MEKELLE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

Challenges of Private Investment (CASE Study MEKELLE CITY)

A Senior Essay Submitted to the Department of Economics in Partial Fulfillment of the

Requirements for bachelor of Degree (BA) in Economics

BY, AMANUEL PHILIPHOS

ADVISOR: SOLOMON.H. (MSc)

June, 2016

MEKELLE, ETHIOPIA

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 1. Acknowledgment
First and most may thanks go to the almighty GOD, without the help of him I could never have
been what I am today

Secondly my deepest gratitude and heart full goes to my advisor Ms. SOLOMON. For his
helpful comments, suggestions and valuable advices starting from initial through the fulfillment
of this paper.

Thirdly, but not least I would also thanks my parents the way they take their responsibility
towards me both financially and financial supports to accomplish my mission.

Finally, my thanks goes to all my supporter friends for their material, idea and others and also
Mekelle city investment bureau and investors. They sacrifice their time and silence for me and
allowed to be interviewed and filled questionnaires.

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Abstract

Investment is one of the key points for the growth of the country .The general in Mekelle city. To
achieve this general objective, to research questions were raised. To address the question 40
respondents out of 448 were selected through simple random sampling techniques. To collect
primary data from objectives of these reasons was to identify the challenges of private
investment the respondents, questionnaires were used as method of data collections. So the
primary and secondary data were used.

The data revealed that lack of sufficient infrastructure, high collateral requirement for taking
loan and lack government support the entire objective is the problem of private investment in the
study area.

Finally the researcher recommended that the government should set appropriate support of
investor and provide loan with appropriate collateral requirement.

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Table of Content page

1. Acknowledgmentii
Abstract iii
List of table and figure vii
2. CHAPTER ONE 1
INTRODUCTION 1
1.1. Background of the study...........................................................................................................1
1.2. Statment of the problem...........................................................................................................2
1.3. Research Questions..................................................................................................................3
1.4 objective of the study.................................................................................................................3
1.4.1 General objective........................................................................................................................3
1.4.2 Specific objectives......................................................................................................................3
1.5. Scope of the study.....................................................................................................................4
1.6. Research Methodology.............................................................................................................4
1.6.1. Data Types and Sources.............................................................................................................4
1.6.2. Target Population.......................................................................................................................4
1.6.3. Sampling Technique..............................................................................................................4
1.6.4. Sample size................................................................................................................................4
1.6.5. Method of Data Analysis...........................................................................................................4
1.7. Significance of the study...........................................................................................................5
1.8. Limitation of the study.............................................................................................................5
1.9. Organization of the paper........................................................................................................5
1.10. Definition of key terms...........................................................................................................6
Chapter Two 7
2. Literature review 7
2.1 Definition of Investment............................................................................................................7
2.1.2.Theories and Models of Investment........................................................................................8
2.1.2.1 Classical Model of Investment.................................................................................................8
2.1.2.2. Keynesian Model of investment..........................................................................................8
2.1.2.3. Accelerator Model of Investment............................................................................................9
2.1.2.4. The Multiplier Model of Investment.......................................................................................9

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 2.1.2.5. Tobin’s Q Model of Investment............................................................................................10
2.1.3. Types and elements of investment...........................................................................................11
2.1.3.1. Types of Investment..............................................................................................................11
2.1.3.2. Elements of investment.........................................................................................................12
2.1.6 The relationship between public and private investment....................................................13
2.1.7 Contribution of investment to economic growth.......................................................................13
2.2 Empirical literature review.....................................................................................................14
2.2.1 Ethiopia investment opportunities.............................................................................................14
2.2.2 Agriculture................................................................................................................................14
2.2.3 Fishery......................................................................................................................................14
2.2.4 Minerals....................................................................................................................................14
2.2.5 Tourism....................................................................................................................................14
2.2.7 Opportunity of private investment in Mekelle..........................................................................14
CHAPTER THREE 16
3. Data Analysis and Presentation 16
3.1. Introduction............................................................................................................................16
3.2. Sect oral Distribution of Private investment in Mekelle City.................................................16
3.3Demographic characteristics of the respondents......................................................................17
3.4 problems associated with access to land..................................................................................18
3.5 problems related to investment finance...................................................................................19
3.7 problem related to access to infrastructure.............................................................................21
3.8 tax related problem.................................................................................................................22
3.9 Other problems........................................................................................................................23
CHAPTER FOUR 25
4. CONCULISION AND RECOMMENDATION 25
4.1 Conclusion...............................................................................................................................25
4.2. Recommendation....................................................................................................................26
Bibliography 27
Appendix 28

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2. List of table and figure
Table 3. 1 Sectorial distribution of private investment in Mekelle city......................................... 16
Table 3.2 characteristics of the respondents................................................................................. 17
Table 3.3 means of getting land for investment.............................................................................19
Table 3.4 the extent of land related problem.................................................................................19
Table 3.5 problem to bank loan.....................................................................................................20
Table 3.6 extent of problem related to access to investment capital..............................................20
Table 3.7 length of time spent to get investment license................................................................21
Table 3.8 the extent of problem related to bureaucracy................................................................21
Table 3.9 extent of problem related to access to infrastructure.................................................... 22
Table 3.10 extent of problem related to tax...................................................................................22
Table 3.11 Extent of other problems related to investment...........................................................23
3.12. Incentive or support given to private investors.....................................................................24

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 CHAPTER ONE

1 INTRODUCTION

1.1. Background of the study

The role of investment for a nation is very significant, investment increases the productivity of an
economy under taking investment on goods and services can enhance the productivity of the
economy in the future. It increases accumulation of capital.

Generally, investment contributes of GDP of the country. This is in turn important input for the
development of the nation (Mankiw, 1987).

More over investment is very important to utilize untapped resources to create opportunity for
citizen to increase foreign currency through import substitution and export promotion to improve
technology to increase foreign currency through import substitution and export promotion to
improve technology of the nation and to facilitate communication and cultural exchange of the
society (Mankiw, 1987).

