COLLEGE OF BUSINESS AND

ECONOMICS
ECONOMICS DEPARTMENT

"Socio-economic factors affecting the growth of urban private investment

(In the case of MettuTown)”

PREPARED BY: - Derartu Dechasa

Advisor Shuramu (Msc)

Mettu, Ethiopia
June 14, 2022

Table content

CHAPTER ONE:.............................................................................................................................2
1. INTRODUCTION.......................................................................................................................2
1.1 Background of the study.......................................................................................2
1.2 Statement of the problem......................................................................................3
1.4 Objective of the study..................................................................................................4
1.5 Significance of the study............................................................................................5
2.2 Types of investment........................................................................................7
2.2.1 Business Fixed Investment.....................................................................8
2.2.2 Residential Investment............................................................................8
2.2.3 Inventory Investment...............................................................................8
2.2.4 Theories of Investment...................................................................................9
2.2.4.1 Classical theory of investment.......................................................9
2.2.4.3 Accelerator theory’s of investment.............................................10
2.2.4.4 Tobin’s ‘q’ theory of investment.................................................11
2.3 Impediments of private investment at micro level ................................11
2.5 Empirical literature Review of Private Investment ......................................13
3.1 Description of the study Area............................................................................17
3.2 Population........................................................................................................................18
3.3 Data type and sources..........................................................................................18
3.3.1 Primary data source collection...................................................................18
3.3.2 Secondary data source..................................................................................18
3.4 Sampling Techniques...........................................................................................18
3.5 Sampling size............................................................................................................19
3.6 Sampling Design..............................................................................................................19
3.7 Methods of Data Analysis...............................................................................................20
Reference.....................................................................................................................................22
List of tables
Table 1 Budget breakdown............................................................................................................20
Table 2 Cost budgeting..................................................................................................................21
Abstract

Private investment plays a great role in country’s development, especially in developing

countries whose capital is scarce and their government lacks enough capacity to cover all

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constraints and bring economic change for development. The general objective of the study is to
analyze socio-economic factors affecting the growth of urban private investment in the case of
Mettu Town. In this study both primary and secondary sources will use. Accordingly, will
collect and analyze data based on descriptive method. Thus, the number of projects licensed and
fully started its operation or production in the study area will be classified into groups based on
their project type. Based on the information from the respondents, the study identifies the main
factors that affecting investor’s decision on investment activities includes: educational level,
access to credit, access to infrastructure facilities and investment incentives are significantly
affected the investment activities and intensity of capital allocation. Therefore, the federal as
well as the regional government should give attention up on supplying adequate credit, access to
infrastructure, investment incentive for active investors as well as potential investors that helps
running investment activities.

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 CHAPTER ONE:
1. INTRODUCTION
1.1 Background of the study
Nowadays, the issues of development become crucial. Especially, in developing counties to
achieve economic growth and development, investment is required. Investment is major
determinant of economic growth and the higher investment activities leads to a higher economic
growth. Investment enhances a nation's ability to produce goods and services and to increase its
standard of living (World Book, 2001).

Investment is a critical determinant of a long-run economic performance. Investment involves

the formation of capital; fixed (tangible) capital, such as reputation or technical knowledge;
human capital such as skills or education (Bond and Jankinson; 1996).Economic growth could be
realized through a proper development policy. One of which could be promoting; developing
countries have shown that growth the economic have come through increased investment. Thus,
investment plays a vital role for economic growth and development and for improving the
welfare of the society. Recent studies (Collier Gunning, et.,al.,1999) conducted in Africa, Asia
and Latin America has established the critical linkage between investment and the rate of
economic growth. It also plays multiplier effects through creating employment opportunity,
reducing poverty, transferring technology through foreign direct investment (FDI), increasing
capital accumulation and Government revenue collected in very essential economic as well as
social institution in which the private sectors is not involved which requires huge investment like
construction of roads, electricity generating, telecommunication, and so on (Birhanu and
Befikadu, et., al., 2003/04).

Private investment plays a great role in country’s development especially, in developing

countries whose capital is scarce and their government lacks enough capacity to cover all
constraints and bring economic change for development. Thus, if private investment involved in
investment, gross domestic product (GDP) country will increase.

Rapid and sustained growth is facilitated by virtuous circle whereby entrepreneurship and
investment leads to higher productivity, making possible to invest large sums in future. In case of

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this process, job is created and new technology is introduced, especially through international
trade and investment linkages.

