CHAPTER ONE

1. INTRODUCTION
1.1 Background of the study
Investment is the main hope of most poor countries, trying to increase their level of income,
because it increases the living standard of the people. Currently the federal as well as the
regional government of Ethiopia devote much of their efforts on accelerating the growth of
investment and its diversification. Private investment is a recent history for Ethiopia because
of fluctuation of different political regimes with different economic policy. The most
significant time in relation to investment was from imperial regime of Hailesselassie to the
current federal government. During the era of Hailesselassie (1923-1974), investment was
belied to be a starting point in the sector. But by the time it was owned either by foreigners
especially by Britain’s or by imperial families or by the government. (Asfaw, 2006).

After imperial regime, Dreg comes to power in 1974 with command economic policy. During
this time investment was relatively better than Hailesselassie. It limited the participation of
private sectors in the economy in which public enterprise is mostly dominant. The
development of public sectors was seems as an appropriate policy response to bring about
improvement in the economy. There appeared to be an economic consequence around the
world. Accepting the public enterprise is an inevitable part of Ethiopia. While the public
sector contributed significantly to the development process, the low rare of return on such
investment and the inability of the government to finance the growing demand for such
industries changed the consensus in favor of economic liberalization and privatization which
forced the then government to introduce mixed economic policy in 1980’s. in the context of
significance changes 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.(ibid, 25)

A new strategy for encouraging private sector was adapted when the tensional 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 those areas where it had especial or unique responsibility.
Since 1991, to enhance the role of private investment in the development process, various
policy measures have been taken by the government. And investment code of the country had
been established and also revised several times. In may 1992 investment code number 15/1992

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was issued, it was revised by investment code number 37/1996 with the objective of
eliminating discrimination against the private sector and creating conducive environment in
the economy of private investment(Knife Abraham, 1998 ).

The investment code number 116/1998 in 1998, gives special attention for native Ethiopian
with having foreign citizenship to invest in Ethiopia. The government believed that opening
more sectors to private investment was important to promote the overall economic
development. And it contributes to the flow of capital, technology and know how in the
country. So encouraging them to return to Ethiopia ensures the flow of foreign direct
investment (FDI) in to the country and allows foreign investors to hire expatriate staff in top
managerial position (IBID, 202).

The private sector response seems to be promising compared to the pre-reform period when
private investment was extremely low, the participation of private investors and approves rate
projects shows dramatic change. The problem, however, is the implementation of projects.
Although many challenges might have contributed to the low level of private investment, one
possible factor can be the limited experience and skill of the investors especially the domestic
investors in identification and study of production and profitable projects. Identifying viable
projects and managing and implementing them required good entrepreneurial skill. In addition
to this, other challenges such as infrastructural, marketing, financial challenges are contributes
for private investment retried from investment and its growth. These problems are seen in
Enemay woreda, even if it has potential area for investment activity (Asfaw, 2006).

Enemay woreda is found in East Gojjam, in Amhara regional government of Ethiopia

established in 1948 E.C and the total area of this woreda is 762.65km 2 and have comfortable
weather condition having woina dega 88% (67113.2 hectare), dega 7%(5338.55 hectare) and
kola 5%(31813.25 hectare), fertile soil. The annual amount of rain is 852mm-1048mm and its
average amount of temperature is minimum 9.82 degree centigrade and the maximum is up to
22 degree centigrade to be experienced. Enemay woreda is far from the capital city of Ethiopia
i.e. Addis Ababa by 300 kilometer and 265 kilometers away from Bahir Dar, the capital city of
Amhara region.

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Enemay woreda has many investment opportunities which are not used efficiently, mainly in
agriculture which has the potential to give enough agricultural production. Especially in the
production of teff, wheat and also maize, barely are the most dominant.

1.2 Statement of the problem

Currently the federal as well as the regional government of Ethiopia devoted much of its effort
on identifying problems and correcting them, searching potential investment areas, conducting
continues reforms in policy and proclamation to increase the participation of private investors.
Enemay woreda has the potential to be favorable for investment. Investors, on the other hand
faced problems in running their business and participation. Such as marketing problem, lack of
accessible development of infrastructure, lack of advertising and promotion, lack of giving
enough land size to investors, financial problem, policy related problems, problem related to
license, technological related problems, problem of taxation and human resource problems.
In these research the researcher mainly focuses on the challenges and fertile conditions, how
to bring economic development by throwing these problems. Therefore the researcher was
going to answer the following questions.
 What are the existed private investment and growing pattern?
 What problem does investors face, and how it hinders for its expansion?
 What types of potential / fertile conditions exist in this woreda?
 How to improve the challenges of private investment?
1.3 Objective of the study
As mentioned earlier, investment is one tool which brings economic growth for the country.
But private investment constrained by many problems to be retreated from investment.
1.3.1 General objectives
 To assess the challenges and fertile conditions of private investment in Enemay
woreda.
1.3.2 Specific objectives
 To assess the nature of private investment in Enemay woreda.
 To assess the types of investment activities those are dominant and contribute to
employment generation in the woreda
 To identify the problems which are hinder for the expansion of private investment in
the woreda.
 To identify the potential / fertile conditions for private investment in the woreda.

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  To provide relevant conclusion and recommendation based on the findin
1.4 Significance of the study
This study is significant in providing information about challenges and fertile conditions of
investment in Enemay woreda. It is also provide information for policy makers about
minimizing the problems of investment in this woreda and this research paper will serve as
core stone for those who want to study in this area. And it can be used for academic purpose in
that; it related the theoretical knowledge with practical in this woreda.

1.5 Scope of the study

The researcher conducted in Enemay woreda by trying to assess challenges and fertile
condition of private investment. The study covers the period between 1996-2001E.C because
of the availability of data and to keep the study recent and also because of most investment
activities takes place between these period in this particular woreda.

1.6 Methods of data collection and analysis

1.6.1 Source of data and method of data collection
For the purpose of the study, both primary and secondary data sources are used. Discussion,
interviews, and Questionnaires are developed and distribute to 40 investors were selected as a
sample and stratified random sampling technique was applied by dividing all investment
projects according to their investment project type and taking equal proportion (80%) to all
project type. After taking this equal proportion the researcher purposively select the investors
to examine.
The secondary data source was collected from internal source of Enemay woreda
administrative office and mainly from municipality and also from available reports, recorded
documents, books, magazines and others.
1.6.2 Method of data analysis
Because of the nature of the research, the researcher use simple stastical description method
such as percentage; table, graph, and statmental expiration to analyze (describe) the numerical
data.

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1.7 Limitation of the study
The main constraints to do this study were un availability of time series data, the data which is
found in the document is written by Amharic, which is difficult to translate in to appropriate
language. Besides, the financial and time constraint to search the reference materials from
respected body and place.
The lack of enough experience about the research methodology was one of the main
constraints facing when this study is conducted.

1.8 Organization of the paper

The research is mainly containing four chapters. In the first chapter the research would focus
on the introduction part which gives the base for the whole paper. In the second chapter the
research would focus on the issues that are related to the topic of the paper. The third chapter
is about finding and discussion which contain deep analysis of the data that the researcher
gathered from different sources. In the last chapter the researcher mainly focuses on the
conclusion and recommendation.

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 CHAPTER TWO
2. REVIEW OF RELATED LITERATURE

2.1 Theoretical reviews

2.1.1 Definition of investment
Many scholars and academicians have defined the term investment differently. “Dr.Mankiw
defined investment is spending today for future benefit and it is the component of national
income that links present with future.”

“Newman, Muluget, and Etuwell (1992), defined investment as the act of developing capital
that is acquisition or creation of resources to be used in production. This definition is
consistent with the definition of Kupper (1996), which define investment as the change in
capital stock over a period of time normally a year for accounting purpose” (Tefferi D,2001).

Similarly V.Gargadhal and R.Babu, 2003, defined investment as the diversification of money
towards investment and thereby increasing productivity of a nation. All the above definitions
taking about the flow of expenditures devoted to increase or maintain the real capital stock. In
different manner different scholars and literatures defined investment as “a person’s
commitment of funds towards his life.’’ It refers acquisition assets which generate income. It
also means parking of one’s idle fund in income generating assets. That is the allocations of
monetary resources to assets that are expect to yield some gain or positive return over a given
period of time (Gandhi and Babu, 2003).

According to Amaling, investment defined as the purchase or institutional investor of a

financial or real asset that produce a rectum proportional to the risk assumed over some future
investment period.

Fisher and Jordan, similarly define investment as a commitment of funds made on the
expectation, some positive rate of return. If the investment is properly undertaken, the return
will commensurate with risk that the investors assume. Both scholars dating investment as
expectancy of positive return keeping in view the risk investors may face.