The macroeconomic performance of Ethiopia or the country's economic position bathing absolute
and in relative term to comparable low-income counters in sub-Saharan African and other region
is not encouraging. Hence, the key to narrowing the development gap between Ethiopia and other
countries is to quicken the pace of economic growth, which depends largely on investment
(Ethiopian economic report, 1999/2000).

Investment is the main hope of major poor countries trying to increase their level of income
because it increases the living standard of the people. Currently the Ethiopian government and its
diversification of private investment is resent history for Ethiopia because of fluctuation of
different political regime with different economic policy. The most significant time in relation to
investment was from imperial regime to current federal government. During the era of
Hailesselassie (1923-1974) investment was believed to be strategic point in the sector, but by the
time it was owned either by foreigners specially by Brittani's imperatival families and by the
government (Asfaw, 2006).

After imperial regime, Derg come to power in 1974 with command economic policy. During this
time, investment was relatively better than imperial regime. It limited the participation of privet
sector. The development of public sector was seems as an appropriate policy response to bring
about important in the economy. There appeared to be an economic consequence around the
world. Accepting the public enterprise is an inevitable part of Ethiopian economy. The public
sector contributed significantly to the development process, the low rate of return on such
investment and the ability of the government to industries and the inability of the government to
finance the growing demand for such investment changed the consensus in favor of economic
liberalization and privatization, which forced the government to introduced mixed economic
policy in 1980s. In the context of significance change in fiscal, monetary, trade and industrial
policies, the need for review of the continued presence of the public sector in wide range of
activities was felt (Dawit, 2005).

A new strategy for encouraging private sector were adopted when transitional government of
Ethiopia(TGE) come to power in 1991; with new economic policy, it marked a turning point in
policy guidelines. The philosophy of a new economic policy was the state should leave for
private sector and concentrate on the areas where it has special or unique responsibility .Since
1991 to enhance the role of private investment in the development process, various policy
measures have taken by the government. In addition, investment code number 15/1992 was
issued. It was revised by investment code number 37/1996 with the objective of eliminating
discrimination against the economy of private sector and creating conductive environment in the
economy of private investment (Kinfe and Abraham, 1998).

Mekelle is among the city that incorporates the development of private investment as an
important component in their development program, and nearly 22 years (fall down of Derg)
since the current government adopted a policy aimed at shifting the economic towards the private
sector. A number of macro and micro economic adjustment and policy reform have been
undertaken. However, these all efforts of the government have been rewarded with an adequate
response of private sector. The performance of private sector in the city is still poor when we
compared with other cities of the country. This low level of private investment in the city is due
to inadequacy of basic infrastructure facilities, like lake of entrepreneurial skill and lake of well-
developed financial institution, corrupt tendency system etc. Most of the investment opportunities
and problems extending at the national level directly extend at local level. Mekelle city being of
the cities of Ethiopia and has been encouraging policies under current regime. Thought has been
suffering from a lot of obstacles regarding private investment. Until a few years ago, the private
investment activities in financial facilities, infrastructure, involvement and attitude of investors
towards investment are some of the factors associated with the investment. Hence factors that are
challenged its development. However, now a day the number of investors is increasing from time
to time though their performance may not be as required in Mekelle city.

1.2. Statement of the problem

According to Majeed Khan (2008), private investment plays a significant role in the economic
growth of a country as it enormously enhances the productive capacity of an economy, and
creates wider opportunities for employment and technological progress. Therefore, private
investment can be regarded as a powerful tool for the innovation of economic growth and poverty
reduction for a country. They asserts that countries with wider and deeper private sector
investments demonstrates accelerated growth as investment creates more job opportunities,
generate more revenue and increase income of the poor. They also claim that private investment
has an essential role in determining long run productive capacity of an economy because it
creates new capital goods, which are basis for higher rate of investment and rapid growth of
capital stock. Likewise, private investment is considered as one of the primary engine of growth
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in a country because it has the potential for productivity accelerated economic development
(UNTAD, 2004).

The problem of policy attitudinal as well as operational inherited from the past had a negative
impact on private investment.

However in the various measures were taken to overcome these impediments. The absence of
infrastructure were improved, and encourage results have been achieved regarding with the
purpose of facilitating efficient reutilization of time and money for investment activities,
measures to avoided bureaucratic red tape also introduced. Despite, the measures taken by the
government still the investment activities of the Mekelle city are considerably low (Mekelle
investment office 2007).

There exist many challenges that hinder the growth and expansion of private investment in
Mekelle city support from the government unfair competition investors invest only in few
selected projects can be mentioned as the main obstacles of the investment. Realizing the impact
of these obstacles on the socio economic development of the city on one hand, it necessaries in
the research conducting the study of role of investment in achieving the desire economic
development on the other (Werkyie, 1996).

Generally the private investment activity of the city is limited and the researcher conducted to
expand and develop this activity by find out challenges.

1.3. Research Questions

1. What are the existed private investments on growing pattern?

2. What are the problems doe’s investors face, and how it hinders for its
expansion?

3. What type of potential condition exists in this city?

4. How to improve the challenges of private investment?

1.4 objective of the study

1.4.1 General objective
The general objective of the study was to identify the challenges of privet investment in Mekelle
city

1.4.2 Specific objectives

The specific objectives of the study are listed bellows

 Assess the potentials of investment in Mekelle city

 Examine the trends and sectors destruction of private investment in the city

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  Identify the challenges of private investment in the city

 Recommend the relevant and applicable solution as much as possible to the identified
challenges of private investment in the city

1.5. Scope of the study

The scope of the study is limited to the area of investigating the challenges of private investment
in Mekelle city. Doing research on the challenges, performance, prospects, determinants, and
other aspects of private investment at national level is a complex task since it requires huge
finance, time lack of experience in the research. The study's period is designed to have coverage
on relevant data between the years 2003-2007. This period is chosen due to the availability of
relevant data and yet considered reasonably long enough to provide adequate answers to the
research questions to be addressed in this study. Therefore, the above constraints forced the
researcher to under tack in Mekelle city.

