ARBA MINCH UNIVERSITY

COLLEGE OF COMMERCES AND BUSINESS ADMINISTRATION

CAUSES FOR THE LOW LEVEL OF INVESTMENT ACTIVITY (IN THE CASES OF ALETA
WONDO TOWN SOUTHERN ETHIOPIAN)

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF FINANCE AND

DEVELOPMENT ECONOMICS AS PARTIAL FULFILLMENT FOR THE
REQUIREMNET OF BACHELOR OF ARTS (BA) IN FINANCE AND DEVELOPMENT
ECONOMICS

BY: - ZELALEM BOGALE

ADVISOR: - MIHRETU T.(Msc)

DEC, 2020
SAWLA, ETHIOPA
ACKNOWLEDGEMENT
ACRONYM

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Contents
CHAPTER ONE..................................................................................................................1
1. INTRODUCTION.......................................................................................................1
1.1 BACKGROUND OF THE STUDY..............................................................................1
1.2. STATEMENT OF THE PROBLEM............................................................................2
1.3 RESEARCH QUESTIONS...........................................................................................3
1.4 OBJECTIVES OF THE STUDY...................................................................................3
1.6 SIGNIFICANCE OF THE STUDY..............................................................................4
1.7 ORGANIZATION OF THE STUDY............................................................................4
CHAPTER TWO.................................................................................................................5
2. LITRATURE REVIEW...................................................................................................5
2.1 THEORTICAL LITRATURE...................................................................................5
2.1.1 THEORIES OF INVESTMENT........................................................................6
2.1.2 CLASSICAL THEORIES OF INVESTMENT..................................................6
2.1.3 NEOCLASSICAL THEORY OF INVESTMENT............................................6
2.1.4 KEYNESIAN THEORY OF INVESTMENT....................................................7
2.1.5 ACCELERATE THEORY OF INVESTMENT................................................7
2.1.6 INVESTMENT AND ECONOMIC DEVELOPMENT....................................8
2.1.7 DETERMINAT OF INVESTMENT..................................................................8
3. METHODOLOGY........................................................................................................10
3.1 STUDY AREA........................................................................................................10
3.2 RESEARCH DESIGN.............................................................................................10
3.3 SOURCE OF DATA...............................................................................................10
3.4 TARGET POPULATION.......................................................................................10
3.5 DATA COLLECTION TECHNIQUES..................................................................11
3.6 METHOD OF DATA ANALYSIS AND INTERPRETATION.............................11
4. Time budget and cost budget.........................................................................................12
4.1 Time budget.............................................................................................................12
4.2 Cost budget..............................................................................................................12
Bibliography......................................................................................................................13

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 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Investment activity plays a crucial role in the economic growth of a country. Investment can
increase a country’s productive capacity, provided that investment expenditure regards
durable goods that have comparatively long useful lives and embody the latest technological
advances. In addition, changes in investment expenditure can potentially result in shifts in the
level of employment and personal income by affecting the demand for capital goods.
Although gross fixed capital formation usually represents a substantially smaller fraction of
an economy’s total expenditure compared to consumption expenditure, it is a highly volatile
component that causes strong fluctuations to a country’s economic activity. (Gofe, 2018).
The role of investment to the development of a nation is very large. Investment increases the
productive capacity of an economy. It is a very important to utilize untapped resource to
create job opportunity for citizen, to increase foreign currency through import substitution
and export promotion of a nation and facilitate the communication and cultural exchange of
society. Investing is putting money to work to start or expand a project or to purchase an
asset or interest where those funds are then put to work with the goal to income and increased
value over time (Cheni, 2019)
In our country there is huge amount of idle resource which is not mobilized to investment
activity due to inefficient and ineffective utilization of resource which results in low level of
income. Because of low level of income, it is difficult for the people to allocate their income
for investment activity out of their consumption. To develop the investment activities in
urban areas, facilitation of the infrastructure facilities, ownership right policy, identification
of potential investment opportunities, access of information about investment activity, given
incentives and promotion of investment opportunities for investment are very essential steps
to be undertaken. (Gofe, 2018)