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Many people sale or invest part their current income to consume more in the future. Some do
is indirectly by letting others invest their funds while others invest directly in their own
business. When people deposit funds in the bank account, for example, banks lend some of
those funds to business firms. The firms, in turn, use these funds from bank loan to invest on
new buildings and equipments to expand production. Many firms also raise fund for business
expansion by issuing stocks and bonds that are sold to investors. (World book, encyclopedia,
2001)

According to the definition of Ethiopian investment code, investment is an activity to

eliminate some social and economic problems, generally to raise productive capacity, supply
of goods and services, science and technology, and managerial ability of a country with some
returns that is profit.

Private investment means any types of investment activity operated in the 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 connoted different concepts
and meanings according to the Gargadhea and Babul (2003), the important, concepts of
investment are;
a) Economic investment
b) Commitment investment
c) Financial investment
a) Economic investment: - means that the net additions to the capital stock of the society
which consists of goods and services that are used in the production of other goods and
services. Additional to the capital stock, means an increase in buildings, plants,
equipments and inventories over the amount of goods and services existed.
b) Commitment investment: - refers money commitment to satisfy personal desire, since
no rate of return is expected. Example commitment of money to a new car is an
investment from an individual point of view.
c) Financial investment:- involves the investment of funds in various assets like stocks,
bonds, real estates, mortgages etc. such investment is the employment of funds with
the aim of achieving additional income or growth in value.
2.1.2 Elements of investment
Elements of investment are those which are common in investment activity. This is return, risk
and time.

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 Return: - refers reward from investment which includes current income, capital gains or
losses and profits.
 Risk: - is the change when the expected or prospective gain or profit is less than expected
outcome, or is the degree of happening of losses.
 Time: - the important factor in which investment is the time which offers several different
courses of action. As time moves on, analysts believe that conditions change and investors
revaluate expected return for each investment (Gargadhea and Babul, 2003).

2.1.3 Kinds of investment

Accounting 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, (2001), there are seven types of investment. These are:
1. Saving account: - these types of investment takes place by saving money in a saving
account at financial institutions such as banks, 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 incase
the person dies. It also includes some kinds of saving provisions.
3. Business investment: - the most dominant form of investment is that investors engaged in
the operation of business ventures for the sake of profit.
4. Real estate: - 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 is a claim on the act of becoming the ownership of the asset of
the firm.
7. Mutual funds: - this is the purchase of mutual fund shares which make profit to share
holders.
On the other hand “fredlic.s.miskin (2001) categorized investment in to two types, fixed and
inventory investments based on the duration of goods owned”. Another category of investment
is domestic and foreign investment based on the citizenship of the owner. Ethiopian
investment authority classified investment based on ownership as public private foreign and
joint investment. According to Ethiopian investment code private investment is privately
operated investment that individual citizens or foreign citizens owned legally permitted
investment areas for private sector and for foreign nations. (As cited, Teferi. D, 2002).

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Based on Dr.Mankiew investment spending classified in to three main categories
1) Business fixed investment
2) Residential investment
3) Inventory investment
1) Business fixed investment: - this is the largest piece of investment spending; term
business meant that the investment good are bought by firms for use in the future production.
The term fixed means that spending for capital that will stay put for while as passed to
inventory investment, factories, and computers to company6 cars. This standard model of
business fixed investment is called neo classical model of investment. This model examines
the benefit and cost to firm of owning capital good.
2) Residential investment: - this includes the purchasing of new house both by people who
plan to live in it themselves and by landlords who plan to rent it to other.
3) Inventory investment: - this is the good that business put aside in storage is at the same
time negligible and of greater significance. It is one of the smallest component of spending
averaging about present gross domestic product, yet its remarkable volatility makers it control
inventory as good are sold and inventory investment become negative.

2.1.4 Determinants of private sector investment

The major factor, which have an important bearing on private investments, are the quality and
quantity public infrastructure investment, different rate of return to investment in the
economy, availability of finance, the real interest rate, fiscal policy, foreign exchange
constraints, risks.

1) Availability of finance
Comparing to industrial countries, the financial constraint are, in general, more buildings in
developing countries. Self financing is limited in developing countries due to two main
reasons.
a) Many firms in developing countries have a limited ability to commutate adequate
finance.
b) Low per capital is often accompanied by low level of saving and leads to fewer
resources being available to financial investment.
The financial constraints are exacerbated due to wider development of capital markets
(N.Gregory Mankiw, 2007). In general, since the total level of financing is limited and the

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price mechanism is not allowed to operate smoothly. It would seem legitimate to hypothesis
that states the private investors in developing countries is restricted by the level of bank credit.

2) The real interest rate

Neo classical model leads to the conclusion that the private investment rate should negatively
related to real interest as a measure of user cost of capital. User cost of capital is an important
factor in any investment decision by private sector. When the user cost of capital increased by
raising the cost of bank credit or by increasing the cost of retained earnings. Which is the main
source of financing investment; there is a decline in investment. However there is no empirical
evidence that support the negative relationship between investment and interest rate in
developing country (Harver, 1985 and Hussien, 1983, as cited in Bazounana, 2004). On the
other hand, in countries where there are high deposit rates, the level of private investment is
higher which suggest a positive relation ship between investment and interest rat, because of
represent financial market in developing countries. Credit policy directly affects the
investment level.

3) Fiscal (government) deficit

Over the expansion of public sector has resulted in the higher deficit in many countries. The
way this deficit is financed has immediate and long term effect on private investment.
Domestic financing of fiscal financing direct reduce the availability of credit to private Over
the expansion of public sector has resulted in higher deficit in many countries. The firms and it
derives up interest rate. State enterprises also borrow heavily from external financial markets
creating external debit burdens and this intern affects private investment in several ways.
Firstly, the firm available for private investment could be reduced where high debit service
payment is involved. Secondly, many developing countries face liquidity (the extent in which
asset changes in to cash). Constraints in international capital markets because of large amount
of debit service obligation. Finally, the existence of large debit to gross domestic product can
reduce the incentive for investment since much as for the coming return from investment must
be used to replay the existing debits (Borenzstain, 1990).

4) Foreign exchange constraints

Access to international market is one of the key factors that determine the private investment.
In most developing countries, the real price of foreign exchange and its availability affects

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private investment. Consequently, there is a real limit on import capacity resulting from
foreign exchange short falls, which one in turn called by inelastic export supply, exogenous
rise in export price, external debit rationing (limiting the purpose for which credit is granted)
by international financial institutions, and exogenous increase in interest rates on outstanding
debit (Matins and Wasow, 1992). Thus for most developing countries, it’s likely that private
investment will be highly responsive to import capacity.

5) Devaluation
To reduce external imbalance, structural adjustment program use a combination of
expenditure reducing and expenditure switching policies. A real devaluation of a countries
currency (i.e. a fixed exchange rate system) is usually included in switching policies, this
generally had negative effect on investment in the short run, but appositive effect in the long
run (N.Gregory Mankiw,2007).

As the economy responds to its competitiveness with higher export in the end, the effect on
private investment can be favorable (Server and Saliman, as cited, 1992). Thus the effect of
devaluation on investment may, therefore be completed and hence theoretically indeterminate.
Devaluation may also reduce investment by depressing aggregate demand, more over, if
investment has a significant import content, the expansion of output is likely to be necessary
conditions to expand investment (N.Gregory Mankiw, 2007). If the currency devaluation leads
to drop in gross domestic product, the slump in economic activity will prompta cut in
investment unless the slump is perceived to be transition.

6) Risk and uncertainty

Since expectation plays a critical role in investment decision, economic and political
instability and uncertainty can have a harmful impact. Indeed, it can be argued that the later
factor as bring partially responsible for the incompatibility of neo classical accelerator model
in developing countries. Effects aimed at encouraging private needs to be supported by
sounds, macro economic policies and adequate regulatory and supervisory structures, which
maintains clarity and releasable stability (Kahn, 1993).justification to introduce risk into
investment decision is the precise of irreversibility that is once investment good are put in
place in certain production activity. It will be either difficult or impossible to divert them in to
other activities with out incurring a substantial economic cost due to irreversibility of

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investment decision. In this context, private investment should be not commit large
expenditure of fixed capital when they are uncertain about the future political, social and
economic environment. Usually unpredictability, instability and imperfect creditability of
macro economic reforms have significance impact on private investment.

2.1.5 Investment theory

As Keynes stated in his book, entitled as “the general theory of employment, interest and
money, 1963” (as cited in encyclopedia of economics, 1982) he was the first to call attention
to the existence of independence on the prospective marginal efficiency of capital which is the
expected yield from new investment and some interest rate reflecting the opportunity cost of
investment funds. He suggested that investment could be raise either by increasing the
marginal efficiency of capital or by reducing the rate of interest. In addition to the above
variables, he introduce expectation of future demand for firms out put, violating of investment,
uncertainty and other non economic variables such as political environment as possible
determinant of investment. These factors determine investment decision because rational
assessment of them is impossible.