1.6. Research Methodology

1.6.1. Data Types and Sources

The study used both quantitative and qualitative data type and primary and secondary sources of
data. The primary sources are concerned with gathering information on the challenges of private
investment. The primary data is collected through questioners and interview method. Secondary
data collected from secondary sources. These collected from investment bureau in Mekelle city
that means from published and un published materials. By using the above methods of primary
and secondary data collection the necessary information will be collected.

1.6.2. Target Population

The target population of the private investment is 448.

1.6.3. Sampling Technique

The researcher will be used simple random sampling technique that means to select the
respondents out of the total and to get the desired information from the sample population of their
respective position.

1.6.4. Sample size

The researcher taken 40 respondents out of 448 private investments in the study area more or less
similar problems through them would engage in different investment areas.

1.6.5. Method of Data Analysis

After the relevant data collected from different data sources, it processed through the use of
tables and percents (%) as the data will be expected to give meaning full conclusion.

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1.7. Significance of the study
This study tries to identify the challenges of private investment in Mekelle city and it will suggest
some feasible solutions as recommendation to the identified challenges, and the results of this
study will be significant for different bodies.

a. Ones the challenges identified in every direction as much as possible the solution forwarded
by the researcher used at list to minimize the challenges of private investment that hinder the
development of the sector.

b. The findings of this study would benefit researchers, policy makers and development planners
in redesigning appropriate investment policy and strategy.

c. The study will give some idea for concerning body to pay attention and look for more effective
solutions to the identified challenges of private investment in the city.

d. It also describes investment potentials in the city and invites investors from different areas to
the city. It may also help others who want to conduct related research works in the particular area
of study.

1.8. Limitation of the study

Due to constraints of finance and time study cannot be conducted in many challenges or
problems that limit the scope of the study. Many of the problems experienced during the data
collection process. The location of each investor in the city is very difficult to identify because,
addresses of private investors are different from the address given in their file in Mekelle city
investment office as it was impossible to get some by telephone. Further, when they identified, it
was difficult to get the investors to fill the questionnaire. In addition, when found they did not
want to fill the questionnaire. They usually give an appointment and they not founded at the
appointment time. Generally most sampled investors were not willing to fill the questionnaire.
Moreover, most of investors fail to understand the objective of the questionnaire. In addition to
this luck of experience in research work exert its own impact on the quality of this study.

1.9. Organization of the paper

The paper organized in to four chapters and appendix. Chapter one consist the introduction part,
which is background, study area, statement of the problem, research question, objective, scope,
methodology, significance, limitation, definition of key terms and organization of the paper.
Chapter two is contain the related theoretical literature on the fundamental challenges and
problems of private investment followed by empirical literatures related to the topic are
presented. The third chapter deals with the detailed analysis and interpretation of collected data.
The fourth chapter incorporates findings of discussions from chapter three and the main

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conclusion and recommendation. Finally, the appendix part will be containing prepared
questionnaire and bibliography.

1.10. Definition of key terms

Approved investment projects: - refers to investment projects that have received investment
permit from Mekelle city investment bureaus.

Capital: - is local or foreign currency negotiable instrument, machinery or equipment, building or

initial working capital.

Domestic investment: - refers to investment committed or made by domestic investor.

Domestic investor:- in this study denotes Ethiopian or foreign national permanently residing in
Ethiopia having made on investment and a Ethiopian born foreign national desiring to be
considered as a domestic invest.

Foreign investor: - is a foreigner or an enterprise owned by foreign nationals having invested

foreign capital in Mekelle.

Foreign capital: - means capital obtained from foreign sources and includes the re-invested profit
and dividends of foreign investor.

Implementation projects: - refers to those approved investment projects that have started practical
activities such as civil engineering works, construction of factory buildings, purchasing of
machineries and equipments but not started production or services rendering.

Investor: - means domestic or foreign investor having invested in Mekelle city.

Investment: - means expenditure of capital by an investor to establish a new enterprise or to

expand the existing one that already exists.

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Chapter Two

2. Literature review

2.1 Definition of Investment

Investment plays a great role in the processes of bringing economic development of a country.
Investment has been viewed and defined by different authors.

Gitema 1997 defines investment is as assessable out lays of funds that commit a firm to same
courses of action. The firm or investors lie on specific procedure to analyses and select that
investment properly.

According to Julie person 2004, investment is putting the valuable things you in to form in which
they will earn more income or many or other benefit. This means that to earn income or
additional capita we have output money or labor in away to produce or generate income in future.
For instance, putting of money in the bank is an investment. Because of earn interest in form of
money. Higher income results in higher saving which in turn to higher investment. On the other
hand investment means purchasing of input or raw materials at a certain price and using it for the
production or to increase the future productivity which is sold at certain prices.

Investment is a fixed and initial operating of resources used for the production of goods, the
provision of services and the development of science and technology capability ( Helfer, page6)

Investment, in economics refers to the purchase of physical asset, such as firm’s acquisition of
plants, equipment, inventory or an individual purchase of new home (Hulbert B.Mayo).

M.pTodaro (1995) define it as follows, investment is the part of national expenditure devoted to
the production capital goods over a period of time. According to him capital accumulation results
when some proportion of present income is saved and invested in order to augment future output
income, new factors machinery, equipment and material increase the physical capital stock of
nations and make it possible for expanded output levels to be achieved. These directly productive
investments are supplemented by investment in what is known as social and economic
infrastructure, water and sanitation, communication and the light which facilitate and integrate
economic activity.

Doctor Mankew define investment is spending today for future benefit and it is the components
of national income that link present with future. The definition of Kupper (1996) which define
investment as the change in capital stock over period of time normally a year for accounting
purpose.
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Private investment means any type of investment activity operated in expectation of public
ownership. That is individual citizens, foreign investors and companies involved in the sector,
which are reserved for private sector. The term investment connected different concepts and
meanings according to the scholars (Babul, 2003).

In addition to this as discussed by Samuel (1989), investment is the addition of the country stock
of tangible capital goods being equipment structure or investors means investment as it is
different from capital. According to him, capital is productive assets. It include all manmade
resources that can be used in the process of production, he categorized capital in to machinery
and equipment, construction and inventories.

Moreover, an expanded defection of capital would include educated skilled manpower, durable
construction like rail way, dams, bridges canals, schools, hospitals and the like. While the stock
of capital is a stock concept, investment is a flow concept measured in per unit of time.

