LITERATURE REVIEW

2.1 Definition of Investment

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

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

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

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

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

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

Doctor Mankew define investment is spending today for future benefit and it is the components
of national income that link present with future. The definition of Kupper (1996) which define
investment as the change in capital stock over period of time normally a year for accounting
purpose.

Private investment means any type of investment activity operated in expectation of public
ownership. That is individual citizens, foreign investors and companies involved in the sector,
which are reserved for private sector. The term investment connected different concepts and
meanings according to the scholars (Babul, 2003).

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

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

2.1.2. Theories and Models of Investment

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

2.1.2. Classical Model of Investment

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

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

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2.1.3. Keynesian Model of investment
The Keynesian theory of investment was propounded in the 1930s by one of the most
collaborated British Economist, John Maynard Keynes. He was the first to draw attention to the
concept of an independent investment decision function in the economy. According to him,
investment is considered as a function of marginal efficiency of capital in relation to a given level
of interest rate that reflects the opportunity cost of the invested capital. Investment , he said, can
be worth under taken if the present value of the future income stream form a given level of
capital investment is equal to or greater than the initial cost of capital. He further argued that
investment spending could be highly volatile partly due to the underlying uncertainty associated
with the expected return of an investment. This argument presented a strong cost in explaining
the concept of business cycle. Keynes further postulated that the decision to undertake capital
investment are based on what he referred to as ‘animal spirit’, he considered investment decisions
as being very much affected by the levels of optimism or pessimism that the investors
constructed about the general atmosphere with in which the investment project will be
undertaken. This implies that the decision to invest or dis invest largely depends on the individual
investors’ expectations about the possible outcome of the investment venture. He therefore,
considered the volume of investment at any point in time of being largely determined by the
investor rational expectations formation about the economic investment with in which they
operate.

2.1.4. Accelerator Model of Investment

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

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

Within a frame work of the flexible accelerator model, output, internal funds, cost of external
financing and other variables may be included determinants of K*. The flexible accelerator

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mechanism may be transformed in to a theory of investment behavior by adding a specification
of K * and a theory of replacement investment (Asante, 2000).

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

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

2.1.5. The Multiplier Model of Investment

The multiplier is the marginal effects of a change of one economic variable up on other economic
variable, of which the first is a component (Lange, 1943). The investment multiplier, introduced
by Keynes an integral parts of his general theory, established a precise relationship between
aggregate income and the rate of investment, given the marginal propensity to consume (Hassan,
1968). In economics, a multiplier is affecter of proportionality that measured how much an
endogenous variable changes in response to a change in some exogenous variables (Hegel and,
1954).

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

 The absence of time logs

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

Multiplayer effect can be seen when new investment and jobs are created into a particular town,
city or region. The final increase in output and employment can be far greater than the initial
injection of demand because of the inter relationship between the secular flow. The multiplayer
model of investment is therefore, based on the feedback effect that output or production has on

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investment. The basic notion is aggregate income increase as, the producer of the new investment
good enjoy higher sales incomes. Thus an increase in investment set off a never ending sequence
of every smaller increase in consumption demand that augment or “multiply” the effect of
investment on income.

2.1.6. Tobin’s Q Model of Investment

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

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

2.2. Types and elements of investment

2.2.1. Types of Investment

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

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A. Business fixed investment

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

B. Residential investment

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

C. Inventory investment

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

2.2.2. Elements of investment

Elements of investments are those which are common in investment activity. These are return,
risk and time. 1 Return: refers to reward from investment, which includes current income, capital
gains or losses and profits. 2 Risk: is the change when the expected or prospective gain profit is
less than expected outcome, or the degree of happening of losses. 3 Time: the important factors in
which investment is the time which offers several different courses of action (Birehanu, 1999).

2.2.3. Methods of evaluating investment

There are five methods for evaluating investment project is set by (shaum’s 1998). The payback
period (PBP): these measures the length of time required to recover the amount of initial
investment. The investors should consider/choose / the project which shorter payback period. 1
the net present value (NPV): in this the excess of present value in cash inflows generated from
investment over the amount of initial investment. The project with positive net present value
would be accepted.
Accounting rate of return (ARR) , this measures the profitability from the conventional stand
point by relating this required investment ( care, rage) investment )to the future annul net
income. Under this method the project with highest rate of return should chose. Internal rate of
return (IRR); is define the rate that equals interest with the present value of future cause allows.
Investment diction is accepted if internal rate of return exceeds the cost of total investment.
Profitability index (PI): is ratio of the total present value of future cashing lows to the initial
investment. The project is accepted if profitability index is greater than one. Shaum (1998) has
also set the process for evaluating and selecting long term investment and classify investment
decisions as follow.
Selection decisions concerning proposed projects that involve investment in long term assets such
as property, plant and equipment or resources. Commitment in sours of a new product

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development, market research, refund (long term debt) and the like. Misrepresent decision such
as replacement of existing facilities with new facilities.