Keynesian analysis is the observation that although savings and investment must be identical
ex-post, savings and investment decisions are, in general, taken by different decision makers
and there is no reason why ex-ante savings should equal ex-ante investment. The next phase in
the evolution of investment theory gave rise to the accelerator theory, which makes investment
a linear proportion of changes in output. In the accelerator model, expectations, profitability
and capital costs play no role. Keynesians have traditionally favored the accelerator theory of
investment while disregarding the role of factor costs.
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 firm’s rate of investment. 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 gives rise to a net investment equation of the form of:
I= (K* - K-1)
Where I = net investment, K* = desired capital stock, K-1 = last period’s capital stock, and 
=partial adjustment coefficient. Within the framework of the flexible accelerator model,
output, internal funds, cost of external financing and other variables may be included as
determinants of K*. The flexible accelerator mechanism may be transformed into a theory of

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investment behavior by adding a specification of K* and a theory of replacement investment.
Alternative econometric 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 models, K* depends on capacity utilization, internal funds, the cost of external
finance and other variables.

Jorgenson (1971) and others have formulated the neoclassical approach, which is a version of
the flexible accelerator model. In this approach, the desired or optimal capital stock is
proportional to output and the user cost of capital (which in turn depends on the price of
capital goods, the real rate of interest, the rate of depreciation and the tax structure).

Theory of investment after Keynes was linked to simple growth model based on Harrod
Domar growth model (a model used as economic analysis to project some macro variables)
and he accelerate the theory of saving and investment. These models are used to determine the
rate of saving and hence investment required to achieve a given target of economic growth
rate with a given technology. In these theories investment is simply made to ascertain
proportion of changes of output. These models therefore sail to have much relevant for
developing countries because they do not have cost of capital and profitability of investment
decisions (Mankiw, 2007).

According to world book encyclopedia, Tobin, 1969, pointed out that investment decision is a
function if the ratio of the addition to value of the firms due to extra units of capital installed

to its replacement cost. If this ratio called Tobin’s q 1 is greater or less than unit the firms would
want to increase or decrease their capital stock. In a disequilibrium context investment is
viewed as dependant on both profitability and demand for output. The following theory gives
emphasis on the relationship between saving and investment as taken from the presentation of
James Kroeger in the form of highlight:

a) The misunderstood relationship between saving and investment

This theory explain the relationship between saving and investment by taking what classical
economists asserted about their relationship and its come up with its thesis’s which is against
what economic development models started ( i.e. investment equal to savings ). And this

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model explains the relationship between saving and investment through using the model of the
loanable funds market (which compromises the supply of loanable funds and demand for
loanable funds) those classical theorists put together long ago. Classical economists argue that
the market price of those funds, i.e. interest rate, is determined by the interaction of supply and
demand.

Another approach dubbed “neoliberal” (Galbis, 1979: 423) emphasizes the importance of
financial Deeping and high interest rates are stimulating growth. The proponents’ of this
approach is McKinnon (1973) and Shaw (1973). The core of their argument rests on the claim,
that developing countries suffer from financial repression (which is generally equated with
controls on interest rates in a downward direction) and that if these countries were liberated
from their repressive conditions, this would induce savings, investment and growth. Not only
will liberalization increase savings and loanable funds, it will result in a more efficient
allocation of these funds, both contributing to a higher economic growth. In the neoliberal
view, investment is positively related to the real rate of interest in contrast with the
neoclassical theory. The reason for this is that a rise in interest rates increases the volume of
financial savings through financial intermediaries and thereby raises invisible funds, a
phenomenon that McKinnon (1973) calls the “conduit effect”. Thus, while it may be true that
demand for investment declines with the rise in the real rate of interest, realized investment
actually increases because of the greater availability of funds. This conclusion applies only
when the capital market is in disequilibrium with the demand for funds exceeding supply.

More recent literature has introduced an element of uncertainty into investment theory. This is
due to irreversible investment (Pindyck, 1991). The argument is that since, capital goods are
often firm-specific and have a low resale value; disinvestment is more costly than Positive
investment. He argues that the net present value rule—invest when the value of a unit of
capital is at least as large as its cost—must be modified when there is an irreversible
investment because when an investment is made, the firm cannot disinvest should market
conditions change adversely. This lost option value is an opportunity cost that must be
included as part of the cost. Accordingly, “the value of the unit must exceed the purchase and
installation cost, by an amount equal to the value of keeping the investment option active”
(Pindyck, 1991: 1112).

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Rodrik (1991) introduces another element of uncertainty—policy uncertainty—as a
determinant of private investment. When a policy reform is introduced, it is very unlikely that
the private sector will see it as one hundred percent sustainable. A number of reasons may be
adduced, among them the expectation that the political-economic configuration that supported
the earlier policies may resurface. There is also the fear that unexpected consequences may
lead to a reversal. Investors must respond to the signals generated by the reform for it to be
successful. However, rational behavior calls for withholding investment until much of the
uncertainty regarding the eventual success of the reform is eliminate.

In the classical model, the demand for loanable funds comes from firms that want to use them
for economic investments that will improve economic efficiency. The supply of loanabel
funds comes from the saving of households, with this model in mind; economists have typical
point out that an increase in saving will increase the supply of money available for leading
relative to demand, forcing interest rates down, which makes borrowed money more
affordable for firms. Conversely, a redaction in savings when demand is constant or growing
would force interest rate up, making funds for firms’ investment prohibitively expensive
(N.Gregory Mankiw, 2007) .

Assumptions economists embrace when analyzing conceptualization of the money or capital

market are:-
 There should be enough loanable funds available at an affordable price if firms are
required to have economic efficiency projects on what they invested.
 All money borrowed by firms is used only for economic investment.
 All saved money borrowed by firms comes from saved money.
 All money borrowed by firms (i.e. what saved is invested).

b) Quantitative and Qualitative Factors Influencing Private investment

Any effort to undertake a quantitative analysis is fraught with the difficulties of choosing
appropriate variables which one might not have full information on, a consistent basis. For
overcoming the problem of limited number of observations, imposed by the constraints in
regard to availability of consistent time series data covering a long period for any given
country, cross-sectional data of a large number of countries, although for a shorter period, are
generally used. Seven (1997) in his study of 86 developing countries examined data on terms
of trade, real exchange rates, property rights and civil liberties and concluded that while

15
factors including credit, availability and the quality of physical and human infrastructure are
important influences, uncertainty in the investment environment was negatively related to
private investment in sub-Saharan countries.

C) The Theory of Fiscal Policy

According to the neoclassical growth models, such as the one by Solow (1956), the share of
government expenditure in output, or the composition of expenditure and revenue does not
affect the long- run growth rate of an economy. In these models, tax and expenditure measures
that influence the savings rate or the incentive to invest in physical or human capital ultimately
affect the equilibrium factor ratios rather than the steady-state growth rate. The model
indicates that growth is driven by exogenous factors- the dynamics of population and of
technological progress; and fiscal policy can only affect the rate of growth during the
transition to the steady state.

Classical economists believed that these assumptions are said to be “close enough” to the truth
that the model can relay on them to give an accurate understanding of the money market and
the crucial role that saving play in the economy. Unfortunately, the following empirical
evidences revels the inconsistency of the assumptions that classical economists had developed
to analyze loanable funds market.
1) Between, 1988-1997, an average of nearly 85% of the money that corporations spend on
investment comes from rationed earnings or other internally generated funds. This empirical
fact would seem to strongly disprove the assumption that all money borrowed by firms comes
from saved money.
2) Between, 1998-2001, the combined borrowing of non financial corporations and all non
corporate businesses varied between 20-34 % of total borrowing. These statistics tell us
inconsistency of the assumption of all saved is invested.
3) Saving are not the only sources of loanable funds. These model argues that the ultimate
determinant of the supply of loanable funds (i.e. availability of money supply), in most
countries economy, is the open market operation (i.e. the act of purchasing or selling
government bonds, securities, bills to the commercial banks and public by the central bank.
Miskin, 2001).

When ever the central bank buys securities in the open market, the availability of loanable
funds in the market increase, but when the central bank sells securities in the open market, the

16
availability of loanable funds will be decline. Accordingly the above thesis’s gives a
profoundly different investment equation. Instead of the equality, Investment=saving that is
taught in most economic development models, a more accurate description of the loanable
funds market would be investment = (savings) + ( newly created money deposited in banks by
the central bank, in the process of creation of deposits ).