2.1.2. Theories and Models of Investment

The theory of investment and what determines it is varies among economists. The existing
theories of investment are mainly developed for industrialized countries, which are quite different
from the developing one. And also the market size, saving and the policy of the country is the
other determinant of the investment (Shibeshi, 1994). Some of the theories are presented below.

2.1.2.1 Classical Model of Investment

Classical theorists did not explain spending in a well systematic ways as others did. Classical
theory treated investment as an inverse function of interest rate. The lower the interest rate is, the
greater the investment spending. According to classical theorist for every prospective investment
project, management estimates the expected rate of returns before allowance for the interest cost
on the funds tried up in the project.

One of the well-known classical economists, Adam smith 1776 took for granted that capitalist
make investment because they expect to earn profit in the future which depends on the actual
profit rate (Higgins, 1959).

2.1.2.2. Keynesian Model of investment

The Keynesian theory of investment was propounded in the 1930s by one of the most
collaborated British Economist, John Maynard Keynes. He was the first to draw attention to the
concept of an independent investment decision function in the economy. According to him,
investment is considered as a function of marginal efficiency of capital in relation to a given level
of interest rate that reflects the opportunity cost of the invested capital. Investment , he said, can
be worth under taken if the present value of the future income stream form a given level of
capital investment is equal to or greater than the initial cost of capital. He further argued that
investment spending could be highly volatile partly due to the underlying uncertainty associated
with the expected return of an investment. This argument presented a strong cost in explaining
the concept of business cycle. Keynes further postulated that the decision to undertake capital

8
investment are based on what he referred to as ‘animal spirit’, he considered investment decisions
as being very much affected by the levels of optimism or pessimism that the investors
constructed about the general atmosphere with in which the investment project will be
undertaken. This implies that the decision to invest or dis invest largely depends on the individual
investors’ expectations about the possible outcome of the investment venture. He therefore,
considered the volume of investment at any point in time of being largely determined by the
investor rational expectations formation about the economic investment with in which they
operate.

2.1.2.3. Accelerator Model of Investment

In accelerator model, expectations, profitability and capital costs play no role. A more general
form of the accelerator model is the flexible accelerator model. The basic notion behind this
model is that the larger the gap between the existing capital stock and the desired capital stock,
the greater a firms rate of investment (Parker, 2010). The hypothesis is that firms plan to close a
fraction of the gap between the desired capital stock, K* and the actual capital stock, K, in each
period. This give rise to a net investment equality of a turn of

I @ (K*-K-1) Where, I=net investment K*=desired capital stock K-1=last periods capital
stock and @=partial adjustment coefficient

Within a frame work of the flexible accelerator model, output, internal funds, cost of external
financing and other variables may be included determinants of K*. The flexible accelerator
mechanism may be transformed in to a theory of investment behavior by adding a specification
of K * and a theory of replacement investment (Asante, 2000).

Alternative economic models of investment behavior differ in the determinants of K*, the
characterization of the time structure of the investment process and the treatment of replacement
investment in the flexible accelerator model, K* is proportional to output, but in alternative
model, K* depends on capacity utilization, interest funds, the cost of external finance and other
variables.

This model thus identifies GDP or output, interest (cost of external financing) capital
(internal fund) as the major determinants of investment. Most of the availability of excess
production capacity which allow for the increase in production from the actual production
level to the desired level.

2.1.2.4. The Multiplier Model of Investment

The multiplier is the marginal effects of a change of one economic variable up on other
economic variable, of which the first is a component (Lange, 1943). The investment
multiplier, introduced by Keynes an integral parts of his general theory, established a
precise relationship between aggregate income and the rate of investment, given the
marginal propensity to consume (Hassan, 1968). In economics, a multiplier is affecter of

9
 proportionality that measured how much an endogenous variable changes in response to a
change in some exogenous variables (Hegel and, 1954).

The multiplier model indicates the total income creating effect of autonomous increment
of investment on the Bases of certain highly amplifying assumptions which include.

 The absence of time logs

 No induced investment
 Constant marginal propensity to consume and
 Closed economy

Multiplayer effect can be seen when new investment and jobs are created into a particular town,
city or region. The final increase in output and employment can be far greater than the initial
injection of demand because of the inter relationship between the secular flow. The multiplayer
model of investment is therefore, based on the feedback effect that output or production has on
investment. The basic notion is aggregate income increase as, the producer of the new investment
good enjoy higher sales incomes. Thus an increase in investment set off a never ending sequence
of every smaller increase in consumption demand that augment or “multiply” the effect of
investment on income.

2.1.2.5. Tobin’s Q Model of Investment

Jams Tobin, another Nobel-Prize winner, formulated an investment theory based on financial
markets. Tobin argued that firm’s investment level should depend on the ratio of the present
value of installed capital to the replacement cost of capital. This ratio is Tobin’s Q. The Q theory
of investment argues that firms want to increase their capital when Q>1 and decreases their
capital stock when Q<1. If Q>1, a firm can buy one dollars worse capital (at replacement cost)
and earn profit that have present value in excess of one dollar. Under those conditions firms
increase by increasing more capital, so we expect investment to be high. If Q<1, then the present
value of profits earned by installing new capital is less than cost of capital. So, more investment
lowers profit. We expect investment to be near zero. Q<1. When Q<1, someone seeking to enter
a particular industry can buy acquire the necessary capital asset more cheaply by buying on
existing firm than by building new one with new capital. This is true because the value of
installed capital (that is the cost of buying on existing firm) is less than the replacement cost (the
cost of buying new firm) (hag eland, 1954, parker, 1960).

Tobin’s Q theory thus, lays bore the fact that, investment a function of the cost of capital
(interest) as well as profitability. Investment makes sense only when the cost of replacement and
or acquiring capital asset is low. Low cost of capital magnifies profitability. Implicitly, risk is
also a factor considered by Tobin’s model as it seeks to limit losses by making sure the Q ratio is
greater than one.

