LEAD STAR UNIVERSITY COLLEGE

FACULTY OF BUSINESS AND LEADERSHIP

AN ASSESSMENT OF THE CHALLENGES AND PROSPECTS OF DOMESTIC

MANUFACTURING INVESTMENT: THE CASE OF ADDIS ABABA CITY
ADMINISTRATION

BY

ABRAHAM LEMMA (LMBA 1725/15)

A thesis submitted to: Graduate Department of Business Leadership

Presented in Partial fulfillment of the requirements for the degree of Master of Business
Administration
Advisor
Fuad Mustafa (Mr.)

December, 2017
Addis Ababa Ethiopia

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Statement of Declaration
I Abraham Lemma, have carried out independently a research work entitled " An Assessment
of the Challenges and Prospects of Domestic Manufacturing Investment: The Case of Addis
Ababa City Administration." in partial fulfillment of the requirement of the Master of
Business Administration with the guidance and support of the research advisor. I do hereby
declare that this thesis is my original work and that it has not been submitted by any other
person for an award of degree in this or any other university/institution.

Submitted by:

Full Name , Signature Date

Approved by:

This Thesis has been submitted for examination with my approval as advisor.

Name of Advisor Signature

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Approval
The undersigned certify that they have read and hereby recommend to Lead Star University
College to accept the Thesis submitted by Abraham Lemma entitled “An Assessment of the
Challenges and Prospects of Domestic Manufacturing Investment: The Case of Addis Ababa
City Administration”, in partial fulfilment of the requirements for the award of a Master’s
Degree in Business Administration.

Submitted by: Full Name , Signature Date

Approved by: Name of Advisor , Signature Date

Name of Internal Examiner , Signature Date

Name of External Examiner , Signature Date

Name of Head of Department , Signature Date

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 Acknowledgement
First and for most I thank Almighty Jesus Christie and his mother Virgin Merry for all the
strength they gave me to make it this far.

Second, I am very grateful to Ato Mekonnen who facilitated the opportunity to me to study in
Lead Star University College.
I would like also to thank my advisor Ato Fuad Mustafa for his unlimited support, suggestion
and advice. His comments guided me to improve the quality of my work. I would like to
extend my gratitude to the institutions: AEA and EIC for providing me with the relevant data
for my study. In addition, I am really grateful to extend my deepest gratitude to my wife W/R
Aynalem Mekonnen and my daughter Soliyana Abraham and the rest of the family members
who have been giving me all round support throughout my study.

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 ABSTRACT

Economic and political reforms have been introduced in Ethiopia and these have boosted
private investment over the last two decades. Reforms have brought about measurable
improvements, but the progress of the status of private investment has remained slow. This
study was conducted with the objective of to assess the Challenges and Prospects of
Domestic Manufacturing Investment in Addis Ababa City Administration, Ethiopia.

This study employed mixed research method where both qualitative and quantitative data
were used in the assessment. Questionnaires and interview were the main instruments used to
gather firsthand information from experts and owners/managers of investments. The
sampling methods used were both probability and non-probability sampling. Purposive
sampling was used to select experts with better knowledge and information. Investment
owners/managers were selected randomly from 720 operating in different subsectors. The
study sample includes 3 experts from Addis Ababa Investment Agency. Totally 220
respondents were involved in this study.

The result of this study indicated that the domestic manufacturing investment faces various
challenges of lack of finance, lack of infrastructure, institutional bureaucracy, and corruption
and other organizational and human elements. Therefore it requires an effective mitigation of
those challenges and impediments enhancing finance and basic infrastructure provision,
institutional reforms, enforcement of technology transfer and timely implementation of
projects.

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List of Tables
Table 1:- Top five constraints perceived by Sub-Saharan Africa and South Asia firms

Table 2: Total and sample operational DPMI Projects in Addis Ababa City by subsectors

Table 3: Trend of private domestic manufacturing investment in Addis Ababa (1985- 2009
E.C.)

Table 4: Socio-Demographic Characteristics of the Respondents

Table 5:- Time taken to complete investment process and difficulty level of the areas.

Table 6: Source of finance and difficulty level to access.

Table 7: Constraints of private investors due to bank loan access

Table 8: Ranking of problems experienced when trying to secure a bank loan

Table 6: the view of investors towards Bank interest rate

Table7: Quality of Infrastructure facilities

Table 8: Land Access

Table 9: Judicial system and the investment

Table 10: Bureaucratic red tape and investment

Table 11: Investment incentives and its promotion value

Table 12:- Political instability risk and investment.