Finally the model come up with a great economic conjecture which stated that it is not only
the interaction of supply and demand that determines the price of those loanable funds but also
it is determined by the involvement of monetary policy in the economy. General speaking, it is
economic investment that is scared in the economy, not the practice of saving money. T hey
are not the same thing many economists frequently refer to saving as a pure good that the
economy can never get too much of, but they are mistaken. The model simply want to say that
policy makers nee3d to be a ware of the serious damage that excessive saving can inflict on
the economy and be prepared to reduce those excesses, when they occur ( Brealey and Myers,
2000 as cited in www. Notive / pursuits. Org / saving investment.htm).

The Solow growth model also explain (shows) the significance of saving rate as a key
determinant for steady state capital stock. If the saving rate is very high, there will be large
capital stock and hence greater out put. It assumes that, all savings are converted to investment
and investment is equal to saving. Over time the higher investment loose the capital stock to
rise. As the capital accumulates, out put consumption, and investment gradually increase,
eventually approaches a new steady state level.

The Solow growth model depends on; capital accumulation population growth and the
technological progress. The model with each of the variables considered the importance of
investment via saving for faster economic growth. Technological progress is the out come of
higher investment in economy.

2.1.6 Institutional factors and private investment

A study by Weder (1998) on 21 Sub-Saharan African countries using data on institutional
factors is of relevance here. The institutional factors employed by Weder (1998) were
qualitative information on annual ratings of the following indicators: quality of bureaucracy,
the rule of law, policy surprises, credibility of announcements, extent of availability of
information on new rules, degree to which business can participate in making new rules,

17
predictability of judiciary enforcement, theft and crime, security of property rights, frequency
of corruption, uncertainty of corruption; and Corruption perceived as an obstacle to business.

2.1.7 Interest rate and private investment

User cost capital is an important factoring any investment decision by the private sector. When
the user cost of capital is increased by raising the cost of bank credit or by increasing the cost
of retained earnings, which is the main source of financial investment, there is a decline in
investment. Findings of various empirical studies are not consistent. Some studies confirmed
that there exist the negative relationship between interest rate and investment, investment
affected by financial markets, credit policy in a distorted manner. The interest channel
transmission mechanism depends up on the institutional set up of financial markets. As
financial sector reforms aiming at deregulation and regulatory measures might have affected
private investment through serious distortions in incentives (seven and solimano, 1993).

2.1.8 Growth links to investment

In the past century in the world there was enjoyed substantial economic growth. It has allowed
people to consume more quantities of goods and services. Higher levels of consumption
enable them to have higher level of standard of living. Income has grown from generation to
generation. However in Ethiopia, until recently 2005 adapted the reverse of the above situation
is true. As the patter son said, the economic growth of this country is due to growth of inputs
like labor, capital and some technologies.

Many countries followed different modes to achieve economic growth through capital
formation. Capital accumulation helped the England to achieve industrializations parallel to
inventions. Capital formation by effective banking system has helped Germany. Taxation
power of government helped Russia to launch in industrialization. Latin American countries
used financial institutions to mobilized resources, while sub-Saharan African countries
depends on government budget, south east Asian countries used their human resource and
state intervention for industrialization( world development,2008). As Gills stated, poor
countries income growth can be achieved through maintaining investment at sizable
proportion of growth domestic product.

18
There are three stages of investment process of capital formation that need to be successfully
completed if a country need to achieve a desired level of investment and its fruits. These are;
 The stage of saving; - The stage which resources might be used for consumption are put
aside.
 The stage of resource mobilization; - A stage where saving secured in the first stage are
assembled and are ready to investors.
 The final stage of investment; - The stage where resources that are mobilized are utilized
for the production of capital goods (missrt puti, 1991).

An economy can have problem of resource mobilization because of failure of any one of these
stages. The level of saving and hence investment is very low in developing countries
associated with little growth rate. Even worse, the quality of capital so accumulated is not
dependable in the sense that, this resource might not be used efficiently. More over, with out
finding a way to mobilize resources to such a high level of effective and utilize this savings,
impossible to achieve the economic goal of the country. Our country Ethiopia can not hope to
achieve successful economic growth and sustainable economic development (Ethiopian
economic association, 2001).

Todaro and smith (2006) also assured that the mobilization of resource domestic and foreign
saving to generate sufficient investment to accelerate economic growth is one of the principal
tricks of development necessary for any take off. As it has formerly mentioned, sub-Saharan
African countries has made important progress in building up of human capital. But this is the
extent that this capital formation has been only imperfectly accounted for the unconventional
measures. African’s investment and saving have been seriously underestimated. It will bee
important to preserve and utilize this capital and of course to continue to build up it in many
future strategy for long term African development. This shows that where capital
fundamentalism is criticized. It is still accepted that, the capital accumulation explains that, a
significant part of the economic growth.
2.1.9 The linkages between investment sectors
The linkage approach targets investment in key linkages as a short to over come failure in
generating positive feedbacks. Such polices would select industries which are with large
number of links with other industries and greater strength of those links. One policy would
generally select sectors which have similar likely hood of private investment sector, because
that is where there are no bottle necks. If investment is a profitable, it is likely that, an

19
entrepreneur will come a long to fill the nicke.This observation shows government
intervention is less efficient than private one’s. If government actively enters, it is vital, but
less profitable industries because of their beneficial effects on development; it is un reasonable
to hold these enterprise to the same profit standards as those of private sectors. State owned
enterprises are generally efficient as privately owned ones.

Barro (1994) also says that, an explanatory economic policy characterized by large public
investment, supported of small agriculturalists and incentives to private investments play an
important role in the early stages of growth. 7% growth domestic product growth with in the
first decades after independence along the oil price stock, lack of adequate domestic saving
and investment slowed the growth of the economy of Nigeria. Various economic policies
designed to promote industrial growth leads to neglect agriculture and consequent decline in
farm price, farm production and farm incomes. He also says, the aid can stimulate growth,
investment, and job opportunities. If it is used appropriately, flow of capital in the form of aid
can finance resources gap and result in higher level of investment and ultimately increase
economic growth. Aid flow can potentially stimulate job creation through increase investment
and accelerate economic growth. But to be appropriate, the aid flow must be allocated to
public investment since of complimentary with private investment for rapid economic growth.
2.1.10 The investment climate and economic growth
The investment climate is the key to economic growth. It reflects the location of specific
factors that shape the opportunities and incentives for firms or investors to invest productively
and to create job opportunity and to expand the growth. A good investment climate is not just
about generating profit for firms, if that where the goal of focus could be limited to
minimizing costs and risks. Whether it must improve out comes for society as a whole, to start
productive private sector investment with the engine for growth and poverty reduction through
creating various opportunities of job to the society. It expands then consumers demand and it
supports a sustainable source of tax revenue to find other social goals. It also expands the
variety of goods and services available and reduces their costs to the benefit of consumers. In
additions, many features of investment climate such as efficient capital, infrastructures, courts,
administrations, and financial markets improve the living standard of the people whether they
work or engage in entrepreneurial activities directly or indirectly. With the rising population
growth, economic growth is the only sustainable mechanism for increasing a society’s
standard of living. Economic growth is not just the result of higher income but better indicator
of human development. This in turn is attended through the establishment of proper and

20
equitable distribution of investment activities and other merges to the society as a whole
(world development report, 2007).

Many factors shape the cost, risk and barriers to competition in a particular location which are
the basic factors that influence investment. Among this factor geographical aspects are
difficult to control. Government has decisive impact over many aspects of investment climate
such as security of property rights, approach to taxations and regulations to the adequacy of
infrastructure and the functioning of financing and labor market and etc.

2.2 Empirical evidence

Yaw and Asanet, as cited in 2000 investigates “determinant of private investment behavior”
He concluded that the growth of real credit to the private sector had appositive and statistic
ally significant effect on private investment. This is strongly supported by the survey results.

The econometric results suggest that the military take over may have created a climate hostile
to private investment. These is not, however, strongly supported by the survey results where
only 22% claimed that political uncertainty acts as a major constraint to their investments and
also factors as official attitude towards private investors and lack of credibility in the
government policy are hindrances to private investment, macro economic instability and
political instability also the main factor that constraint private investment.

Seven and Soliman (1991), on their paper have estimated a simple investment equation using
pooled cross-section and time series data for a group of developing countries fund that the real
output growth has strong negative impact on private investment. Public investment after one
year lag, other countries specific research argue that public investment has a “crowding out”
effect on private investment even if not all papers support this idea.