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2.1.3. Types and elements of investment

2.1.3.1. Types of Investment

Investment can be classified in to private, public, domestic and foreign investment. So investment
is one of the primary engine of growth especially, technological progress, skilled acquisition and
talent and development innovative capacity. Generally, according to some economists, spending
of investment is the spending devoted to maintain the stock of capital and hence real or physical
investment is aggregated in the following three categories. They are:-

A. Business fixed investment

This type of investment consists of business forms spending on durable machineries, equipment
and infrastructures such as factories and machineries. Firms use capital along with labor to
produce goods and services for sale. But firms will keep investing until the value of output
producing by adding one more units of capital production reaches its maximum.

B. Residential investment

It consists of the building of single family and multi-family dealing which we call housing in
short. The theory of housing investment start from the demand for the stock of housing affected
by wealth, the interest rate available on alternative investment, on the net real return obtained by
owing house. The price of housing is determined by the stock of demand and the given stock
supply of housing available at any time. So the rate of housing is determined by the rate of which
builders supply at doing prices in general, residential investment depends on the relative price of
housing. Housing price in turn depends on the demand for housing and the current fixed supply.
An increasing in housing demand perhaps attributable to fall in the interest rate, raises housing
prices and residential investment.

C. Inventory investment

Inventory investment includes in store shelves waiting to be sold, cores in show rooms, waiting
to be shipped and even part of the product to be assembled. Moreover, it consists of raw
materials, good in the process of production and completed hailed by promise in anticipation of
their sale. Firms have various motives for holding inventors of goods; Smoothing production,
using them as a factor of production avoiding stock outs and storing work in process. One model
of inventory investment that works well without endorsing a particular motive is the accelerator
model. According to this model, the stock of inventory defends on the levels of the GDP, and
inventory investment depends on the change in GDP. According for about three quarter of the
total is business fixed investment. The scholars classified investment using different bases for
classification. According to world book encyclopedia, (1992) there are seven types of investment,
they are: 1. Saving account: this types of investment takes place by saving money in a saving
account at financial institutions such as bank, credit unions or credit and saving association in a
return of some percentage of its deposit at a certain period of time usually a year. 2. Life
insurance: it protects investors from financial disasters and for family members in case the
11
persons die. 3. Business investors engaged in the operation business ventures for the sake of
profit. 4. Real state: this includes investment on home, land or rental property. 5. Bonds: it is
debit security that allows investors to be paid periodically until the maturity date of the security.
6. Stock: It is a security that a claim on the act of becoming the owner ship of the asset of the
firm. 7. Mutual funds: The purchase of mutual funds shares which make profit to shareholders
(Teferi, 2002).

2.1.3.2. Elements of investment

Elements of investments are those which are common in investment activity. These are
return, risk and time. 1 Return: refers to reward from investment, which includes current
income, capital gains or losses and profits. 2 Risk: is the change when the expected or
prospective gain profit is less than expected outcome, or the degree of happening of
losses. 3 Time: the important factors in which investment is the time which offers several
different courses of action (Birehanu, 1999).
2.1.4 Methods of evaluating investment
There are five methods for evaluating investment project is set by (shaum’s 1998).
The payback period (PBP): these measures the length of time required to recover the
amount of initial investment. The investors should consider/choose / the project which
shorter payback period. 1 the net present value (NPV): in this the excess of present value
in cash inflows generated from investment over the amount of initial investment. The
project with positive net present value would be accepted.
Accounting rate of return (ARR) , this measures the profitability from the conventional
stand point by relating this required investment ( care, rage) investment )to the future
annul net income. Under this method the project with highest rate of return should chose.
Internal rate of return (IRR); is define the rate that equals interest with the present value
of future cause allows. Investment diction is accepted if internal rate of return exceeds the
cost of total investment. Profitability index (PI): is ratio of the total present value of future
cashing lows to the initial investment. The project is accepted if profitability index is
greater than one. Shaum (1998) has also set the process for evaluating and selecting long
term investment and classify investment decisions as follow.
I. Selection decisions concerning proposed projects that involve investment in long
term assets such as property, plant and equipment or resources. Commitment in
sours of a new product development, market research, refund (long term debt) and
the like.
Misrepresent decision such as replacement of existing facilities with new facilities.
2.1.5 Determinants of investment
What determine the level of investment are highly continuous and emphasized topics in
economics. Because of this, various approach have been adapted the theory of investment
behaviors goes back to Keynes (1936)
General theory states that, first called attention to the existence of an independent
investment decision function in the economy. He observed that, investment defends in
margin efficiency of capital relative to some interest rate is reflective of the opportunity,
12
cost of invested funds. According to Somues Son (1989), investor invests more. That will
enable them to earn profit. According to him, there are three determinants of investment.
1. Revenue: an investment will bring more product which leads to encourage investors
less and otherwise it dis courage.
2 costs: determinant is cost of investment, which is interest rate.
3 expectations: it is the investors predict about the future return of investment and if its
prediction is positive, there will encourage him or its production are negative, on its return
this leads to discourage him.
2.1.6 The relationship between public and private investment
Empirical studies on the relationship between private and public investment in developing
countries other than Pakistan shows that while public investment in non –infrastructure
dis courage’s private investments the latter is strongly induced by investment in
infrastructure. Moreover, private investment in productive sector is more efficient than
public investment in the some (Blejer and Khan, 1987).
Recent studies have shown that private investment is more closely associated with growth
and tends embody newer technologies and capital than public investment. This argument
is also supported analysis versus private sector investment in developing countries.
Between investment in the public and private sectors from 1970 -1998 in both high and
low growth developing countries show that high growth countries invested 15% of GDP
in private sector compared to 10% for low growth country. Over all, high growth counters
invested 60% more in private sector than in the public. That is the conclusion of recent
study of 50 developing countries from 1970-1998 examining the relationship between
private and public investment, growth rate and income level. The study found that the
association between private investment growths was even more pronounced during 1990s
a period when private investment was accelerated in many countries because of
liberalization and market reforms, while public investment was the declining as the result
of privatization and tighter budget constraint.
2.1.7 Contribution of investment to economic growth
There are different theories regarding the contribution of investment to economic growth
this disaggregate investment in to its structure (construction) and equipment components
using a sample of both developing and industrial economics, they find that equipment
investment contributes much more to per capital GDP growth than structure
investment(long and summer,1991). In short term, investment has been shown to depend
on the rate of output growth, the rate of capacity utilization, or both as indicators of future
demand and the severity of liquidity constraints faced by firms-to variables critical to
decision to expand productive capacity. Thus during the course of the business cycle
output may lead investment in accelerator fashion (server and Selman 1993).
Development economics has traditionally maintained that capital accumulation is
fundamental cause of growth over the long term. Recently, however this view has been
challenged by the argument that the movement of investment ratios and growth rates may
be largely caused by the action of the third factor technological innovation. That is