The private investment is the main engine of growth in market economies. It thrives and delivers
sustained growth when number of factors combines to produce conductive environment for the
private sectors to develop. Private investment is crucial pre-requisite for economic growth
because it allows entrepreneurs to set economic activity in motion by bringing resources together
to produce goods and services.

The Ethiopian Investment Agency (EIA) and Regional Investment Offices (RIO) licensed some
56,421 investment projects with an aggregate capital of Birr1.1 trillion during 1992/93-
2010/11.Out of these projects 84.1 percent are domestic, 15.7 percent foreign, and 0.2 percent
public investment. In terms of capital, 39.4 percent is attributed to domestic investors, 35.4
percent to foreign investors and 25.2 percent to the public sector (NBE, Annual report, 2010/11).
The resilience of the Ethiopian economy is projected to continue through 2011/12 and show 11.0
percent growth compared to 5.5 percent for sub-Saharan Africa and 4.4 percent for the entire
world (ibid).

Investment plays a very important and positive role for the progress and prosperity of any
country to solve their economic problems. Developing countries like Ethiopia try to learn from
each other how to attract private investors, because proper investment in proper economic sectors
can change economic conditions quickly. Ethiopia as a developing country aims at achieving
economic development. Accordingly, the Ethiopian government is working a lot to attract
investors for investment in different sectors of the economy (Zelalem, et., al., 2005).
Mettu Town is located in central Ethiopia in Oromia National Regional State; South zone at a
distance 600 kilometer from Addis Ababa. Based on the 2007 national census conducted by the
Central Statistical Agency (CSA), it has got a total population of 65,231, of whom 31,668 are
men and 33,563 women.

Then, Mettu Town also works a lot to attract private investors to invest in different sectors of the
economy, especially urban areas than rural once. The city or town aims to create conductive
environment for investment in the long run business plan.

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1.2 Statement of the problem

Private investment is an engine for creating innovation, economic growth and poverty reduction.
In Ethiopia domestic investment has shown progressive trends with speedy starting from
announcement of liberal policy in 1992. Nevertheless, the gap between domestic investment and
saving has remained wide thereby reinforcing the need foreign direct investment in development
of the economy (UNCTAD, 2002).

Although the investment climate has improved greatly in recent years, there are still money
aspects of investment promotion where improvements are urgently needed. In other words, even
if the situations or investment has improved from the previous period, the participation of private
sector is not satisfactory. Thus, investment including private investment should be enhanced
since it has an essential role to bring economic growth as it overall the world. Again in Ethiopia
considering Mettu Town, private investment is the primary engine to promote the country’s
economic growth and development. But, a lot of new factors are emerged that inhibit the
expansion of private investment in Mettu Town. Some factors that inhibit or reduce investor’s
decision on investment activities to be: educational level, access to credit, poor infrastructure
facilities, licensed problem, inadequate access to land and investment incentives. These are some
of the problem for expansion of PI in Mettu Town.

A number of studies made use of various methodologies to identify the role of private investment
on economic growth in Ethiopia (example Zelalem, et., al., 2005). According to this study,
instruments and capital accumulation, available of resources, growth compatible institution,
technological development, entrepreneurship and population are identified as a major
determinant of economic growth. However, the extent of private investment contribution to
economic growth are differs from place to place. In addition to this previous studies focus on the
role of private investment in economic growth without the factors affecting PI on economic
growth problems are also differs from place to place.

So that, the research will be undertaken in Mettu Town is essential since the result may give spot
light to investors in order to combat its problem at country level. To the best of our knowledge
no similar studies have been conducted in the study area.

1.3 Research questions

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 What are the major factors that affect private investment in Mettu Town?
 What are extents of PI problems in Mettu Town?
 And also what are the social and economic factors that affect PI in Mettu Town?

1.4 Objective of the study

1.4.1 General objective
The general objective of the study is to analyze socio-economic factors affecting the growth of

urban private investment in the case of Mettu Town.

1.4.2 Specific objective

The specific objective of the study includes:
 To assess the major factors that affect private investment in Mettu Town.
 To examine the social, and economic factors that affect private investment in Mettu
Town.
 To propose recommendation for future intervention that can boost private investment in
Mettu Town.