Ethiopian Economic Association, annual report on the Ethiopian economy (1999/00), on

“factors contributing the low level of private investment in Ethiopia” conclude that, the factors
are a bit more controversial, growth fixed capital formation has yet to reach the level of
achieved during the imperial regime the reason for this are obvious for the Derg period. Its
policy of imposing capital ceilings has made the government the only investors in the medium
and large scale industries during its 17 years rule. The incredible expansion of the state and its

21
bloating bureaucracy has significantly increased government consumption at the expense of
private investment activities. Its nationalization of foreign owned businesses and its anti-
imperialist rhetoric has simply stopped the flow of foreign direct investment (FDI) to Ethiopia
during its tenure. So Ethiopian Economic Association was generally conclude that the fallen
of private investment and lower inflows for compatible countries in the region explain by two
schools, call the liberal view and the structuralist explanation.

The liberal view essentially suggests that the reason for private investment is not flowing to
Ethiopia is because the country did not liberalize its economic policy enough. They site
numerous “restrictive policies” as a proof of their explanation until recently, the government
restricted private investments in power and telecommunication as well as defense related
industries which, they are indicators of the governments overall openness to foreign
investment. The slow process of privatization is also considered a clear manifestation of the
government’s lack of clear commitment to liberalizing the economy. In the addition to these
specific areas, proponents of this view argue that the governments land policy, overall
bureaucratic red tape and inefficiency, a dysfunctional legal environment, lack of
infrastructural development are serious constraints to private investment in general.

The stracturalist, on the other hand, believe that the main concern for lack private investment
in Ethiopia is the constraints improved by the land policy and overall bureaucratic red tape,
and they generally argue with liberal view on the land policy.

Workie Mitiku (1997), on the “Determinants and constraints of private investment in

Ethiopia” conclude that private investment is determined by the availability of finance, real
exchange rates, investment policy, debit service payments and debit over hang. His data
between 1975 and 1994 show the real interest rate, growth of per capital growth domestic
product, public investment and changes in terms of trade did not affect private investment. He
further carried out a survey on a number of firms in Addis and the data collected showed that
bureaucratic procedures, lack of infrastructures and access of finance are the leading
constraints to entry, operation and expansion of private investment.

Skully (1997) in his study on Fiji and other countries in the region stressed that the availability
of finance at competitive real interest rate was not a constraint for private investment. Further
more, he concluded that public sector borrowings crowding out private sector.

22
2.2.1 Private investment in Amhara region
a) Investment policy in the past two regimes
After liberalization of most African countries from colonial governments of each country
designed to develop their countries by making their own policy and the government was
considered to be the only force to achieve economic growth of citizens of such countries
neglected their important contribution to the development process and develop a confidence in
government to economic growth. But private sectors started to participate gradually
supplemented by the government incentives.

Investment law in Ethiopia started from the period of imperial regime. From 1950’s there were
polices that encourage private investment, but these legislations and notice were considered in
1963 as investment decree and ultimately enacted as proclamation in 1966 (proclamation
number 24231/1964). The major objective started in the code is national capital formation and
in particular the attraction of foreign investment. The important feature of this code is the non
specific provision is made serving certain sectors of the state, implying that private investors
could invest in all sectors. An attractive incentive structure was ensured in this code. Some of
the major incentives were:
A) Agricultural and industrial machines, implements appliances for exclusive use in
Agriculture and industrial enterprises are exempted from payment of imported duties.
B) Newly established enterprises with investment of not less than Ethiopian birr 200000
exempted from payment of income tax for four years.
C) Manufacturing goods for export were exempt from export duties (Negues, 1992).

Private sector was heavily discouraged by the Derg regime. The period between 1974-1991
could be considered as the one that bought to an end chapter of private sector in Ethiopia.
Private ownership gave way to public ownership by introducing the national domestic
revolution for economic and social development. The very starting point for declared Derg
policy of nationalization was proclamation number 20/1975, which as “it is the basic principle
of socialism to eradicate personal gain and to give priority to the interest of the community
and it is necessary to government ownership of those resources that are crucial to economic
development ------.” In this period the government put itself not only in the production but
also in the distribution of goods and services. More ever, proclamation number 76/1975

23
started the private sector participation only in small industrial activities [Kinfe Abraham,
1998].
b) Investment in the Post 1991
By the year 1991, the military government was replaced by the transitional government of
Ethiopia (TGE) with the introduction of new economic and political policy. In the economic
sphere, economic reform programs was launched with one of its primary objectives being
build an economy in which the private sector plays a leading role, to enhance the role of
private investment in the development process. Various policy measures have been taken by
the government. The policy measures were designed to eliminate discriminations against the
private sector and to create conducive environment in the economy for private investment.
Investment proclamation number 10 / 1992 was issued as the first policy measure by the
transitional government of Ethiopia for the purpose of encouraging private investment. The
proclamation stated the spending up of the economic and social development of the country
thought
 Increase the supply of goods and services.
 Encouraging foreign investment to participate widely and constructively the
rehabilitation and reconstruction efforts of the country.
 Removing legal restriction on private investment, which is no longer subjected to
qualitative ceilings to promote and encourage private investment.
The minimum investment capital required from private investors to invest in the country was
also indicated on the proclamation number 15 / 1992. But it was revised as investment
proclamation number 37 /1996. This proclamation solved the short comings of proclamation
number 15 /1992. The minimum capital requirement for foreign investors has been reduced
from $ 500,000 to $ 100,000 and for domestic private investors, minimum capital required by
previous proclamation i.e. birr 250,000 was also lifted under this proclamation.

The Ethiopian investment authority (EIA) was established under this proclamation number
37 / 1996 to eliminate bureaucratic hurdle and to serve as a nucleus for investment maters.EIA
implement investment policies with decentralized mechanizes through regional level and to
design and implement its own investment policy under the frame woke of federal policy. The
proclamation removed restriction on investment and allowed for the participation of private
sector and also provides investment incentives under article 13 of proclamation number 15 /
1992. The proclamation provides domestic and foreign investors with incentives.

24
 CHAPTER THRE

3. FINDING AND DATA ANALYSIS

As the researcher mentioned in the introductory part of the paper, investment promotes
economic growth; contributes to a national wealth; increase the living standard of the people,
and important tool for sustainable economic development. Here the researcher tried to analysis
deeply on the challenges and fertile conditions of private investment in Enemay woreda.

3.1 Nature of private investment in Enemay woreda

Investors invest their potential capital in different sectors in Enemay woreda. The following
activities are mostly dominant:

A) Agriculture
Agriculture is the back bone of Ethiopian economy and provides raw material for the domestic
industry. Agro- ecological condition of Ethiopia is suitable for the production of crops, fruits,
and vegetables. This condition is also true for Enemay woreda especially teff, wheat, been,
maize and barley widely harvested.

B) Manufacturing
The manufacturing sector of Ethiopia is in its early stage of development. It accounts 12% of
gross domestic product and provide employment opportunity. Although, it has shown some
growth and diversification in recent years much of it is concentrated in Addis Ababa. This
manufacturing sector mainly concerned on the production of food, beverage, tobacco, textile,
leather items, paper production, metal and non metal production, oil production flour mill
production. Agricultural development led industrialization (ADLI) policy focus on agricultural
products as an input for the manufacturing sector so as to utilize the countries human and
material capacity.

Food and beverages constitute some 40 percent of the sector, but textiles and leather are also
important, the latter especially for the export market. A program to privatize state-owned
enterprises has been underway since the late 1990s. Among the above listed item flour mill
factory and vegetable oil factory widely practice in Enemay woreda.

25
 C) Service sector
Service sectors focus on providing service to the society. The following service sector
dominantly practiced in Enemay woreda such as, education, health, hotel, cafeteria, stationary
and others. The following table 3.1 lists the detail explanation of growth pattern of investment
and the total investment of investors in each sector for the year 1997-2001 EC

Table 3.1 Annual investment project from the year 1997-2001EC

Year Sector total growth
rate

manufacture hotel educati agriculture trade health *sc others

on

1997 1 2 1 1 1 1 4 5 16 -

1998 1 7 1 4 1 0 4 3 21 31.25

1999 1 3 0 0 0 1 0 0 5 -76.19

2000 1 0 0 1 0 0 0 2 4 -20

2001 1 3 0 1 0 0 0 1 6 50

Total 5 15 2 7 2 2 8 11 52

% from the 9.6 28.8 3.85 13.7 3.85 3.85 15.35 21.15 100
total

Source: Sample survey, 2002 EC

*sc=stationary and cafeteria

As shown on the above table 3.1 from the year 1997-2001 EC 52 investors invest in the
woreda. Hotel is dominant by constituting 15 (28.8%) out of the total. This is mainly available
demand for hotel service and the topographic suitability for construction in the woreda. Fuel
stations ranks second by sharing 11(21.15%) from the total followed by eight (15.38%) of
stationary and cafeteria, seven (13.7%), five (9.6%), of agriculture and manufacturing sectors
respectively, and education, trade, and health sector shares two (3.85%) of each. The growth
pattern of investment in the woreda is shown as below by the line graph.