13
driving both capital accumulation and output expansion (levies, 1994). UN extreme
interpretation of this view would hold that a capital accumulation is consequents which
other than cause of the growth process, is caused by technological factors. Investment
plays a dual role in the economy in the first place, it affects short run output through its
impact that means, when there is investment, and expenditure on factors of production
will increase. This leads to an increase in income of factors of production which inurn
result in increase in aggregate demand. Secondary, in influence long run output growth
through the impact capital formation on potential output.
2.2 Empirical literature review
2.2.1 Ethiopia investment opportunities
Ethiopia is predominantly agriculture country which account for 80% of its export and
85% of total, manufacturing and service industries also gaining.
2.2.2 Agriculture
Because it’s diverse agro ecological zones each with its own physical and biological
potential crops of various denominations could extensively grow.
2.2.3 Fishery
From its lake, dams and rivers Ethiopia has potential crop of various producing 45000
tons of fishes out of which only 20% is currently being exploited.
2.2.4 Minerals
Geological study conducted up to now certain that Ethiopia is endowed with vast mineral
resources such as gold, platinum, tantalite, god ash, cobalt, lead, copper chromium,
uranium and petroleum.
2.2.5 Tourism
Ethiopia is characterized by unique man made culture heritage and scenic beauties which
give the country much stronger competitive edge as the most prepared tourist destination
in Africa hence investing in resort facilities and service development would be rewarding
business under taking in Ethiopia.

The investment office of Mekelle city was established in 2001 G.C to for the promotion
and extension of private investment activity as well as to play a great role in socio
economic development of the country in general and that of Mekelle in particular through
investing vast investment opportunity available on lapped natural resource of the area and
that socio economic gaps by building hospitals, schools, higher education institutions and
so on…
2.2.7 Opportunity of private investment in Mekelle
A. Economy
The populations of Mekelle city are predominantly merchants which accounts a higher
share of the city population. The rest populations engaged in other activities like
agriculture and service like hotel, garage crop production is practiced in limited area of
the city.
B. Natural resource

14
The city has natural resource which is properly exploited will improve the using condition
of the city. The geographical location of Mekelle helps it to become the center of trade for
different people who come from different area so; this location endowment helps to us to
become trade Centre and to expand its size. The area also endowed with suitable whether
condition for agricultural development.
C. tourism attraction
In general the city land escape can be most important potential for tourism, the place of
king aste yohannes, the culture of ashenda, people is shore to motivate the culture
interested tourist area, wildlife potential though not yet conserved is suitable tourist
resource of the area. Moreover, churches and mosques are important tourism center of the
city.

15
CHAPTER THREE

3. Data Analysis and Presentation

3.1. Introduction
Mekelle city is located northern part of Ethiopia it is the capital city of Tigray. The situation of
Mekelle for settlement is most probably good, especially for industrial and construction
development. Due to this the supply of material is surrounded here. The investment activity, in
the city is increasing from time to time like industries, construction, education, health and other
social service the reason for this increment is reliable peace and stability in the city.

3.2. Sect oral Distribution of Private investment in Mekelle City.

During the period which covers the year 2000-2007, the distribution of investment among the
sectors were not even as that of the distribution of year to year. The table below presents the
detailed information about the number of projects, capital stock and job opportunities across the
sectors in the period.

Table 3. 1 Sectorial distribution of private investment in Mekelle city.

No Types of Approved Investment capital in<000>
sectors projects
Total job opportunities

No Share in Capital<000>ETB Share employment Share

% in % in %

1 Agriculture 8 1.78% 23,500,000 0.38% 157 0.37%

2 Industry 149 33.25% 3,402,159,470 55.79% 14487 35.03%

3 Construction 198 44.19% 926,507,858 15.19% 19095 46.17%

4 Hotel and 67 14.95% 1,470,710,868 24.12% 6767 16.36%

tourism

5 Social 26 5.80% 274,763,765 4.50% 852 2.06%

service

448 100% 6,097,641,961 100% 41358 100%

Source: computed from Mekelle city investment office date, 2007EC

Table 3.1 indicated that at the end of the 2007EC the number of construction project were the
largest compared with other sectors this is a reason that the sector, which absorbs huge number of
labor force and followed by industry, which account 149. Projects, birr 55.795 of capital stock
16
14,487 job opportunities created this due to increase in number of investors to the sector in to the
city.

3.3 Demographic characteristics of the respondents

The demographic characteristics of the respondents include age, sex, marital status and level
education.

Table 3.2 characteristics of the respondents

characteristics Number of respondents

number Percentage
(%)

Sex male female 24 60 40

total 16 40 100

Age Below 30 31- 4 10

40 41-50
above 50 10 25
total 18 45

8 20

40 100

Marital status Married un 20 50

married
separated 11 27.5
polygamy 7 17.5
total
2 5

40 100

Educational status 1-8 2 5

9-12 9 22.5

Diploma 18 45

17
 Degree and a 11 27.5

above

Total 40 100

Source; sample serve respondents 2008, EC

Based on the above table we can understand that the majority of investors in Mekelle city are
those who are the male. These is due to woman are discouraged because of cultural habit and the
lack of awareness of the societies towered the investment.

When we are see the investor’s age who are engaged in the investment activity in Mekelle, the
age between 41-50 account the highest share. This is due to the reason that accumulation of high
capital require long period of time mostly. Therefore this age group takes the advantage of
accumulation capital and investing their capital more.

