still in its low level due to various
constraints. New business activity is concentrated in commercial sector.
The analysis of the data and the findings are presented here after.

Table 4.1. Sex ratio on respondents

Response of investors Male Female Total
22 8 30
Percentage 73.3% 26.7% 100%
Source: own survey result
As indicated in table 4.1 on investment indicate that 73.3% of male where as the rest 26.7% only are
females. This indicates that there are a large proportion of male in investment activity than females.
Female’s contribution is less then they need encouragement to be participated in different investment
activities.Table4.2. Age ratio on investment
No, of respondents Percentage
<30 9 30%
30-40 12 40%
40-50 6 20%
>50 3 10%
Total 30 100%
Source: own survey result
Table 4.2.on investment implies that 30% are under the age of 30 year old. From the age range of 30
– 40 are 40% these group of age are dominate in investment 20% are for the age range of 40 – 50
years old. The rest age above 50 years old are 10% close group also the least contribution in
investment activity. This indicated that less than 30 years olds are least in investment activities even
above 50 years old are less participation.

Table 4.3. Educational background on investment activity

No, of respondents Percentage
Below 12 grade 9 30%
Certificate 9 30%
Diploma 6 20%
Degree or above 6 20%
Total 30 100%
Source: own survey result
As indicated in table 4.3.Based on educational background on investment activity 30% are below 12
grade and certificate while 6 (20%) are diploma and degree or above. These shows in investment
below 12(30%) grade and certificate have dominant over the others. But diploma and degree or above
are still less in investing on investment. They need motivation to invest their capital and resources on
investment activity.

Table 4.4 Marriage background of respondents

Marriage status Number of respondents In %age

Married 25 83.4%

Divorced 2 6.6%

Widow 3 10%

Total 30 100%

Source: own survey, 2017

The table above show that majority of investor in the study area are included in the married marital
status. The total indicators that 25(83.3%) of them are categorized in the married marital status, 2(6.6
%) of them found themselves in divorced group and 3(10%) them are widowed
Table 4.5 the information obtained on private investors about the type of investment activities.

Type of investment activity Number of investors Percentage (%)

 production of goods and 12 40%
service
service giving 18 60%
Source: primary date, 2017
From the total of 30 respondents 18(60%) of them has answered that their investment activity is
service giving while the remaining 12(40%) investors is production of goods and services. This
shows that most of the investment activities in the town are related to the type of service giving
activities.
The town is an important transport mode which can develop a regional distribution center in the west
shewa part of Oromia. This owns to its location a function point for roads that leads to Ginchi, Adds
Ababa Jaldu, Guder and waliso and the like. The town’s relative proximity to Addis Ababa enhances
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 metal works taken
account for about the percent of the total number of manufacturing enterprises in the town. There are
also a 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 (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.
4.2 Major Factors That Affect Level of Investment Activity in Ambo Town
4.2.1 Institutional Factors
A. 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 investor’s show that among 30
respondents 24 investors replied that land lease policy as a major cause on investment activity.
Table 4.6 Respondent opinion on 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, 2017

As it is also suggested by investment office workers that is 24(80%) of them suggest that, land lease
holding policy is the major problem which affects the investment activity negatively. But others or
only 6(20%) said about the questions that the negatively only 20% of investment activity is caused by
others problems and from here Ambo 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 on
the type of project submitted. Investors who want lands for construction purpose, has to submit a
proposal about his business activity in the first case. Then the authority of land for construction was
presented for auction among many investors. During this time there was high competition on the
price of given plot land
The land lease holding policy has also some problems related with longer time to get land for
business activity and an investor cannot facilitate time value of money.
As it is also suggested by investment office workers, land lease holding policy is the major problem
which affects the investment activity negatively. Ambo 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 on 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 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
Table 4.7 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, 2017

If yes is it adequate?
Respondent Frequency Percentage %
Yes 10 33.4%
No 0 0
Source: primary date, 2017
Is it continuous?
Respondent Frequency Percentage %
Yes 10 33.4%
 No 0 0
Source: primary date, 2017

The data collected from the interview questionnaire shows that from 30 investors about 20(66.6) of
them which did not get advisory and consultation services. This shows that only10 (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 business men 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. 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 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.
Considering this, the questionnaire on private respondents has given the following results. There may
activity done by the investment office of the town and other governmental agencies in promoting
investment opportunities
Table 4.8 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, 2017
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, 2017
But the Ambo investment offices 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 that22 (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 opportunities in the
town, financial constraint faced by the office. The remaining 8(26.7%) of respondents said that there
is promoting of investment through seminars (newspaper, magazine) 4 (50%), by advertising through
radio television which is about4 (37.5%) and the remaining 1(12.5%) through other methods like
creating of social awareness about the investment activity.
Table4.8 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, 2017
The above analysis shows that the promotional activity of the town is not adequate to attract potential
investors as 25(83.3%) respondent said while only 5(16.7%) 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 Ambo town.