26
Graph 3.1 The growth pattern of investment for the consecutive five years (1997-2001 EC).

growth pattern

25
no. of project

20

15
total number of
project
10

0
1997 1998 1999 2000 2001
year

As shown on the above line graph, the growth rate of investment increased by 32.25% from
1997 to 1998. But in the year 1999 and 2000EC the growth rate severely declined. This is due
to the introduction of lease policy in the woreda. However, in the year 2001 the growth pattern
of investment recovered by 50% than the year 1999 and 2000EC.

3.2 Private investment and employment generation

As the of two linkage between unemployment and poverty, it is still remains true that one of
the major mechanism for reducing poverty and unemployment problem in less developed
nations is the provision of productive employment opportunity and apply economic and social
measures are essincial.the provision of more work and wider share of workers that is available
would entirely go a long way to wards solving the problem (Todaro, 1992). In the woreda
investors create job opportunity with parallel to their capital accumulation and the woreda
trade and industrial office and investment office promote investment in order to alleviate
poverty and unemployment.

27
Table 3.2 The investment project, and employment generation from the year 1997-2001EC.

sector No of Percentage Investment Job opportunity Capital

project share capital(000) permanent casual share
Manufacture 5 9.6 15652000 NA NA 15.55
Hotel 15 28.8 8971411.3 64 103 8.92
Education 2 3.85 813246.52 45 19 0.81
Agriculture 7 13.7 6371127 8 2 6.33
Trade 2 3.85 515866.9 9 4 0.51
Health 2 3.85 906298 4 NA 0.09
Stationary 8 15.38 1952548.4 15 5 1.94
and
cafeteria
others 11 21.15 66259959 14 9 65.85
total 52 100 100626789 159 142 100
Source: Survey, 2002EC
NA: data is not available
The table indicates that 52 projects with estimated capital of birr 100626789 have been
licensed between the year 1997 and 2001 in the woreda. Hotel is the leading in the number of
projects and with both permanent and casual employment generation, education is the second
in both permanent and casual employment generation. In contrary health is the least in
employment generation and capital share. The reason for low level of health share is the low
level of ability of investors to identify their suitable sectors and what they do is what their
neighbors do.

3.3 Projects on processing stage and started production or service stage

The number of projects increase time to time, which have on processing stage are limited
between the years 1997-2001 compared to projects which give production or service. From the
total projects the number of project which are on processing stage and projects started
production or service are contributed 32.7% and 63.5% respectively. The remaining 3.8% are
in the pre- processing stage.

28
Table 3.3 Projects on processing and on started production or service stage

sector Processing Investment Started Investment

stage capital(000) production or capital(000)
service
Manufacture 0 NA 5 15652000
Hotel 8 2509714.14 6 6461697.16
Education 1 239077.99 1 574168.54
Agriculture 2 125661.20 5 6245465.8
Trade 0 NA 2 515866.9
Health 1 90629.8 1 NA
Stationary and cafeteria 2 452144.42 6 1500403.97
Others 3 104410.6 7 66155548.4
Total 17 3521638.16 33 97047429.75
Percent from the total 32.7 3. 45 63.46 96.44
Source: Investment survey, 2001EC
NA: data is not available
Table 3.3 shows Hotel is the leading sector in processing stage by eight (47%) from the total
project which are under processing stage and six (18%) are on started service. The remaining
one (5.88) on pre-processing stage (on the stage of raw material supply). The second dominant
in the stage of processing is the other sectors like, fuel stations, metal work, wood work etc. on
the other hand, manufacturing, trade and much of the other sectors are fully in the stage of
production and giving service to the society.
As compare, projects which are started production or service is the leading by sharing 63.46%
from the total project and founded the processing projects by accounting 32.7% out of the total
52 projects.

3.4 Infrastructural facilities of Enemay woreda suggested by investors in

percent
Investors asked to evaluate infrastructure facilities that have direct or indirect impact on their
operational activities or in the absence of such facilities the activity will be strongly

29
challenged. Infrastructural facilities is summarized, and presented as follows depends on
respondent’s point of view.

Table 3.4 Infrastructural facilities suggested by investors

Accessibility by percent
facilities good percent poor percent Very poor percent
Road 3 8 22 55 22 30
Telephone 23 58 9 23 5 13
Power supply 5 13 26 65 5 13
Water supply 28 70 7 18 3 8
Transportation 4 10 21 53 18 20
Availability of 21 53 4 10 14 35
land
total 84 35 89 37.09 67 27.91

Source: Personal survey, 2002

According to the above table, among the total sampled investors 35% of the respondent
respond that infrastructural facility in Enemay woreda is good, and admired. The remaining
respondents, which is 37% responds the facility is poor and 27.91% of the respondent
responds the infrastructural facility in Enemay woreda is very poor. Investors involved in
agricultural and hotel sector ranks first and second to respond road and availability of land in
Enemay woreda is poor. While telephone and water supply is good by accounting 58% and
70% respectively.

The respond of very poor regarding road, availability of land and transportation is given by
agricultural investors, which consists 85% 0f respondents given as very poor. This indicates
the urbanization have a great impacts in availability of infrastructural facilities as a result low
level of road, land and transportation facilities in rural areas. And inaccessibility of power
supplies also the major problem of investors which are involved in manufacturing sector.

30
In general, much of the respondents respond the infrastructural facility in Enemay woreda is
poor, that accounts 37% from the total ample investor. The remaining 35% and 37% of sample
investors responds the facility is good and very poor respectively.

3.5 Potential / Fertile condition of private investment in Enemay woreda

Because of the launching of the 1992 Ethiopian free market policy the federal as well as the
regional government of Ethiopia taken wide range of economic reference by promote
economic liberalization and encourage private investment.

The woreda reflected through well come attitude for private investor and supports policy rules
and regulation, incentives including adequate grantee. According to the woreda administration
the condition is suitable to strengthen the private sector by designing private investment
development program, aimed to enhance the role of private sector and brings socio-economic
development. In contrast according to the view of private investors, the program is encourage
the investors to focus on hotel, by utilization of natural resources for expanding this sector in
order to bring rapid economic growth of the woreda and bring beauties of the woreda.

The woreda has suitable topographic structure for agriculture and has fertile soil to give
enough products. But private investor was not much distribute on this sector, because
investors invest what they do is what their neighbors do. Next the researcher try to state the
main potential/fertile conditions existed in the woreda as;
A) Water resource
Water is the life of all living things; the woreda has potential and incanted water resource that
used for large irrigation project. The following table shows the potential water resources in the
woreda.

31
Table 3.5 Water resource potential in Enemay woreda

S. Types of water Unit in No Uses for irrigation Coverage of % from the

No resource development(hector) area (hector) total
1 River 27 621 820 76.42
2 Stream(Minch) 140 82 183 17.05
3 Hall(geomembrian) 404 12 50 4.65
4 Kure 163 6 20 1.86
total 734 721 1073 100

Source: Enemay woreda wealth and sewerage office, 2000 EC

As mentioned in the tables, among 1073 hector water resource only 820(76.42%) of water
covered by river and it shares the largest percent but from this 621(75.7%) of water resources
from river used for irrigational purpose.
In general speaking, among the total coverage of the woreda that is 1073 hector only 721
hector of water used for irrigational development. The remaining 352 hector of water
resources in the woreda was still enacted. So the woreda has potential water resource, which
interest to invest in irrigational project.

B) Available natural resource

The woreda endowed with variety of resources that are still intact potential for large scale
investment as well as small scale investment activities, but the societies are not benefiting
much of it. This is mainly due to the lack of systematic promotion and incentives done yet in
the woreda. Investment sector need quite competition, promotion of investors, utilization of
natural resource that used for export high value of the product.

These competition, promotion and incentives encourages peoples to focus on investment,

where peoples more based resources potential to be have competitive advantage in the area.
The untapped natural resources, various investment opportunities are suitable for agro-
economic development. This untapped natural resource in woreda,by exploit this for the
development of commercial irrigation (modern )farming to be bring economic development in
the woreda.Specificaly available natural resources in woreda are;

32
  Lumen (fertile) soil, accounts 75%, 10% of red soil, and 15% of other soil and favorable
air condition that covers 67113.2 hector (88%) of Woina dega, 5338.55 hector (7%) of
dega and 3813.25 hector (5%) of kolla.
 Minerals like Sand, Red sand, Granite, Coal and Mucha, Itan and also Belse trees are
existed in woreda.
 Rivers that is suitable for commercial irrigational system.
 Peace and prosperity political system is one condition that the woreda selected by
investors.
C) Available agricultural land area demarcation
The woreda is under take various development programs to alleviate poverty and increase per
capital income to over ride stage of moderate economic development. In order to achieve this
development objective increase agricultural productivity through modern inputs and modern
technological supply is inevitable. The woreda agricultural technology supply is summarized
as;
Table 3.6 Technological supply of the woreda from the year 1997-2001EC

S. No Types of technology 1997 1998 1999 2000 2001

1 Modern hate 320 380 757 807 1220
2 Pedal pump 126 294 278 320 156
3 Droplet irrigation system 2 4 5 26 86
4 BBM 8 12 714 3135 4326
5 Motor pump NA 8 35 126 332
6 Geomembrian NA 4 7 29 124

Source: Enemay woreda agricultural office, 2001EC

NA: data is not available

The above table shows, the technological supply of the woreda with five year. Because of the
inflow of investors in the woreda was increased through year to year and the increasing
demand of investors, the woreda obligated to increase the technological supply. So the woreda
has available agricultural land demarcated area with modern agricultural input.