Regarding to the marital status, those who are married highly invest their capital. Investment by
itself requires huge amount of capital and those who are married are solved the capital problems
by sharing their individual capital.

When we are looking the education effect on the investment, those who are educated until
diploma are highly invest that of the other, because those who are more spent their time at
education abstain themselves from undertaken different types of business activities.

3.4 problems associated with access to land

Land is one of the essential means of production and no investment project, which take place
without the requirements of land. Especially, investment in agricultural activities required large
amount of land. Investors in Mekelle get land for investment by different means from those
means lease, free of lease, buying from owners and from family are the common for many
investors.

As 75% of sample investors have responded that, the problem related to access of land is the
main problem for the most investor’s project implementation activities.

18
Table 3.3 means of getting land for investment
Types of business Means of getting land for investment

By renting Free of lease By buying From family

Sole proprietorship 4 3 2 1

Partnership/corporation 5 2 11 2

Total 9 5 13 3

Source: sample survey respondent 2008EC

From the above table one concludes that the investors are getting their land through buying
because the cost of renting is leads the investors to the risk and also getting the land through free
lease is difficult due to bureaucracy system of administration.

Generally, the extent of problem of lack of access to land as the sample investors responded for
the question about the problem of land access presented as follow.

Table 3.4 the extent of land related problem

High Medium low No problem

No respondents 18 10 12 0

Percentage share 45 25 30 0

Source: sample survey respondents 2008EC

From the above table we can see that the extent of problem to access the land is high because
from the respondents response it account about 45 percentage share. Investing has full of
challenges due highland problems.

And there is no investors who say there is no the problem of land out of 40 respondents.

3.5 problems related to investment finance

The role of adequate finance for any economic activity to produce successfully is expected to be
one of the most crucial factors. Those, it is quit essential to address the problem arise from lack
of accesses to finance for any economic agent. As 50%the sampled investors have respond that,
the problem related to access to finance is serious problem for most investors. T is now that the
source of investment finance for investors are crucial and the date gathered indicated that there
are three major source of finance for most of investors in Mekelle city. Namely, owned found,
loan from banks and partnership or corporation or sells stock, from those 50% and 40% of
investors source of found are own found and loan from banks respectively.

19
Table 3.5 problem to bank loan
Problem related to bank

collateral High interest Bureaucratic No problem

rate Producer of
bank

No respondents 20 5 3 0

percentage 71% 17.87 10.71 0

Source survey respondents 2008,

The above table revealed that the problems loan from the bank, according to the respondents
suggestion the main problems are collateral problems, high interest rate and bank producers.
From the problems the major problem is collateral problems. And least problem is producer of
the bank.

Table 3.6 extent of problem related to access to investment capital

Extent of problem related to the investment capital

high medium low No problem

No 12 16 10 2
respondents

Percentage 40 30 25 5

Source survey respondent 2008

As the above table indicated that, the extent to access of the capital problem the majority of
investors are say that the high problem of capital, those who are say medium 16 respondents and
only 2 respondents are say there is no problem of capital to invest.

Problem related to bureaucracy

The problem related to acquiring investment license, land loan from banks and other services
provided by government face bureaucratic producer. The table below shows the length of time to
get investment license.

20
Table 3.7 length of time spent to get investment license
Length of time spent to get investment license

Below 1 1-5 month 6-12 month 1-2year Above 2year

month

No of 3 11 13 8 5
respondents

percentage 7.5 27.5 32.5 20 12.5

Source: sample survey

According to the above table the length of time to get investment license is 6month up to one
year. The waiting from 6 month up to one year is hindering the investment activity, because the
capital that expected to investment may expand to other purpose.

Table 3.8 the extent of problem related to bureaucracy

Extent of problem related to bureaucratic

high medium Low No problem

No 21 12 7 0
respondents

Percentage 42.5 40 17.5 0

Source: sample survey respondent, 2008

Problem related to bureaucracy

The problem related to acquiring investment license, land loan from banks and other services
provided by government face bureaucratic producer. The table below shows the length of time to
get investment license.

3.7 problem related to access to infrastructure

The economic and social infrastructure is very important for investment to be undertaken.
However, in the infrastructure in most developed countries are low and poor. This is one of the
cases of their low level of development. In Ethiopia telecommunication, electric power and water
supply are provided by the government. In most causes private investment is not allowed to
invest in those sectors. As results, there seems to be poor economic infrastructure. The extent of

21
the problem of infrastructure is investigated by taking the sample respondents. The survey
revealed that there is moderated problem of lack access to economic infrastructure.

Table 3.9 extent of problem related to access to infrastructure

Extent of problem related to access to infrastructure

High Medium Low No problem

No respondents 3 17 15 6

Percentage share 7.5 42.5 37.5 12.5

Source: sample survey EC 2008

According to the date obtained as it represented in the above table 42. 5% of the
respondents have responded that there is medium problem of infrastructure in the city and
about 12.5 % of the respondents responded that there is no problem of infrastructure in
the city. Similarly, it is difficult to expect a good function of investment activity without
having better access of power supply, water supply, road and other infrastructures. the
following are considered the major problems related to infrastructure in the city for the
well operation of projects ;
Most investors are required to share that the cost is acquiring power and water supply.
The large time period in acquisition of power and water.
The continual increase in monthly power cons consumption and cost.

3.8 tax related problem

Table 3.10 extent of problem related to tax

Extent of problem related to tax

high Medium Low No problem

Lack of tax 18 8 10 4
holiday

Duty free 9 5 13 13
import.

Source: sample respondent, 2008.

Tax is the main source of government revenue. Government accomplishes many activities for
public use. Building roads, expanding electric power, constructing water supply, social services
22
like hospitals and schools and other projects for the community are some activities accomplished
by the government through the collection of tax. However, as the sampled respondents responded
that the rate of tax is very high. In the above table from the total of 40 respondents 18(45%)are
responded that there is lack of tax holiday in the city. On the other side 4(10%) are responded
that there is no problem of lack of tax holiday.