Table 13: Raw materials product market availability

List of Figures

Graph 1: Investment Trends (19985E.Cto 2009E.C)

List of Appendices
Appendix A: Survey Questionnaire

Appendix B: Interview Questions

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List of Acronyms and Abbreviations
ACP African, Caribbean and Pacific Group
AGOA African Growth and Opportunities Act
COMESA Common Market for Southern and East Africa
CSA Central Statistical Agency
DBE Development Bank of Ethiopia
DPMI Domestic Private Manufacturing Investment
EBA Everything but Arms
ECA Economic Commission for Africa
EEPCO Ethiopia Electric Power Corporation
EIA Ethiopia Investment Agency
EIC Ethiopia Investment Commission
EPRDF Ethiopian People’s Revolutionary Democratic Front
ETC Ethiopian Telecom Company
EU European Union
FDI Foreign Direct Investment
FDRE Federal Democratic Republic of Ethiopia
GDP Gross Domestic Product
GSP Generalized system of Preference.
GTP Gross and Transformation Plan
NBE National Bank of Ethiopia
OAU Organization for African Union
OLS Ordinary Lease Square
PSD Private Sector Development
SMEs Small and Medium Enterprises
SPSS Statistical Package for the Social Science
SSA Sub Sahara Africa
UNCTAD United Nations Conference on Trade and Development
USA United States of America
USD United States Dollar
WTO World Trade Organization

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 Table of Content
Content Page No

Statement of Declaration.............................................................................................................i
APPROVAL...............................................................................................................................ii
Acknowledgements...................................................................................................................iii
ABSTRACT..............................................................................................................................iv
List of Tables..............................................................................................................................v
List of Figures............................................................................................................................v
List of Appendices.....................................................................................................................v
List of Acronyms and Abbreviations........................................................................................vi
Table of Content.........................................................................................................................1
CHAPTER ONE........................................................................................................................2
Introduction................................................................................................................................2
1.1. Background of the Study...............................................................................................................................2
1.2 statement of the problem..............................................................................................................................3
1.3. Research Questions.......................................................................................................................................4
1.4. Objectives of the study..................................................................................................................................4
1.4.1. General objective of the study...........................................................................................................4
1.4.2. Specific objective of the study...............................................................................................................4
1.5. Significance of the study...............................................................................................................................4
1.6. Scope of the study.........................................................................................................................................5
1.7 Description of the study Area........................................................................................................................5
1.8. Limitation of the study..................................................................................................................................6
1.9. Organization of The study.............................................................................................................................7
CHAPTER TWO.......................................................................................................................8
Literature Review.......................................................................................................................8
The Theory of Investment....................................................................................................................................8
Constraints to private investment in the poorest developing countries.............................................................9
2.2.1 Macro environment constraint.............................................................................................................10
2.2.2. Institutional constraints.......................................................................................................................11
2.2.3 Financial constraints..............................................................................................................................14
Determinants of private investment in Ethiopia-Empirical Framework............................................................18
Challenges of the Ethiopian manufacturing sector............................................................................................19
Manufacturing Investment opportunity in Ethiopia..........................................................................................23
Trends of private investment in Ethiopia...........................................................................................................26
CHAPTER THREE..................................................................................................................32
Methodology............................................................................................................................32
3.1. Operational Definition of variables.............................................................................................................32
3.2. Research design and methodology of data analysis...................................................................................34
3.3 Population....................................................................................................................................................34
3.4 Sample Size and Sampling Techniques.........................................................................................................35
3.5 Sample Size Determination..........................................................................................................................35
3.6 Data type, source and collection method....................................................................................................36
3.7 Research Hypothesis....................................................................................................................................36
3.8 Analysis of the data......................................................................................................................................36
CHAPTER FOUR....................................................................................................................38
Data Presentation, Analysis and Interpretation........................................................................38
4.1 Response Rate..............................................................................................................................................38
4.2 Demographic Characteristics of the Respondents.......................................................................................38