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Investment is a sizable out lay of funds that commit a firm some course of action. The form
lies on specific procedures to analyze and select. Those investment sectors examine required
rate of return, rate of expected inflation and the risk involved which are basic to invest in any
kind of investment and investment area. The required rate of return is the minimum return an
investor expects to achieve by investing in a project. An investor typically sets the required
rate of return by adding a risk premium to the interest percentage that could be gained by
investing excess funds in a risk free investment (Tejvan Pettinger, 2019).
This research is conducted in one of the urban center, Aleta wondo town, which is located in
southern of Ethiopia. The town is established long years ago. But still the investment activity
is in its infancy stage.(Source)
Now a day the town has its own investment offices to encourage private inventors and
foreign investors through giving major incentives to potential investors and promotional
activities about investment opportunity in the town. The investment office is also responsible
to facilitate infrastructural facility for investment activities, about marketability of project,
technical and advisory service to investors. But due to problems both on private investors and
government side, the investment activity in the town is very limited.(source )

1.2. STATEMENT OF THE PROBLEM

Investment is very essential to mobilize human and natural resource to more productive,
efficient and effective utilization of available resource by allocating them in investment
activity. It is also important to produce goods and services and create employment
opportunities for the society.(Source)

As investment plays a great role in economic development, the government of Ethiopia

has given emphasis concerning this activity. Its purpose was to develop the investment
activity by giving major incentives for investors and promotion of investment opportunities
both for domestic and foreign investor so as to increase the number of participants in this
activity. But due to social, political and economic constraints, this activity has not shown a
remarkable development in Aleta wondo town.
Some research finding on promotion of private investment is concluded that, investment is
constrained that, investment is constrained by the macro and micro economic determination,
human capital base weaker and less diversified economies. But, his study cannot explain the

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inadequate and deteriorating infrastructure and poor institution. Additionally, there is another
problem come up and no solutions gain.
This study will analyze causes for the low level of investment in Aleta wondo town and
indicate what should be done to enhance this activity.

1.3 RESEARCH QUESTIONS

The study will address and has been try to answer the following research questions.
1. What are the factors that contribute for the low level of investment activities in the
study area?
2. What is a trend of investment in the town?
3. What is the possible solution to address investment problem in the town?
4. What are the share of government, people and investors in addressing investment
problem?

1.4 OBJECTIVES OF THE STUDY

The research paper has general and specific objectives.

The general objective of this study is to assess the causes for the low level of investment in
Aleta wondo town.
The specific objectives are:
To examine the share of government; people and investors in addressing investment
problem and their general attitude towards investment activities in the town.
To examine the trends of investment in Aleta wondo town.
At the end to forward some policy and recommendation.
To assess the factors that contributes for the low level of investment activities in the
study area?
1.5 SCOPE OF THE STUDY
In order to collect information by primary and secondary data, the study will cover different
populations. This population includes private owners in the town, public investment by the
society, governmental and non-governmental organization.
Aleta wondo town investment offices are including in the study and supplementary
information has been collect. It helps to know governmental supporting for investment

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activity in the town by giving major incentives and promotion of investment opportunities
through different promotional methods.

1.6 SIGNIFICANCE OF THE STUDY

To improve the living standards of the society, capital allocation on different sectors of
economic activity is important to mobilize the available resources to more productive. For
this purpose, Aleta wondo town has good investment opportunity due to favorable climatic
condition and its favorable strategic location, owning to proximity and as a junction. But due
to lack of significance study to identify this opportunity and to investigate its impact on
economic development, the investment activity in the town is very limited.
Due to absence of significance efforts to enhance the investment activity, there are many
developmental problems and promotional activities for investors, corruption and
administrative influence; infrastructures problems like social service, poor and deteriorated
roads and inadequate power supplies; and economic constraints like lack of loan service and
high taxation. Identification of these causes for low level of investment is very important to
develop this activity in the future.