2.2.4. Determinants of investment

What determine the level of investment are highly continuous and emphasized topics in
economics. Because of this, various approach have been adapted the theory of investment
behaviors goes back to Keynes (1936)
General theory states that, first called attention to the existence of an independent investment
decision function in the economy. He observed that, investment defends in margin efficiency of
capital relative to some interest rate is reflective of the opportunity, cost of invested funds.
According to Somues Son (1989), investor invests more. That will enable them to earn profit.
According to him, there are three determinants of investment.
1. Revenue: an investment will bring more product which leads to encourage investors less
and otherwise it dis courage.
2. Costs: determinant is cost of investment, which is interest rate.
3. Expectations: it is the investors predict about the future return of investment and if its
prediction is positive, there will encourage him or its production are negative, on its return
this leads to discourage him.

2.2.5. The relationship between public and private investment

Empirical studies on the relationship between private and public investment in developing
countries other than Pakistan shows that while public investment in non –infrastructure dis
courage’s private investments the latter is strongly induced by investment in infrastructure.
Moreover, private investment in productive sector is more efficient than public investment in the
some (Blejer and Khan, 1987).
Recent studies have shown that private investment is more closely associated with growth and
tends embody newer technologies and capital than public investment. This argument is also
supported analysis versus private sector investment in developing countries. Between
investment in the public and private sectors from 1970 -1998 in both high and low growth
developing countries show that high growth countries invested 15% of GDP in private sector
compared to 10% for low growth country. Over all, high growth counters invested 60% more in
private sector than in the public. That is the conclusion of recent study of 50 developing countries
from 1970-1998 examining the relationship between private and public investment, growth rate

8
and income level. The study found that the association between private investment growths was
even more pronounced during 1990s a period when private investment was accelerated in many
countries because of liberalization and market reforms, while public investment was the declining
as the result of privatization and tighter budget constraint.

2.2.6. Contribution of investment to economic growth

There are different theories regarding the contribution of investment to economic growth this
disaggregate investment in to its structure (construction) and equipment components using a
sample of both developing and industrial economics, they find that equipment investment
contributes much more to per capital GDP growth than structure investment(long and
summer,1991). In short term, investment has been shown to depend on the rate of output growth,
the rate of capacity utilization, or both as indicators of future demand and the severity of liquidity
constraints faced by firms-to variables critical to decision to expand productive capacity. Thus
during the course of the business cycle output may lead investment in accelerator fashion (server
and Selman 1993). Development economics has traditionally maintained that capital
accumulation is fundamental cause of growth over the long term. Recently, however this view
has been challenged by the argument that the movement of investment ratios and growth rates
may be largely caused by the action of the third factor technological innovation. That is driving
both capital accumulation and output expansion (levies, 1994). UN extreme interpretation of this
view would hold that a capital accumulation is consequents which other than cause of the growth
process, is caused by technological factors. Investment plays a dual role in the economy in the
first place, it affects short run output through its impact that means, when there is investment, and
expenditure on factors of production will increase. This leads to an increase in income of factors
of production which inurn result in increase in aggregate demand. Secondary, in influence long
run output growth through the impact capital formation on potential output.

2.3 Empirical literature review

2.3.1 Ethiopia investment opportunities

Ethiopia is predominantly agriculture country which account for 80% of its export and 85% of
total, manufacturing and service industries also gaining.

2.3.2 Agriculture
Because it’s diverse agro ecological zones each with its own physical and biological potential
crops of various denominations could extensively grow.
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2.3.3 Minerals
Geological study conducted up to now certain that Ethiopia is endowed with vast mineral
resources such as gold, platinum, tantalite, god ash, cobalt, lead, copper chromium, uranium and
petroleum.

2.3.4 Tourism
Ethiopia is characterized by unique man made culture heritage and scenic beauties which give the
country much stronger competitive edge as the most prepared tourist destination in Africa hence
investing in resort facilities and service development would be rewarding business under taking
in Ethiopia.
The investment office of Bulki town will be established in 2000 G.C to for the promotion and
extension of private investment activity as well as to play a great role in socio economic
development of the country in general and that of Bulki in particular through investing vast
investment opportunity available on lapped natural resource of the area and that socio economic
gaps by building hospitals, schools, higher education institutions and so on…

2.3.5 Opportunity of private investment in Bulki

A. Economy
The population of Bulki town is predominantly merchants which accounts a higher share of the
town population. The rest populations engaged in other activities like agriculture and service like
hotel, garage crop production is practiced in limited area of the town.
B. Natural resource
The town will be natural resource which is properly exploited will improve the using condition of
the city. The geographical location of bulki helps it to become the center of trade for different
people who come from different area so; this location endowment helps to us to become trade
Centre and to expand its size. The area also endowed with suitable whether condition for
agricultural development.
C. tourism attraction
In general the city land escape can be most important potential for tourism, the culture of a shed,
people is shore to motivate the culture interested tourist area, and wildlife potential though not
yet conserved is suitable tourist resource of the area. Moreover, churches and mosques are
important tourism center of the city.
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3. METHODOLOGY

3.1. Description of the study area

The study area (Geze GofaWoreda) is located in Gofa zone, Southern Nations, Nationalities and
Peoples` Regional (SNNPR) State at the geographical location of roughly between 6° 18'N 36º 56′E
with altitudes ranging from 1760 to 2,950 meters above sea level. The Woreda has area of 1,913
km2and is divided into 26 rural and one urban Kebeles. Buliki town is the administrative center of
the Woreda and is located 531 km from Addis Ababa (Socio-Economic Data of GezeGofaworeda,
2011). The Woreda also has three major agro-ecological zones: Dega, Woina-Dega and Kolla.
GezeGofaWoreda lays within the boundaries of Demba Gofa Woreda in the West, OydaWoreda in
the South, MeloKozaWoreda in the North, Ari Woreda in the South East and Basiketoworedain the
East. The Woreda contains 27 Kebeles.