II. Major Incentives for Investors

According to investment proclamation No 3711996, the following types of incentives shall be
approves in full or in part, taking in to consideration the type of project and their location of
establishment, these includes:-
 Income 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 business men 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.
Table 4.10 Respondents opinion whether there is any support (incentive) for investor or not
Respondent Frequency Percentage %
yes 9 30%
No 21 70%
Source: primary date, 2017
If yes, which one?
Incentive Frequency Percentage %
Exemption from tax 5 55.6%
Access of land 2 22.2%
Loan from a bank 2 22.2%
Source: primary date, 2017
From the total of 30 respondents 21 explained as they did not get any support or incentive. The only
remaining 9 (nine) respondents which accounts 30% said they got incentives during their
engagement. These include exemption from tax (5 respondents), access of land and loan from a bank
on behalf of the investment office (from two (2) respondents.)

D. Corruption and Administration

Corruption: - 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.
Administration:-.Good administration enable to provide urban socio-economical service and
expanding infrastructure, promoting investment activities , providing effective and efficient public
service, ensuring greater public participation and ensuring good governance and development so as to
make the town suitable for investment activity.
But the weak administrative negative affects the investment activity in the town.
Table 4.11 Respondents response on difficulty in getting investment license and permission from
local government. There opinion on corruption
Respondent Frequency Percentage %
yes 16 53.3%
No 14 46.7%
Source: primary date, 2017
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.
Table 4.12 their opinion on administration
Negative impact on investment Frequency Percentage %
Administrative low level of skill of 17 56.7%
workers, frequent turnover of workers
Other causes
13 43.3%

Source: primary date, 2017

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(56.7%) of them answer that Administrative
low level of skill of workers, frequent turnover of workers are factors that hinders the investments
and as the rest of the 13(43.3 %) said that the rest 43% of investment affected by other problem only
so information on administrative subdivision included 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 therefore, be
taken in order to appoint strong and committed personalities that would lead the administrative
system in a more responsible manner. Table 4.11 Investor source of income to start their investment
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(16.7%)
respondents or get loan from a bank to start their investment activity. The remaining 13 got loan from
an individual which 13(43.3%) investors use their income which is saved for investment purpose.
Data also shows us that 12(40%) of respondents use their own saving and no loans provided from the
non-governmental organization. This shows that even though there are enough financial institutions
in 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.
Table 4.13 the incentive for investors from government
Respondent Frequency Percentage %
yes 9 30%
No 21 70%
Source: primary date, 2017

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 and 0 0%
service

Source: primary date, 2017

The above table shows that as 21 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. The 9 respondent out of 30 respondents, 5(55.6%) respondent got
exemption tax incentives, and 2 (22.2%) investors got loan from bank and 2(22.2%) investors got
access of land incentives.

4.1.2. Infar–Structural Problems in Investment Activity

Ambo has better infrastructure facilities like transportation service; finances service (private and
governmental) telephone, social service (education and health centers). But the currently available
infrastructure services 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.
Table 4.14 the respondent’s opinion on the infrastructural service for the developments of
investments
Respondent Frequency Percentage
Yes 7 23.3%
No 23 76.7%
Source: primary date, 2017

If yes, which one?

Infrastructure facilities Respondent Percentage %

Power supply 3 43.6%
Banking and loan service 1 14.2%
Telephone 2 28. %
Transportation 1 14.2%
Source: primary date, 2017
The data from the above shows that from 30 respondents only 7 respondents got the infrastructures
service but 23 of them said there is no any of the above facilities available for them to be initiative in
their investment activity. Only 14.2% of them got loan service and Banking. From an individual
which 12% investors use good transportation which is available for their investment purpose. This
shows that even though there are the are a number of infrastructures in the town, the number of
investors who got these service are very limited. This is due to absence of motivation of the
institution of the town to facilitate them to get enough service from concerned institutions, failure of
banks to give loans service. Private owners have also problem related with poor power supply which
only 3 investors among 30 are accessed with power supply system, failure to make investment bases
on their investment which leads losses, low level of investment and how utilize their funds.
From the data above and oral questions given from the managers of the investment
Office gives the next information.
The oral discussion with managers of the of the office about the area of transport service, education
condition and the electric facilities which can affects the investment indirectly in the town as follow
Ambo 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 ordered 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 – Ambo is one of the very few towns in Ethiopian with bus transport service. While
some buses overlap on the same route, there are many large unnerved 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 garage for maintenance and hence the service is not provided smoothly and
regularly.
The major problems observed on the road condition of the town include.