1.5 Significance of the study

Private investment is the primary engine to promote any country’s economic growth and
development. Despite this fact, the share of implementation projects out of total licensed projects
in the study area is still rudimentary stage. Therefore, it is essential to study factors that hinder
the development of private investment decision.

This study will initiated to explore the current factors that affect the development of private
investment in Mettu Town. In doing so, will hope that the study will add knowledge in area of
private investment and it has its own contribution for future research work. The study will be
important to show factors that affect the growth of private investment activity. In addition, it will
serve as a step for other researchers who want to conduct a research on this and related topics.

1.6 Scope of the study

There are many factors affecting the growth of private investment but the paper only cover the
socio-economic factors in private investment and it focuses mainly the area of in Mettu Town.

1.7 Limitation of the study

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The term investment is abroad topics. However, this study is taken in to consideration only
private investment. The study is limited on the number of project licensed and fully started its
operation or production in the study area. The principle limitation of this study is that the study is
not involving investment climates indicators of the other area; it is only the area in Mettu Town.
Thus, the result of this study is not be reliably used for other area. In addition to this, the study is
limited because of certain factors. These factors include:

 Financial problem for different materials

 Lack of sufficient data from the investment office
 Shortage of reference materials and internet services
 The respondent are not willingness at the time of data collection
 There is no defined number of populations; so the study is not used appropriate sample size
determination technique.
 Shortage of time. Thus, the results of this study need to be understood by taking in to
account the above limitations.
1.8 Organization of the study

This paper contains five chapters and appendixes in the end. The first chapter is the introduction
section. The second chapter contains the review of related literature on the topic of the study.
The third chapter contains methodology of the study; the fourth chapter contains data analysis
and discussion. In the last chapter conclusion and recommendation are sited. In addition to this
bibliographic and reference are included.

CHAPTER TWO:
2.LITERATURE REVIEW
2.1 Theoretical literature Review

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In this section, the theoretical literatures related with the suggested proposal were discussed. The
detail discussion of the reviews as follow:
2.1.1 Definition of investment

Investment is a fixed and initial operating resources used for the production of goods, the
provision of services and the development of science and technology capability.Investment in
economic analysis can be defined as flow of expenditure devoted to increase or maintain the real
capital. More broadly, it is defined as the flow of expenditure devoted to projects producing
goods and service, which are mostly not intended for immediate consumption where this project
may take the form of adding both physical and human capital as well as investors. It is also
defined as flow of capital, the volume of which is determined by those entire projects, which will
yield positive net present value of an internal rate of return greater than interest rate (Dictionary
of modern economics, 1992).

Investment is the part of national expenditure devoted to the production capacity of goods over a
period of time. According to him, capital accumulation results when some proportion of present
income is saved and invested in order to augment future output income, new factories,
machinery, + equipment and material increase the physical capital stock of nations and make it
possible for expand output level to be achieved. These directly productive investment are
supplemented by investment in what is known as social and economic infrastructure, water and
sanitation, communication and the like which facilitate and integrate economic activity (Todaro,
2007).
2.2 Types of investment
An investment may be ex-ante or planned or anticipated or intended investment or it may be ex-
post, i.e. actually realized investment or when investment is not merely planned or intended but
which has actually been invested or implemented.

Another classification of investment may be private investment or public investment. Private

investment is on private account, i.e. by private individual and public investment is by the
government. Private investment, i.e. by private investors or entrepreneurs is influenced by
marginal efficiency of capital i.e. profit expositions and the rate of interest it is profit elastic.
Public investment is by the state or local aesthetes, such as building of roads, irrigation projects,

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school buildings, public parks, electricity works, etc. In the public investment profit motive does
not enter in to consideration. It is undertaken for social good and not for private gain.

Generally, there are three type of investment spending; business fixed investment, including the
equipment and structure that business buy to use in production. Residential investment, included,
the new housing that people to buy to live in and that land lords buy to rent out. Inventory
investment, includes, those goods that business put aside in storage, including materials and
supplies, work in process and finished goods. When expenditure on goods and services foul
during a recession much of the decline is usually due to a drop in investment spending (Mankiw,
2006).
2.2.1 Business Fixed Investment

The largest piece of investment spending, accounting for about three-quarter of the total
business fixed investment the term “business” means that these investment goods are bought by
firms for use in future production. The term “fixed” means that this spending is for capital that
will stay put for a while as opposed to inventory investment, which will be used or sold shortly
later. Business fixed investment includes, everything from fax machined to factories, computers
to company cars.