1.7 ORGANIZATION OF THE STUDY

The study has been consisting four chapters. The first chapter constitutes back ground,
statement of the problem, research question, and objective of the study, scope of the study,
significance of the study, limitation of the study and organization of the study. The second
chapter has been deals with both having two sub components; the theoretical review and the
empirical review. The third chapter consist the source of data, method of data gathering and
sampling techniques. The fourth chapter deals with the time and budget schedule budget
estimated cost break down.

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CHAPTER TWO

2. LITRATURE REVIEW

2.1 THEORTICAL LITRATURE

According to (Shafi, 2016), investment is the flow of capital which is used for productive
purposes. There is a great emphasis on investment for being the primary instrument of
economic growth and development for a country. Investment means an increase in capital
spending and it helps in creating a robust economy. (Shafi, 2016) In economics,
investment can be defined as the purchase of plant, equipment or inventory. In lay terms
investment is the acquisition of an asset such as a stock or a bond. Once an individual
receives income, there are two alternatives to spend or to save it. Regardless of how you
use your income, investment can be defined as postponed consumption. Individuals may
postpone their current consumption to accumulate for the sake of accumulating. For any
or all of these reasons individuals save part of their income rather than spend all of their
income.
The term investment refers to a sum of funds committed on the physical and human
cavity by both profit and no profit oriented individuals and institutions. It is applied to
production of goods not meant for immediate consumption but further production of
goods such goods are called, investment goods. The investment of business firms usually
comprises of capital goods and inventories. Investment influences the rate of economic
growth because it is a component of aggregate demand and more importantly influences
the productive capacity of the economy. (Tejvan Pettinger, 2019)
The above analysis shows that investment has a strong relationship with saves in come.
But the extent of investment also depends on the level of consumption. In an economy
where living standard of the masses is too low, to curb consumption, it is difficult to
mobilize and allocates resource in to investment activity.
Harrod-Domar growth model can be used to predict the role of foreign capital inflows on
growth. The model assumed that saving depends on income via the marginal propensity
to save and that investment is a constant ration of capital. The positive difference
between investment and saving equals current account deficit. It implies that a higher
savings rate allows for more investment in physical capital. This investment can increase
the production of goods and services in a country therefore increasing growth. The capital

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output ratio shows how much capital is needed to produce a dollars’ worth of output.
(Agarwal, 2019)
As investment activity is affected by social, political and economic condition, there are
some criteria have to be considered before starting investment activity. That before
starting investment activity, one investor must know and analyze in what area he is going
to invest, the available funds he/she has for investment, the economic and political
situations and profitability. In addition, an investor should know the advantage for the
society. That is the quality and quantity of goods and service to be produced,
employment, export and utilization of natural resources. ( Tejvan pettinger, 2019)

2.1.1 THEORIES OF INVESTMENT

There are many theories of investment that discussed such as classical, Keynesian,
neoclassical, Accelerate and other theories of investment.

2.1.2 CLASSICAL THEORIES OF INVESTMENT

The classical school argued that capitalist make investment because capitalist make profit
in the future depends on what profit are now. For example, Adam smith in his book “the
wealth of nation “elaborated this fact by arguing that, investment was made because he
capital expected to earn profit on invested capital depending up on the present climate of
investment as well as actual profit. However, the rate of profit tends to full with
economic progress, when the rate of which capital accumulated increase completion
among capitalist, raise wages and tends to lower profit and hence investment. The interest
rate will fall causing investors to demand more of the available savings hence an increase
in saving will lead to an increase in investment. (Harcourt, 2016)
2.1.3 NEOCLASSICAL THEORY OF INVESTMENT
For the neoclassical theories, the marginal benefit of investment can be represented as
addition to future expected output that will be accrued, with investment capital stock; the
marginal cost can be represented by the cost associated with buying and renting an
additional unit of capital. The desired level of capital is positively related to the rented
cost of capital which is in turn depending on real interest rate. The neoclassical theory
explains that at a particular time how much capital stock a firm desire to achieve. Further