33
D) Suitable topographic structure
The woreda has attractive and suitable topographic structure. The woreda covered half percent
by plain topographic structure that is 38132.5 hector (50%), the remaining 30506 hector (40%)
and 7626.5 hector (10%) of the demarcated area covered by up and down and valley land
structure respectively.

In general the fertile investment environment of the woreda is attractive. Private investors
increase at increasing rate, even there exist constraints. The investment potential and
opportunity of the woreda is wide range, so the woreda ready with urban and rural land
preparation, and will prepare other facilities to say well come for more and more investors to
invest in this woreda.

3.6 Problems related with the expansion of private investment in Enemay

woreda
Table 3.7 Major problems related with the expansion of private investment in Enemay woreda
Types of problem No of respondent who Percentage
cited the problem (%)
A) Technological problem
-Insufficient information 8 20
-Lack of spare parts 31 77.5
-High cost for new machines 25 62.5
-Lack of counseling service 22 55
-Lack of professionals 5 12.5
-Lack of substitute materials 8 20
B) Marketing problem
-Low level of living standard 16 40
-Lack of information 6 15
-Public service dominant of the 9 22.5
society
-Low level of urbanization 4 10

C) Financial problem

34
-High interest rate 20 50
-Limitedness of private banks 32 80
-Shortage of finance to invest 4 10
D) Police related problem
-Problem of land allocation 32 80
E) Problem of human resource
-Low level of professionals 27 67.5
-Need high payment of skill persons 5 12.5
- Lack of honesty of workers 21 52.5
F) Land related problem
-Limited land size 33 82.5
- land owners need high payment 5 12.5
-Lack of time consideration of the 8 20
project

G) Lack of incentive, advertising & 15 37.5

promotion
H) problem of taxation 12 30
I) Problem of license
4 10
-Lack of professionals
5 12.5
-Corrupt behavior of officials 2 5
2 5
-Religious problem
2.25
-Disintegrated management system 1

Source: - own computation from interview

A) Technological related problems

There is a very limited capacity in the area of technological development in Ethiopia, even if it
exist technological materials. This is seen in Enemay woreda. Some of the problems
associated with the development of technologies are listed out by investors presented and
summarized as;
 Insufficient information, low capacity to identify technological resources and
technological packages responded by eight (20%) of the respondent.

35
  Lake of spare parts supplied domestically. The respondents respond that spare parts are
existing in Addis Ababa, in order to search this material investors incur additional cost
for transportation suggested by 31 (77.5%).
 Higher cost faces to replace old technologies by the new and modern technologies and
forced them to continue the business activity on the old one. Responded by 25 investors
from the sample.
 Lack of counseling service about the technology before start production process. By this
low awareness of the investors on modern machines and equipments their operation need
high cost responded by investors by 22 (55%) of sample respondents.
 Lack of professionals to maintain and repair the old machines and equipments. So
investors obligated to travel long distance to get maintenance and repairing service by
five (12.5%).
 Taking long process of importing modern technologies.
 Lack of substitute materials like skill man power and infrastructure in Enemay woreda
was suggested by eight (20%) of sample investors.
B) Market related problems
Market is the core of investment decisions from feasibility study of investment projects after
analyzing future profitability and availability of its necessity. The market of most developing
nations of the world are quit small compared with industrial nations, this quit small market is
seen in Enemay woreda. The in adequate size is caused by low income level; market size may
grow if income level rise, but a combination of negative factors may prevent rapid growth of
investment. Investment growth is constrained by insufficient market according to the
suggestion of investors in Enemay woreda. Market related problem is summarized as;

 The low level of living standard of the society challenged their marketing activity
responded by 20% from hotel, 10% from agriculture and 15% from stationary and
cafeteria.
 Lack of information about the market as a problem were given by six (25%) sampled
investors undermines their market activity.
 The society demanded public provided services, like education and health service
because of their relative labor costs during taking service from them, and the ability to
get service from private sector is limited responded by nine (22.5%) of sample
respondent.

36
  The low level of urbanization affects the investors that involved in education, and health
sectors. According to the woreda municipality investors was not interested to invest on
education and health because of the low level of urbanization, but this condition will
gradually changed and this is a plan to propose the town will changes to town
administration suggested by four (10%) of the sample investor.

C) Financial problems
The access of financial sector is an important factor in the accumulation of capital and get loan
to any kinds of investment activities. Investors seek finance in the case of shortage in running
their business and they seek to expand production, to maintain and repair old machines and
equipments, to purchase new equipments, in the case of loss. This finance is obtained from
either their own saving or from loan obtained from financial institutions, like banks, credit
unions. In Enemay woreda commercial bank of Ethiopia, peace (Amhara loan and saving
institution) are the main source of credit to investors. The following are problems related to
finance;
 High interest rate for loan, need of higher collateral during loan from bank, and problems
of limited wealth are to be used as collateral responded by 20 (50%) of the sample.
 Limited number of private banks around the area by 32 (80%) of the sample
 Shortage of finance to operate their investment project by four (10%).

D) Policy related problems

Policy related to investment taxation, credit, property right, land policy etc are the main one.
Even though, efforts are made to improve policy related problems including corruption; it may
result in the mistrust of policy framework to under take long term investment.
Based on the interview the major policy related problem were proposed by investors is
Problems results from land allocation; that is unfair distribution of land to the investors,
because of corrupt behavior of government officials suggested by 32 (80%) of sampled
investors. the remaining eight (20%) of sample investors are abstain to give their response.

E) Problems related to human resource

Human resource is an important input for any investment activities with their talent and
creativity. The efficiency of any investment activity depends up on the well of its human

37
resource that is trained and effectively utilized. But lack of such things put any investment
activity to inefficiency. The problems associated with human resource listed out by investors;
 Low level of availability of professionals in the woreda.The low level of productivity of
labor is the indurate skills of labor and scarcity of technically skilled labor suggested by
27(67.5%) of respondents.
 The existing technically skilled labors need high payment for their profession suggested
by five (12.5%) of respondents.
 Lack of loyal (honest) labors in the woreda proposes 21(52.5%) of sample investors have
pointed out.

F) Land related problems

Land is the natural resource which needed to on any economic activity. The land size, which
give to investors is depends up on the type of economic activity, for instance agricultural and
industrial sector are needs much size. But investors are not get enough land size to run their
project in Enemay woreda suggested by 24 (60%) of the sample investors. Investors invest in
hotel account 19 (48%) suggested there is a limited land size given to the investors in the
woreda. Problem related to land is summarized by the respondents as follows;
 Most of the land owned by low living standard peoples.
 The land owners need high payment during renting the land suggested by six (15%) of
respondents from agricultural sector.
 The land size and period of time given to investors to begin the project is not considering
the type of the sector by eight (20%) of sample investors.
G) Lack of incentive, advertising and promotion
Developed nations reach on higher level of economic growth by promoting saving and
investment. The over growth of investment is important for develop the country, and helps to
create job opportunity for unemployment, leads to help the declining rate of unemployment.
Incentive and promotion is help to increase the flow of investors to invest their potential
business. But incentive, advertising and promotion is not give to investors to invest in the
woreda suggested by 15 (38%) of respondents.
The woreda has endowed with natural gift resources and has attractive sites, this attractive
sites is not advert to attract investors. So the respondents suggested that there is a limited
advertising and promotion, incentive activities in the woreda to attract investors.

38
H) Problem related to taxation
Tax is the main source of government revenue, and used to provide goods like social service
and infrastructural facilities to the society. So paying tax is the responsibility of any society.
Even though, paying tax is the responsibility of any society, it levied beyond the capacity.
This type of tax may affect the economic activity and investment expanding suggested by
eight (20%) of sampled investors from the total sample size. The remaining four (10%) of
sample investors suggested the level of taxation is slightly affect the expansion of investment,
and 28 (70%) of sample investors suggested that the level of taxation is consider the ability of
investors to pay.