The standard model of business fixed investment is called the neo-classical model of investment.
The neo-classical model examines that the benefit and cost of firms to owning capital goods and
also shows the level of investment, in addition to the stock of capital, these related to, the
marginal product of capital, the interest rate, and the tax value.
2.2.2 Residential Investment

This investment includes the purchasing of new housing both by the people who plan to live in it
themselves and by land lords who plan to test it to others. This investment depend on the relative
price of housing price in turn depend on the demand for housing and the current fixed supply.
Increases in housing demand, perhaps attributable to a fall in the interest rate, raise housing
price, and residential investment.
2.2.3 Inventory Investment
Inventory investment is the goods that business put aside in storage. It is one of the smallest
components of spending, averaging about 1% of GDP. Yet its remarkable volatility makes it

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central the study of economic fluctuation. In recessions, firms stop replenishing their investment
as good are sold, and inventory investment becomes negative, in a typical recession. More than
half of the fall in spending comes from a decline in investor investment (Mankiw, 2006).
2.2.4 Theories of Investment
There are a number of competing theories of investment behavior in the literature and it is not
clear which one is superior to the other. Therefore, in this section an attempt is made to review
only some of discussed theories of investment. Investment is generally defined as the flow of
spending that adds to physical stock of capital. According to Dornbusch and Fishery (1994),
investment spending is important as it is accounts for much of the movement in business cycle. It
is attempted to those theories of investment. However, Emphasis is given to those theories of
investment that won the attention of development economists.
These are classical theory’s of investment, Keynesian theory’s of investment, the accelerator
theories of investment, and the Tobin’s ‘q’ theories of investment. Each of these theories is
discussed below:
2.2.4.1 Classical theory of investment
Classical theory investment did not explain spending in well systematic way, as other did
classical theories treated investment as an inverse function of interest rate. The lower, the interest
rate, the greater investment spending, According to the classical theory for every prospective
investment project, management estimates the expected rate of returns before allowance for the
interest cost on the funds tripe up in the project.
One of the well known classical economists, Adam smith (1776) took for granted that capitalists
make investment because they expected to earn profit in the future. This depends on the actual
profit rate.
2.2.4.2 Keynesian theory’s of investment
Keynes (1936) who introduced the idea of an independent investment functions in the economy.
According to him investment depend on prospective marginal efficiency of capital which is the
expected field from new investment relative to some interest rate reflecting the opportunity cost
of the invested fund. Moreover, Keynes also pointed out that spending is highly volatile due to
the uncertainty associated with the return on investment, which explains the business cycle.
Hence, he said investment decisions are very much affecting by how optimistic or pessimistic the
investors feel.

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The definition of marginal efficiency of capital invokes the present value criteria of the
investment project in which account is taken of an expected steam of future returns associated
with a given investment project. This income is then discounted at some appropriate rate of
interest. In order to undertake, the investment project a certain cost and its present value, which
gives a clue about of its profitability. One of the criticisms that it has faced is the model that is
not applicable to developing countries.

Investment is an important economic variable to economic growth and development. The history
goes back to Keynes (1936),” the general theory” who first attempts to explain the existence of
an independent investment decision function in the economy. According to Keynes, investment
can be increased either by decreasing interest rate or by increasing marginal efficiency of capital
along with the above variable he introduced expenditure of further demand for firm output,
velocity of investment uncertainty and other non-economic variables such as political, socio-
economic variables and human instincts as possible determinants of investment which regard to
government intervention. Keynes says government expenditure on infrastructure, education and
health have a possible effect on investment, but if government involve directly in productive
activities that will discourage private investment (Abdurahman, 2011).
2.2.4.3 Accelerator theory’s of investment

Keynes theory of investment is denied by accelerator theory, for it claimed to investment on the
bases of current profit and future expected profit. Accordingly, accelerator theory’s argue that
the investment to acquire more goods arises, because increase in output are putting pressure on
firms existing productive capacity an increase in productive capacity, requires an expansion of
capital stock, which in turn calls for a higher rate of investment spending than would otherwise
needed.

Following Keynes, investment theory is developed around growth models on Harrod Domar
tradition giving rise to the now popular accelerator theory according to which investment is a
linear proportion of output changes. Keynes’ ideas are never left unchallenged because in 1950s
and early 1960s other economists formulated models that gave rise to the accelerator theory of
investment. These models are used to determine the rate of saving and hence, investment
required to achieve a given target of income with available technology.