3.1.1 Population
Local communities around the study area are belongs to the Omotic family. The major Nationality
groups that live close to the study area are Gofa. According to Central Statistical Agency’s census
(2007), the population size of Geze Gofa woreda is 95,332 persons. Crop-livestock mixed highland
farming is the major form of farming in the area. Land and livestock are the most important
livelihood assets for the population. Cattle and goat is the most important herd reared in the warm
and hot lowlands while equines (horses, donkeys) and sheep are important stocks in the moderate
and cool mid highlands. Oxen are used for plowing while donkey, horse and mule are used for
transport agricultural products and human transportation. Also sheep and goats are used for meat,
skin and generating income. The main food crops grown in the area are cereals including maize
(Zeamais), teff (Eragrostisteff), barley (Hordeumvulgare), wheat (Triticumaestivum), and sorghum
(Sorghum bicolor). Subsistence root crops of food security importance are enset
(Ensetventricosumor Musa ensete), sweet potato (Ipomoea batatas), cassava (Manihotesculenta) and
yam (Dioscoreaspp). Among the perennial crops Enset plays an important role in the life of the
people by its multi-uses as a source of food, fiber and animal fodder and also used as constructional
material. Some legumes and pulses grown are haricot bean (Phaseolus vulgaris), faba bean
(Viciafaba) and field pea (Pisumsativum). The land use system follows the homestead gardening and
outer field crop cultivation. Whereas the cereals, pulses, sweet potato and cassava are planted in the
distant outfields, enset and coffee are planted in the home gardens. Intercropping cereals with pulses
is common while tef and maize are rotated with cassava and sweet potato.
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3.1.2. Topography and climate
Geze Gofa Woreda is in mountainous region with altitudes ranging from 1760 to 2,950 meters
above sea level and which surrounded by Bako Mountain rings. The landforms are also
characterized by highly undulating and steep comprising 75% moderate relief mountains and
plateaus, 20% vallies and dissected side slopes, and 5% plains and foot hills. Agro-ecologically, the
woreda is classified as cool sub-humid highlands (50%); moderate moist mid highland (40%); and
warm moist lowlands (10%) (Eyasu Elias, 2016). Farmers traditionally identify three agro-
ecological zones the dega, woinadega and kola. Based on metrological data for the Sawla station (17
km from the site), the climatic can be characterized as follows: maximum annual temperatures occur
in either June to February and ranges from 20 to 25ºC whereas; minimum annual temperature with a
range of 16 to 18 ºC. The average annual rainfall is 68 mm, the maximum rainfall 97 mm is
recorded in April. The short season rain is observed in December and it is erratic and unreliable in
most cases. The monsoon rainy season is between June and October (locally called balgo) that falls
under the influence of inter tropical convergence zone circulation system. In this season the major
agricultural activities such as, plowing, sowing and weeding are carrying out. The dry months are
between November and March (locally called bone) when less than 6% of the total annual rainfall
occurs. The balgoseason (June – October) is more reliable for farming activities.

1.1.1 Data types and sources

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

1.1.2 Target population

The target population of the private investment is 448.

1.1.3 Sampling technique

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

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

1.1.5 Method of data analysis

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

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 4. Time Schedule
Table 1: Time schedule of research works
Activities Apri May Jun July Augus Septe Octob Novembe Decem January
l e t mber er r ber

Proposal  
preparation

Proposal 
submission

Proposal 
presentation

Data   
collection

Data analysis  

Submitting 
the first thesis
draft to the
advisor

Submission of 
the thesis to
the
department

Defense or 
presentation
of the thesis

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5. BUDGET BREAKDOWN

Table 2. Per-diem and transport cost

S/N Items Person/day Total days Rate Total

1 Per-diem for data 3 10 171 5,130

collectors

2 Per-diem for researcher 1 20 300 6,000

3 Per-diem for supervisor 3 10 300 6,000

4 Transport cost 3000

Total 20,130

Table 3. Stationary
S/N Items Unit Quantity Unit price Total price

1 Field bag No 1 600 600

2 Printig paper Pac 1 150 150

3 Flash 16 gb Piece 1 400 400

4 Printing Page 300 2 600

5 Photocopying Page 300 1 300

Total 2,050

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Table 4. Budget summary
S/N Items Sub-total

1 Per-diem and transport 20,130

2 Stationary 2,050

3 Contingency (10%) 4,567

Grand total 26747

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