There are investors who import operating or raw materials from abroad. In this regard,
governments prepare duty free import. There are nine (22.5%) of the respondents said that there
is high problem of duty free import. At the same time, 13(32.5%) investors responded there is no
problem of duty free import. Generally; the problem of lack of tax holiday is series problem than
the problem of duty free import.

3.9 Other problems

The problem that affects the growth of private investment in the city is discussed in above parts
of this unit but they are not the only challenge of private investment. There are many other
problems which are the challenges of private investment in the city.

Some of the problems are discussed below.

Table 3.11 Extent of other problems related to investment

Extent of other problems related to investment

high Medium Low No problem

Market problem 15 11 11 3

Lack of 3 7 16 14
entrepreneurial
skill

Technological 2 23 13 2
problem

Source: sample survey respondents, 2008.

Market is the core of investment decision from feasibility study of investment project after
analyzing future profitability and availability or its necessity. As shown in the above table 37.5%
of the respondents responded that there is high problem of market demand. Lack of
entrepreneurial skill is high problem for 7.5% of the respondents. 57.5% of the respondents
responded that there is medium problem of technology in the city. There is shortage of trained
people in information technology, management skill and other desired technical. So it is good to
encourage technical and volitional training. This need to produce capable technical and training
should be guided by market demand. In addition there is a need to upgrade their managerial and
technical skill to meet the challenges of production and marketing and even changing countries
market place.
23
3.10. Incentive or support given to private investors
One of the steps taken by the government to enhance investment in Ethiopia is the incorporation
of provisions regarding investment incentives. This subtitle contains details of the incentives as
the respondents mentioned and council of ministers regulations number. 270/2012 on investment
incentives and investment areas reserved for domestic states. The Ethiopian government provides
these investment incentives such as exemption from income tax, exemption from the payment of
customs duty, under exemption from income tax there are, investment activities eligible for
income tax exemption, income tax exemption from expansion or upgrading of an existing
enterprises, commencement of period of expansion from income tax and carry forward of losses.
In addition, under exemption from the payment of customs duty there are conditions for
importing vehicles duty free, areas of investment no eligible for customs duty exemption, transfer
of capital goods imported free of customs duty and exemption from income tax.

Note with standing the provisions of the exemption from the payment of customs duty, the
following areas of investment are not eligible for exemption from the payment of customs duty.

Real estate development

Publishing;
Exporting of raw coffee, chat, oil seeds, pulses, precious minerals, hides and skins bought
from the market natural forester products, live ships, goat, camel cattle and equines not
raised by the investor; and

Wholesale trade in supply of petroleum and it’s by products as well as wholesale of own
products.

However, the investment board may, where it finds appropriate, issue directives providing for
additional areas of investment which may not be eligible for exemption from the payment of
customs duty.

Transfer of capital goods imported free of customs duty

Capital goods or construction materials or motor vehicles imported free of customs duty may be
transferred to persons with similar duty-free privileges.
The investor may re-export the duty-free imported capital goods or construction materials or
motor vehicle.
Even if the government put those investment initiatives, the respondents indicate that it
the procedures to get them are very difficult and cumbersome.

24
 CHAPTER FOUR
4. CONCULISION AND RECOMMENDATION
4.1 Conclusion
It is obvious that investment activity particularly by private sector is important to high economic
growth for both developed developing countries. Ethiopia is as one of the developing countries
needs a huge amount of investment to achieve economic growth. Investment increase productive
capacity, technical progresses labor productivity and employment and the use of existing resource
and output.

As result if it is to alleviate poverty it is crucial to encourage and increase participation of private

sector in economy. In this respect, Ethiopia has signed multilateral and bilateral investment
promotion agreement with money country and is ready to use its investment potential and to
expand this to other country.
Mekelle is one of the cities of the country, which has huge investment potential in industry,
construction, hotel and tourism, social service and agriculture. However, there are many
challenges for investors to inter on this sector as well as for the well operation in the city. Within
the five years (2003-2007) period the trends of approved private investment projects, capital
stock and job opportunities vary from year to year and it is the same between the sectors. In the
period industry and construction contains 77.44% of total approved investment projects, 70.98%
initial investment capital and 81.2% of the employment opportunity expected to create in the
period.

Most investors get land for investment by renting or buying from the owners. The problem
related to access of land is the main problem for the most investor’s project implementation
activities. Therefore, problem in land impose high difficulties to investors to engage in
investment activities. The sources of investment capital in city are own fund, loan from banks
and partnership or corporation (sales of stock), from those 50% and 40% of investors source of
fund are own fund and loan from banks. The problem of collateral is series problem, which limit
the access of investment finance, and the problem related to high interest rate is the main problem
of bank loan. As the result, the access of loan is series challenge for the growth of private
investment in the city.

In Mekelle city indicated that the problem related to bureaucracy is the leading sector, which
hinders investment in the city. There is lack of transparency. Even the land provided to investors
is not suitable, that means it is given without the consideration of the nature of the proposed
investment projects. However, the problem associated with the provision of public infrastructures
such as telecommunication, water supply, electricity and market demand is relatively low.
Generally, the problems related to access land, finance, bureaucracy, and tax are the most series
challenges of privet investment in the city.

25
4.2. Recommendation

One the objective of this study is to give some relevant and applicable solutions to the
identified challenges of private investment in Mekelle. As a result, defending on the
above finding, the following recommendations are forwarded by the researcher.
1. The city administration should identify cities from the investment in each sector
according to the nature of investment projects before the application of investor for land.
2. The government should provide land at lower lease for payment for the sectors where
land is not available freely.
3. The loan procedure of banks should be clear and take place in a short period.
4. Developing the saving habit of the people of the city in particular and the country as a
whole.
5. The government should have to prefer a good working procedure in investment related
offices.
6. The government has to appoint skilled and committed officials for investment and
investment concerned offices.
7. The city administration should render adequate incentives to attract and motivate
investors.
8. The investors should follow rules and regulations of investment.
9. Since infrastructural problem are the major problems in the city, infrastructural
facilities’ such as road, water, and electricity and like should improve to encourage privet
investment activities.
10. To increase the contribution of private investment towards creating job opportunity
the government should encourage the investors who invest in secondary and tertiary
sectors.

26
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27
Appendix

28