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 2.2.4.4 Tobin’s ‘q’ theory of investment
Tobin’s ‘q’ theory of investment is developed by the noble-prize winner economist James Tobin.
He proposed that firms base their investment decision on the following ratio.
i.e. q = Market value of installed capital
Replacement cost of installed capital
The numerator of Tobin’s ‘q’ is the value of the economy’s capital as determined by the stock
market. The denominator is the price of the capital if where purchased today, Tobin’s reasoned
that the net investment should depend on whether “q” is greater or less than one (Gupta, 2008).
2.3 Impediments of private investment at micro level

Although, adjustment of macroeconomic factors stabilization is necessary, it is not sufficient so

as to increase the private investment. Thus, there should be also adjustment of microeconomic
factors and institutional factors that affect private investment. Inadequate accesses to land, weak
market, bureaucratic red tape, corruption, and poor functional factors. These are much of the
problem for expansion of private investment in developing countries in long term (Workie, 1996)
as cited in Dawite, 2010.According to Girma as cited in Dawite (2010) although, many author
showed determinants of private investment decision like political, and macroeconomic
instability, availability of natural resources and market size insignificant, a lot of new factors are
emerged that inhabit the expansion of private investment at micro level. Some factors that
inhibitor reduces private investments are discussed below:
Poor business environment: this refers to the general frame work of regulation not being clear
and unequal provision of service, anticompetitive policies by the government and practice by
private enterprises, inefficient legal system and negative attitudes toward a private investment.
Distorted incentive policies: i.e. this refers to only some groups benefiting from incentives such
as controls on product and factor prices, tax incentives, trade protection, state subsidies, and
access to resources.
Inadequate legal framework: Insufficiency of laws defining property right, regulating
enforcement of contracts, ensuring effective competition, establishing bankruptcy procedures
and regulating labor contracts.
Weak financial systems: i.e., inefficiency of the financial market and financial institutions in
providing credit and other money related services.

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Inaccessible to land: i.e., difficulties in gaining access to land through outright purchase or
leased contracts.
Poor infrastructure: i.e., shortage of communication networks, domestic and international
links, and reliable power supplies.
Lack of skilled labor: i.e., not fitting to the increasing demand for skilled or highly trained
human capital that can cope with emerging technologies.
Absence of supplies network: i.e., not creating appropriate conditions and supportive policies
investors to contribute to the development of the networks.
Hence, along with macroeconomic factors, microeconomic factors should be considered to create
a business friendly environment for the recovery and expansion of private investment.
2.4 Steps to raise the level of private investment

The following measures have been suggested to boost the levels of private investments are
(hejela 1999):-
i. It is believed that the high rates of taxation reduces the marginal efficiency capital and thus
discourage private investment economists like, Hansen, Lerner.
ii. It has been suggested that reduction in the money wage would also hoots the level of private
investment. Because it will act in two directions; firstly, it would affect the rate of interest.
Secondly, by a cute in the money wage, because a reduce wage bill of the employees would
recue their demand for cash balance substantially and it will obviously make the rate of fall but
some economist have pointed that investment being virtually interest inelastic a fall of interest
rate would not produce a subsoil effect on private investment in general cut in money wage
would reduces the aggregate demand, which will ultimately reduce the aggregate demand, which
will ultimately reduce the level output and employment in the economy.
iii. Pump priming is another method suggested to stimulate private investment. This indirect
public investment in the economy to raise the level of general investment. It is believed, other
nation that when government undertakes investment to provide basic services to the private
investors, it helps in pulling the economy out of depression pump priming is to be done by
incurred expenditure.
iv. Helein has suggested that during depression two steps to be take private investment. Firstly,
the monitory privileges must be abolished and secondly scientific, research must be curtailing the
money right certain business houses and the second measure can be effected by providing funds

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to non-profit institution like universities, public, scientific business trust are not given funds to
promote research.
v. Finally, it has been suggested that price stability is also essential for promotion private
investment and throe force, to cheek price flotation the government should adopt policy of price
support such a policy implies that the government should undertaken bulk purchase and sale of
important commodities it should purchase during depression and store them to sell at a time
when the price rises.
2.5 Empirical literature Review of Private Investment
From the theoretical as well as empirical point of view there are number of macroeconomic
variables that influence private investment. According to Asmelash (2007), private investment in
developing countries determined by the following factors:
Real Interest Rate: The demand for investment depends up on the level of interest rate because
interest rate is a measure of cost of finance for financing investment. When the interest rate is
high, the cost financing projects is high, as this time the level of demand for investment coming
to down (Mankiw, 2000).