 Deterioration and lack of proper maintenance of roads

 Sharing of the same route by different modes of transport (by foot and by different
types of vehicles) which caused overcrowding.
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
Ambo town is high as the town serves 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

Education 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 three private college primaries which provide distant education
program in Ambo 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 classroom, low level of teaching process and absence of capable teachers
are among few problems to be mentioned.

Water supply: Until recently Ambo water supply has been obtained from ground water source.
And the existing water supply situation does not reflect the exact supply demand conditions.
Electricity Supply 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 which is one affect investments
negatively.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1 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. Without
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, there was below productivity which
results in low level of income, there is poverty.
This research is conducted in Ambo town to investigate the factors responsible for the 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 that the investment
activity was found in its low level to activity due to various a constraints. However, the town has
good opportunity to become an important distribution center in west shea zone, owing to its strategic
location due to its proximity to Addis Ababa and as a function 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 administration problem, a small unit of land has high price in the town and it is difficult to get
land easily for construction purpose.
Level of in situational 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 overcrowded roads, unbalance educational and health services with the
town’s population have also negative influence on investment activity.
In general, Ambos 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,
infrastructures and political hindrances this activity in its low of stage in the town.
5.2 Recommendation
To enhance the investment activity in the town in the future, the following recommendations are
suggested by the researcher.
 Regarding to the participation of Female’s their contribution is less to be participated
in different investment activities. So it is better if concerned part of the town gives
 them an encouragement for them because they have great role to participate equal to
males
 The work force people given them incentives to employ in the investment activities
.There for the governments should motivate them through facilitate good condition.
 The institutions of the investment activity in the Town should allocated sources of the
capital for the skilled force to increase their motivation in investing on investment.
 The government also should facilitate health and transportation system for the society.
 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 reflection 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 additional inner roads which can help for fast movement of goods and service
within 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
 Baddely M.C (2005), Investment Theories and Analysis.
 Neoclassical theories on determinants on Investment. .
 Daniel Zerfu (2004) Macroeconomic Determinant of Private Investment in Ethiopian.
 Fantaun Melles, Investment Guide to Ethiopia, January 2004, Addis Ababa, Ethiopia
  ( N.Greogory model 1930)
 Keynesian theories (1936) on determinants on Investment.
 (R. Stephen sear 1993)
 (Frederick 2000)
 Serven L. and Anders solimano (1991), Economic Adjustment and Investment performance in
developing countries.
 (World Bank) on investment on sustained Growth.
 Harrod-Dommar model (investment and foreign income.
 (Genet (1992),Workie (1996),Seyoum(2002))

 Endegouness gross model Macro-Economic theory.

 Adamsmith 16th revised edition on wealth of nation
 Jorgen’s 1971

APPENDIX
JIMMA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS
Dear respondents;
The purpose of this questionnaire is to collect information from the private investors, for research
purpose. The 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. Sex A. Male B. Female

2. Age A. <30 year B.30-40 Year C. 40-50 year

D.> 50 Year
3. Educational Status
A. below 12 grades B. Certificate
C. Diploma D. Degree or above
4. Marital status: single married Divorce widow
5. What is the area of types of your investment?
Agriculture trade
manufacture serves giving other
6. What is the major source of fund to start your investment activity?
Loan from a bank personal saving
Loan from individual other source
Loan from NGOS
7. Did you get consultation and advisory service from the town’s investment office when you started
your business an activity?
Yes No
If yes, was it adequate?
8. What do you think the cause for level of investment activity in the town?

9. 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
10. Is there any activity done by the investment 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?
11. 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?
12. 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)
13. To develop the investment activity more rapidly, is there infrastructural facilities for this activity?

Yes No
If yes, which one?
Power supply (electricity, water supply)
Banking and loan service
Telephone
Land and aired rate
14 .As a general what is the transportation service in the town
DECLARATION

I undersigned declared that this student research 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.
_____________________ _________________
Name of student Signature
This student Research has been submitted for examination with approval as a university advisor.

_______________________ _________________
Name of Advisor Signature
______________________
Date.