6
according to this theory rate of investment is determined by the speed with firms adjust
their capital stocks towards the desired level. (W.Jorgenson, 2017)

2.1.4 KEYNESIAN THEORY OF INVESTMENT

The theory of investment behavior goes back to Keynesian (1936) General theory who
first called attention to existence of an independent investment decision function in the
economy. He observed that investment depends on the prospective marginal efficiency of
capital relative to some interest rate that is reflective of the opportunity cost of investment
fund. He further there pointed out that because the rational assessment is volatile. He
described this volatility of expectation by saying that investment decision depends on the
private investors or entrepreneur’s optimism or pressurizing about the future. In a context
of economic instability and crises, economic policy is the main source to support
entrepreneurs’ expectations and investment. In this sense, macroeconomic policies are
capable of affecting effective demand and building a good institutional environment. The
first is to develop a Keynesian type of macroeconomic policy able to stimulate
investment and effective demand, and, as a result, mitigate Unemployment. (Arestis,
2018)

2.1.5 ACCELERATE THEORY OF INVESTMENT

The accelerator theory postulated linear relationship between investment and output.
According to this theory, given an investment requirement associated with a given target
for output growth. That means a change in the rate of growth of income produced a
magnified change in investment. As income falls, investment falls quite significantly and
arise in income result in arise an absolute level of investment. The accelerator theory is
an economic postulation whereby investment expenditure increases when either demand
or income increases. The accelerator theory posits that companies typically choose to
increase production, thereby increasing profit, to meet their fixed capital to output ratio.
(GANTI, 2019)

2.1.6 INVESTMENT AND ECONOMIC DEVELOPMENT

Investment activity is central to promotion of economic well-being because it is one of
the most important economic activities that consumers, producers and business can

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 undertake. Investment also has an important influence an employment and today
determines economic activates of tomorrow by building up resource of capital that will
be used to produce goods and services. Capital investment results when businesses
purchase capital goods. Investment is long term in natures that allow companies to
generate revenue for years by adding or improving production facilities and boosting
operational efficiency. (ROSSI, 2019)

2.1.7 DETERMINAT OF INVESTMENT

What determine the level of investment are highly continuous and emphasized topics in
economics. Investment spending depends on the economic, social and political situation of a
country that affect the return, but such a favorable condition is often lost for most developing
countries in realizing this, there is growing interest in the countries on the factors that
influence the pattern and level of the private investment activities and the same factors is
identified. (Batu, 2016)

2.2 EMPLRICAL LITERATURE

The empirical research on investment has invariably been limited in the developed country.
However, many studies have been made in developing country recently and have been
conducted about the low level of investment activity in different countries. Corruption can
also deter investment and there by lower the economic development Corruption is a specific
measure of illegal activities within the political system. The opportunity for corruption
occurs when public officials are the gatekeeper of public goods and services (Gofe, 2018)
(Gofe, 2018) Has tried to model the determinant of investment in Ethiopia following the
argument that investment is externally constrained in developing countries and it is affected
by risk and unattained variables. The model tries to capture the effects of external financial
constraints domestic and international risk variables, public investment of infrastructure and
out on the private investment. In his thesis he concluded that private investment is
determined by availability of finance, the real exchange rate, investment policy, debt service
payment and the debt over hanging.
2.3. Conceptual framework of the study