Given the neoclassical model interest rate come up with a conclusion of negatively related with
private investment. However, some arguments suggested that the cost of money to investors is
less important than other major costs like cost of machinery, labor, and raw material. Moreover,
most studies suggested that in developing countries which have repressed financial markets like
Ethiopia, its interest rate are not affected the level of investment rather it is affected by credit
policy. Thus, the study includes it as an empirical study which does not support the negative
relationship between investment and interest rate in developing countries (Husain, 1993).

Availability of Finance: It is one of the factors that affect the level of investment especially in
developing countries, there is high problem regarding the availability of finance. Because of
segmented capital markets and non-flexible regulatory rules in developing countries the level of
private investment is adversely affected (Akpalu, 1997).
Economic Growth: In most developing countries the rate growth of real output (GDP) per
capita should be positively related to the private investment, but common in industrial countries
(Blejer and Khan, 1984). Empirically, however, the postulate does not work well because, it is
unlikely that the economy’s output ratio is fixed overtime as it is influenced by such factors like

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cost of capital, labor and technological progress, etc. for greater relative rate of investment there
must be appropriately faster rate of output.
Public investment: the relationship between public and private investment takes on greater
importance in developing world than in industrial countries because of the large role played by
the government in the overall process of capital accumulation.

At the theoretical level the effect of public investment on private sector investment is ambiguous.
On the one hand, public investment activity may be complimentary and thus support private
investment, particularly where public investment involves useful infrastructure. It includes
communication facilities, transportation system, schools, water and sewerage system and to like.
Projects in these areas tend to raise the expected rate of return on private investment. On the
other hand, public sectors investment may detract from private investment activity to the extent
that it substitute or ‘’cords out ‘’private investment. This may occur the investment involves
same enterprises producing goods that compete with the private sectors, or when heavy spending
for public capital projects lead to high interest rates, sever credits rationing (Green and
Villanueva, 1991).

Macroeconomic stability: macroeconomic stability indicates important signals to the private

sectors about the direction of economic policies and credibility of the authorities’ commitment to
manage the economy efficiently. The key macroeconomic stability indicators are described
below:
Domestic inflation rate: high domestic rate of inflation will have an adverse effect on private
investment. It enhances the riskiness of long-term investment projects. It reduces the average
maturity of commercial loans and distorts the information conveyed by prices.
In the economy income per-capita: income per capita is hypothesized to effect of private
investment positively. Positively correlation is due to the ability of high-income countries to
devote much more income to saving, so that investment is positive.
Foreign exchange availability: 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 availability affects private investment consequently there is real limit on import capacity
resting from foreign exchange short falls.

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Devaluation: A real devaluation of countries currency (fixed exchange rate system) is usually
included in switching policies this generally negatively affect investment in the short run.
Devolution may also reduce investment by depressing aggregate demand. Moreover, if
investment has significant to import content in the expansion of output is likely to be necessary
condition to expand investment (Mankiw, 2007).
Uncertainty: uncertainty lays in impact on private investment decision. change in uncertainty
are usually associated with unpredictability, instability of the incentive structure as well as lack
of sustainability and imperfect credibility of macroeconomic policy reforms. Thus, private
investor will be reluctant to commit large expenditures on fixed investments when they are
uncertain about the future political, social and economic environment (Green& Villanueva,
1991).
Before the current government literature on private investment is very limited and the available
literature, are also sort of data despite this fact an interesting study has been carried out on
private investment by “worke mitiku” in 1997 under the little of “determinate and constraints of
private investment in Ethiopia”. The study had attempted to identify the macro-economic
determinate of private investment.
Using time serious data for the period 1976-1994, the econometric result has shown that private
investment is determined by the availability of finance, the real interest exchange rate,
investment policy, debt service payments and debt overhang. The real interest rate, growth of per
capital GDP public investment and changes in terms of trade not affect private investment during
the period of study.
In addition, both the econometric and the surrey have confirmed that the availability of finance
rather the interest rate is a crucial determinant of finance rather than the interest rate is a crucial
determinant of private investment.
Among the recent studies has worked on private investment under the title “the performance and
problem of private investment in Ethiopia post 1991”the study used descriptive analyses, and has
used data mainly from Ethiopian investment office, national bank of Ethiopia and ministry of
economic development and cooperation this analysis disclose that the response of private
investment, if for beyond. Adequate for the required economic growth to achieve a sustainable
development in the country and also observed that the implementation of the project is rather low
and there is a real skewness to wards urban centers (Dawite Getaneh, 2000).