I) Problem related to license

For any democratic country economic activity should be legal license to run his or her
business. Among the sample investors 28 (70%) of the respondent suggested investment
license in the woreda is given with out any anxiety, but 12 (30%) of respondents suggested
that the license policy in the woreda is not given to investors at the time investors interested to
invest in the woreda. Problems related to license are presented by 12 (30%) respondents as;
 Lack of professionals who study the income of each individual in the woreda responded
by four (10%) of the respondent.
 Corrupt behavior of officials in the woreda responded by five (12.5%) of the sample.
 Religious problem in the woreda suggested by two (5%) of sample investors.
 Disintegrated management among each sectors give license responded by the investor
responded by one (2.25%) of the sample respondent.

CHAPTER FOUR
4. CONCLUSION AND RECOMMENDATION

39
On the ground of finding of the discussions, the following conclusion and recommendations
are traced out.
4.1 Conclusion
Investors invest their potential capital in different sectors in Enemay woreda. From the year
1997-2001, 52 investors invest in agricultural, manufacturing and service sectors.
Hotel is the dominant by constituting 15(28.8%) and it is the leading sector by number of
projects and by both permanent and temporary employment generation out of the total
projects. This is mainly due to available demand for hotel service in the woreda.Fuel stations
(others) ranks second by sharing 11(21.15%) from the total. In contrary health sector is the
least in employment generation and capital share from the total project. Investment growth
increase from the year 1997 to 1998 by 32.25%, but in the year 1999 and 2000 the growth rate
severely declined, due to the introduction of lease policy in the woreda. after these two years
the growth rate recovered by 50%.

From the total projects, on aggregate, 32.7% are in processing stage while 63.5% of the
investment projects were in production or service stage. Generally, because of many reasons
the contribution of private investment in Enemay woreda is at lower level. An attempt was
made to discuss problems faced by investors by analyzing their responses and the most
important conclusion arising is that; infrastructural facilities are the major obstacle to run
investment activities in Enemay woreda as responded by 37% of sample investors. The
remaining 35%, 28% of the respondent responded that the infrastructural facility were good
and very poor respectively. From the infrastructural facilities road and availability of land in
Enemay woreda were the major obstacle forwarded by agricultural and hotel sectors, while
telephone and water supply are admired by investors.

Insufficient information about the technology, lack of spare parts domestically, high cost of
replace old machines and equipments, lack of professionals to maintain and repair the old
machines and equipments are the major technological problems that face investors to run their
business.

The market effectiveness for investment project is constrained by low income level of the
society, lack of information about the market, the societal demand only depends on public
provided services and low level of urbanization affects the investors that are not to be involve
in service sectors ( in education and health).

40
Limited number of private financial institutions access to finance and leads to higher interest
rate, and need of higher collateral during loan from banks, limited number of wealth’s used as
collateral. Because of corrupt behavior of government officials and less effectiveness of
investment law land is not fairly distributed.

Limited numbers of skilled labors with lack of initative give rise to lower productivity and
profitability of investment activity and also limited advertizing, promotion and incentives in
the woreda.lack of professionals who study the income of each individuals in the woreda, but
the level of taxation is consider the ability to pay suggested by 70% respondents.

Even if, problems are hinder for the expansion of private investment in the woreda, the woreda
has conducive for investment and has unexploited resource. The woreda reflected well come
attitude for private investors and support policy rule and regulation, incentives including
adequate guarantee. The woreda has suitable topographic structure for agriculture and have
fertile soil to give enough products, but private investors was not much distribute on this
sector, because investors invest what they do what their neighbors do.

Enemay woreda has potential and incanted water resource that used for large irrigational
project. The water resource of the woreda covers 1073 hector, out of this 721 hector water
resource was only used for irrigational development. The untapped natural resource exist in
the woreda like lemon soil, sand, granit,coal, Mucha, Itan and Beles tree are existed in the
woreda. The woreda also has suitable topographic structure covered by half percent i.e.
38132.5 hector (50%) of plain, the remaining 50% covered by up and down and valley
structure.

4.2 Recommendations
Based on the finding the following suggestions are forwarded to improve the challenges and
means to foster fertile conditions in the woreda.

41
  Allocation of infrastructural facilities must get emphasis to reduce its impact on
investment activity.
 Prepare land for investment and equipped with infrastructural facilities.
 Supporting and encouraging those investors those are on the phase of processing.
 Contacting those investors whose project are on pre- processing (on the stage of material
supply) and help in finding solution in cooperation.
 Provide investors with information regarding market, finance, technology, and policies.
 Initiating, advertizing, promoting investors to participate in investment activity
individually or by grouping.
 Banks provide loan based on project performance and type of project.
 All organization and institutions should draw programs for the development of the
economy and training of investors to remove the bottlenecks for investment.
 Necessary to give attention for human resource development in technological capacity,
specific skills in the area by marketing, financing etc.
 Provide investors with training, seminars on various issues.
 There is a need for government institutions to identify the opportunities that exist in
different sectors in the woreda.
 Searching means for the supply of machines and spare parts in the home to investors.
 Individuals as well as groups make promotion for investment.
 Expanding private loan institutions to increase the financial activities.
 Tax should consider the individuals ability to pay (amount of wealth that the investors
have).
 Integrate management among each sector.
 The society must make market linkage to the other in order to improve the marketing
problem.
 All individuals’ emphasis on corrupt behavior persons and try to avoid them as much as
possible with the coordination of government.

Bibliography
Asfaw (2006), Problem of private investment in south Gonder zone, unpublished
Arba Minch University, Ethiopia.

42
Befekadu Degefe and Dr. Berhanu Nega (1999/2000), Annual report on the Ethiopian
economy, vol.2, Addis Abeba, Ethiopia.
Alberto.R and Mulalem (1989) An Empirical analysis on private investment in Mexico,
WB processed, Washington Dc, America
Brealey and Myers (2000), as cited in www. Notive / pursuits. Org / saving investment.htm).
Ethiopian Herald (2006), private investment in Ethiopia voll. Lx, Addis Ababa, Ethiopia.
Fredlic. S. Miskin (2001) monetary economics test book, Six edition.
Douglas Green Wald (1992),World book encyclopedia
Dr, Knife Abraham (2001), Dynamics of economic reform Addis Ababa, Ethiopia.
Dr, Mnakiew Macro economics, six editions, Harvard University, America
Negus (1992), Contribution of private investment to economic growth in Amhara region,
Addis Ababa University, unpublished.
License and renewal of investment project, annual magazine of Enemay woreda
department of trade and industrial office (June, 2009).
Manual of Enemay woreda municipality bureau, investment opportunities and alternatives,
June, 2009, unpublished.
Tekleberhan (1996), Project analyzing on investment in Ethiopia, Adiss Ababa, Ethiopia,
unpublished.
Todaro Michael, (2000), Economic development, fifth edition London long man, Germane
Workie mitiku (1997), Determinants and constraints of private investment in Ethiopia,
unpublished, Mekle University, Ethiopia.

Appendix 1
Questionnaire
The researcher is to conduct the research on the topic known as the challenges and fertile
conditions in Enemay woreda.The main objective of the research is to identify the challenges

43
that are obstacle for private expanding and to identify the fertile/ potential conditions that exist
in the woreda. There for, to make the work easy the researcher prepared some questionnaire
papers. So the researcher asks your politeness to fill the answer, suggestions and
recommendation according to the question. Your cooperation has a great value to fulfill my
work with out any anxiety.

1. In which investment sector you are operated?

--------------------------------------------------------
For your response put a tick (√) in the box
2. How do you see infrastructural facilities of Enemy Woreda?
Good poor very poor
2.1 Road
2.2 Telephone
2.3 Power supply
2.4 Water
2.5 Transport
2.6 Land

3, Which problems challenge in running your investment activity?

3.1 Technological related problem
3.2 Market related problem
3.3 Financial problems
3.4 Policy related problem
3.5 Land related problem
3.6 Man power problem
3.7 Problem related to promotion and advertising
4, Is the tax system consider your ability to pay?
Yes No to some extent

5, Dose the tax levied on you hinder to retreat to expand your project?
Yes No
6, Did the government easily give license to expand your investment activity?
Yes No

44
7. If your response is no for question number six what is the reason for this?
A. Economical case
B. Political case
C. Religious case
D. Social case
E. If any mention--------------------------------------------
8. Dose the license policy provides to get enough land size to expand your project?
Yes No
9. What types of fertile conditions exist in Enemay woreda?
-------------------------------------------------------------------
-------------------------------------------------------------------
----------------------------------
10, Dose these fertile conditions are contributing for running your business?
Yes No

45