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 CHAPTER THREE

3. METHODOLOGY

3.1 Description of the Study Area

The study will be conducted in Aleta wondo town and Aleta wondo is located in southern
nation nationalities and people’s region of Ethiopia at distance of 336km from Addis
Ababa. Aleta Wondo is bordered on the south by Dara, on the west by Chuko, on the
north by Dale and Wensho, on the east by Bursa and on the southeast by Hula. The
administrative center is Aleta Wondo. A survey of land in this woreda shows that 72% is
arable or cultivated, 12.9% pasture, 7% forest and the reaming 8% is considered swampy.
Aleta Wondo is also located in a fertile and forested area near Lake Abaya in upper
Gidabo River basin, not far from the source of the Genale Doroya and Dawa river in
sidama zone of southern nations nationalities and people’s regions. This town has a
longitude and latitude of 6036’N 38025’/ 6.6000N38.4170E with an elevation of 2037
meters above sea level. (Source)

3.2 RESEARCH DESIGN

The study will be focused on the causes of low level of investment activities in aleta wondo
town which found in southern nation nationalities and peoples region of Ethiopia. The study
used descriptive analysis, it used present situation of investment activities in the area and
identifying the major cause that affect investment activities in the town.

3.2 SOURCE OF DATA Types of data and methods of data collection techniques
To achieve the general and specific objectives of the study, both primary and secondary data
will be collected. Primary data will be collected through structured questionnaire distributed
to individuals engaged in investment activity in the town and oral questions for the manager
of investment office. The secondary data will be obtained from written materials available in
the investment office of the town.
3.4 TARGET POPULATION
The target population for this study is investors who engage in different investment activities
and concerned government officials who give important information about investment
activities in the town.

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3.3 DATA COLLECTION TECHNIQUES Sampling Technique and Sample Size
Determination
To answer the questions 30 investors will be selected by random sampling. That is all
random samples are based on randomly procedure (methods).
3.6 METHOD OF DATA ANALYSIS AND INTERPRETATION
The study variables about investment activity that are collected through the above methods of
data collection are important to investigate their impact on investment level of the town.
These include information about opportunities and types of investment, economic incentives
given for investors (access of land to invest, exemption from taxes, advisory service etc) and
promotion of investment opportunities in the town for local and forging investors through
advertising, mass media, newspaper, magazine by governmental bodies to promote the
investment activity in the town.

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 CHAPTER FOUR

4. Time budget and cost Budget Plan and Time Schedule

4.1 Time budget
Dec Jan Feb Mar Apr May Jun
1 Literature survey 
X

2 Problem 
formulation and
report preparation
3 Research design 
4 Data collection 
5 Data analysis 
6 Report writing 
7 Presentation and 
submission

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 4.2 Cost budget
No. Items Quantity Pric P
e
1 Internet fee 40hrs 10 400
2 Paper 53 0.5 26.5
3 Pen 2 10 20
4 Binder 1 35 35
5 Typing cost 53 5 265
6 Printing cost 53 1 53
7 Miscellaneous 1 100 100
expenses
8 Note book 1 30 30
9 Total 929.5

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 Bibliography

Agarwal, P. (2019, April 12). Retrieved from http//www.intelligenteconomicst.com

Batu, M. m. (2016). Determinats of private investement. A systematic review international

journal of economic,finance,and management science , 04 (2), 23-25.

Cheni, J. (2019, Jun 30). Retrieved from https://www.invetopedia.com

GANTI, A. (2019, september 9). Retrieved from http//www.investopida.com

Gofe, T. E. (2018). Assessment of the determinants of investment activity. In T. E. Gofe,

Assessment of the determinants of investment activity (Vol. 06). Wollega: College of

business and economics Wollega university.

Harcourt, H. M. (2016). Retrieved from http//www.cliffsnotes.com.economics

ROSSI, S. (2019, July 8). Retrieved from http//www.investopedia.com

Shafi, D. m. (2016). Determinates infulancing individual investor behavior in stock market.

Accross country research survey arabian journal of business and management review ,

14-17.

Tejvan Pettinger. (2019, May 06). Retrieved from https://www.economicshelp.org

W.Jorgenson, D. (2017, december). Economietric studies of investment behavior. A survey

journal of economic literature .

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