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Most of the problems identified in the study also share some common features. This includes
structural problems, which are in one way or another result of institutional failure. According to
her analysis to accelerate the pace of private investment as a basic engine of economic growth, a
development, is a pre-requisite. The study also recommitted that the development of private
sector investment needs a state committed for development, a state that provide a suitable macro
and micro economic environment, a state that gives the required guidance and support for the
private investors, a state that proved a suitable institutional interest, physical infrastructure and
legal services.

Another empirical study has been carried out on private investment by “(Tweros Gash as” in
2001) under the title of “economic policy and private investment in Ethiopia” this study has used
descriptive data analysis mainly based on secondary data the major source of data for this study
are the Ethiopian Investment Authority (EIA) annual reports, Ethiopian Economic Association
(EEA), the World bank publication, publication of world investment reports etc.

The study discloses that even though a relatively improved investment policy measure have been
undertaken currently to increase. The participation of the private investment sectors, the respond
of private investment particularly foreign direct investment is for in adequate for the required
economic growth to a chive sustainable economic development in the countries. And it has also
observed various factors contributing to the low level of private investment in the country,
among those various impediments the major ones includes absence of effective demand, poor
infrastructural facilities, and land problem, low level of saving, weakens in the financial sector,
major economic and political uncertainty and lack of investment promotion, bureaucracy, and
inefficient fiscal in contrives and lack protection to domestic projects.

Mbugua (2000) analyzed the micro and macro determinants of private investment in the
manufacturing sector in Kenya, using OLS the technique, for macro level determinants and
descriptive statistics for micro level determinants of private investment. His findings showed that
high interest rate, inefficient infrastructure, corruption, insecurity, weak institutional framework
and inefficient and bureaucratic public serves are the greatest hindrances to investment.
Furthermore, according to Getachew (1997) in this thesis on determinants private investment
industrial investment in Ethiopia by using OLS technique in analysis of macro level
determinants and descriptive statistics for analysis of micro level determinants found out that

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sever constraining factors to private manufacturing investment are sets of markets, financial,
infrastructure, policy, technology and input related. He further noted that the root cause for these
problem are many and interdependent. Moreover, the degree of severity of these problems is
found to be independent of location of the enterprise.

Finally, the study recommends that to accelerate the private investment, the government should
open its door to private sector investment established. Development policy in collaboration with
private sectors, impartment the existing land policy, facilitate a mechanism to establish business
information and advisors center stabilize, financial sectors, create stable economic and political
conditions. Be transparent; minimize bureaucratic procedure and re-organizes current customer
service. Generally, the above summarized review of the empirical literature on micro level
factors affecting private investment revealed there are different factors that affect private
investment at operational levels. Thus, this study attempted to identify major factors affecting
private investment to the north part of Ethiopia, Oromia National Regional state at Mettu Town.

CHAPTER THREE:
METHODOLOGY OF THE STUDY
3.1 Description of the study Area

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This study will conduct in Mettu town of Oromia region of Ethiopia in Nouthern ilubabur zone.
The town far from 600 km to Addis Abeba.This town is bounded border of different
countryside.Thus,by east side Nekemit by weast side Gambela by north side welega by south
side Masha town.The town have two doors east door use to go estern part of Ethiopia and west
door is use to go western part to Gambela.
3.2 Population

The total population of Mettu town is 121052 according 2010 census of oromia region. From the
total population 60244 are males and 60808 are females (Mettu town growth and private
investment office, 2013).
3.3 Data type and sources
The study is based on both primary and secondary data that are both qualitative and quantitative
in nature. The survey is conducted at Mettu Town, in Oromia regional state and secondary data is
collected from different sources.
3.3.1 Primary data source collection
The primary data is collected based on survey by using through structured questionnaire and
some interview by preparing both open-ended and close-ended question for the respondents. The
questionnaire is designed in such way that enables to collect data on investor’s project of
different sector industry, agriculture, service, tourism and construction level characteristics and
investment climate indicator. Major variables expected to have relation with investment activities
including firm level characteristics, socio-economic, institution and household factors that
affecting the growth of private investment incorporated in the questionnaire.
3.3.2 Secondary data source
The other type of data source is secondary which are collected through different available books,
reports of Mettu Town investment office and city administration, and Secondary data also collect
from different little document, manual, and the annual report of the administration office of
Mettu town journals, magazine and other related to the research topic, internet is included as
secondary data, the year span covers from 2002-2013E.C.

3.4 Sampling Techniques

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In this study, the individual investors are actually responsible for making decision on investment
activities. Thus, an individual investor is the basic sample unit because of heterogeneity among
investors group, stratification is needed. To avoid the problem of bias and to represent each
stratum adequately and also non-proportionally sampling technique is used. In this study, the
individual investors are actually responsible for making decision on investment activities. Thus,
an individual investor is the basic sample unit because of heterogeneity among investors group,
stratification was needed. To avoid the problem of bias and to represent each stratum adequately
and also non-proportionally sampling technique is used.

The resaercher classified the projects in to five groups. Group 1rular road constraints investors
who invested in industry and the total number is 3. Group 2 investors who consists construction
of farmer training sector and total number 4. Group 3 investors who invest in health post
maintenance and the total number are 5.Group 4 investors who invest construction of veterinary
clint the total number are 2. Group 5 investors who invest in maintenance of publi drinking water
and the total number are 21.In the study area totally 20 projects.

3.5 Sampling size

Accordingly, the number of project licensed and fully started its operation or production in the
study area totally 20 projects is classified into five groups based on their project states. In the
study area investors or the target population are small. Thus, after taking this the researcher used
to collect the data for all projects which are fully started its operation or production because of
the total population is small .The researcher was analyze the data by using descriptive method of
data analysis through quantitative and qualitative expression and the method of data presentation
such as table, graph, chart, percentage etc. and following by both qualitative and quantitative
means of analysis.
3.6 Sampling Design

The study would be used sampling designs which are population proportion to decide the number
of total sample size (n) and stratified sample design to identify the sample size in each target
kebeles. The formula for sample size according to Israel in 1992 as follows;
n=z×z *p (1-p)÷e×e
Where = Standard normal distribution

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n= sample size
= Proportions of population
= Estimated error terms
Z=1.96
The total number of population 16900 from these populations 700 are engaged in private
investment . From the above formula the sample size (n):
n= (1.96)(1.96)*0.041 (1-0.041)/ (0 .05)(0.05)=60
3.7 Methods of Data Analysis
The study used descriptive method of data analysis. In this regard percentage, frequency
occurrence and table presentation with essay description are employed for the analysis of the
study.

The concerning method of data analysis has been descriptive method of data analysis for the
collected data from both primary and secondary data sources are frist edited, classified and
organized heterogeneous classes in to substrata based on their common characteristics.
After data pass through this processing mechanism, then it would be passed descriptive analysis
by using percentages, chart and graphs to attempt the role of growth of private investment in
Mettu town.

3.8 Budget Breakdown

Table 1 Budget breakdown

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No Item June June June June July July Ogest
13-15 16-22 22-26 27-30 6-12 16-30

1 Search problem for proposal xxx

title
2 Reading different materials
for develop the idea on the
title xxx

3 Preparing materials what

need for writing the
proposal Xxx

4 Writing the first draft on the

title as been selected xxx
5 Editing the first drafting
order xxx
6 Re-writing the last
Draft Xxx
7 Submitting final draft to the
instructor xxx

Cost Budge
To prepare the research in effective manner the researcher has to prepare the cost budget.
Table 2 Cost budgeting

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 No Materials/Activities Unit Quantity Unit cost Total cost

1 Working paper Rim 2 100.00 220.00

2 Pen Pecs 10 5.00 50.00
3 Flash Pecs 1 280.00 280.00
4 Down load Mint - 0.30 250.00
5 Photo copy Page 80 1.00 80.00
6 Transport - - - 150.00
7 Mobile card &Tel. Month 3 100 300.00
8 Total birr 1330Birr

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 Berhanu.N & Befekadu.D, (2003/2004). “Annual report on Ethiopian Economy”, Vol.3.
 Ethiopian Economic Association press, Addis Ababa, Ethiopia.

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