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 4.3 Investment process rate and Status of operational Domestic Private Manufacturing Investment (DPMI)
Projects in Addis Ababa City by Sectors.............................................................................................................39
4.4 Source of and access to Finance of private Investors..................................................................................40
4.5 Cost of Finance.............................................................................................................................................42
4.6. Infrastructure facilities................................................................................................................................43
4.7. Access to land..............................................................................................................................................45
4.8. Judicial system.............................................................................................................................................46
4.9. Bureaucratic Red Tape and corruption........................................................................................................47
4.10. Investment incentives...............................................................................................................................49
4.11. Political instability, Erratic Policy and Investment.....................................................................................50
4.12. Raw material supply and product market.................................................................................................51
4.13. Feed Back..................................................................................................................................................52
4.14 Summary of the chapter............................................................................................................................52
CHAPTER FIVE......................................................................................................................56
Conclusion and Recommendations..........................................................................................56
5.1 Conclusion....................................................................................................................................................56
5.2. Recommendations......................................................................................................................................57
6. REFERENCES.....................................................................................................................58
APPENDICES.........................................................................................................................66
Appendix A: Survey Questionnaire...................................................................................................................66
Appendix B: Interview Questions.......................................................................................................................74

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 CHAPTER ONE

1.1. Background of the Study

Investment is one of the main determinants of an economy’s long-run growth rate and productivity
and so is crucial for achieving sustained growth and development. In the growth and development
literature, capital accumulation is regarded as a key determinant of an economy’s long-run growth
(Turnovsky, 2011). This strategic role of investment in the development process has been
confirmed by recent empirical studies based on data for African countries. For example, using cross
country data, Mijiyawa (2013) finds that investment, credit to the private sector, government
effectiveness, exports and the share of agricultural value added in GDP are significant growth
determinants in Africa. Ghazanchyan and Stotsky (2013) also find some evidence that investment
boosts growth in Africa.
Investment expands the productive capacity of a nation and plays a crucial role in the economic
growth and development process. Investment has been regarded as one of the primary engines of
growth (UNCTAD, 2001) proposed solutions to SSA economic and geographic disadvantages
(Sachs, 2005, P. 273). It seems why almost all nations try to motivate the internal investment and
attract foreign investment.
Based on the general emphasis of growth theories on the importance of investment in the process of
economic growth, and the evidence from our recent studies where investment is found to be a
positive determinant of economic growth and trade performances of SSA economies (Mekonnen,
2011).
According to different theories and principles the word investment can be defined in various ways
but similar in meanings. Economics defined investment as the utilization of resources in order to
increase income or production output in the future. An amount deposited into a bank or machinery
that is purchased in anticipation of earning income in the long run is both examples of investments.
On the other hand, finance professionals define an investment as money utilized for buying
financial assets, for example stocks, bond, bullion, real properties, and precious items.
Business theories define investment as that activity in which a manufacturer buys a physical asset,
for example, stock or production equipment, in expectation that this will help the business to
prosper in the long run. Therefore, manufacturing investment lay under definition of business
theories. In the legal sense, investment is the outlay of money that is mainly for income or profit. It
is also the property purchased or the sum invested. (www.investopedia.com). we can see that

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investment expands the productive capacity of a nation and plays a crucial role in the economic
growth and development process (UNCTAD, 2001). It seems that is why nations try their best in
order to motivate internal investment and attract foreigners. However, investment work has not
only prospect but also challenges which hinder the efforts of individuals as well as nations.

Ethiopia as one of the least developed countries, it has been backward in socio‐economic
development. Agriculture has been the main source of income and stay of the population while the
industrial sector lingers thin, yet. The Ethiopian economy has been deteriorated by prolonged
internal and external wars, wrong policies and recurrent drought coupled with ever‐rising
population resulting into economic stagnation, image deterioration and unattractiveness to
investment expansion in spite of the recent revival.

In Ethiopia, manufacturing industry began to appear in the 1950’s and the early 1970s accompanied
a central planning system of economic management ,however ,this development frustrated
whatever little there was in private investment that had appeared in the earlier period.
A period of decline from l974/75 to l977/78 and an average annual growth rate of l8.9 percent for
l978/79 and l979/80 was followed by a reduction of about 3.1 percent per annum between l980/81
and l984/85 and 3.8 percent per annum from 1985/86 to 1988/89.
The industry sector in general and the manufacturing sector in particular were given due national
importance following the formulation of the national industry policy in 2002 by the FDRE. This
policy was designed within the framework of global environment based on the following
underlying principles of free- market economy:-
 Accept that the private sector is the engine of the industrial development strategy;
 Following the direction of Agriculture- led Industrialization;
 Following export- lead industrialization;
 Focusing on Labor Intensive Industries;
 Using Coordinated Foreign and Domestic Investment; and
 Mobilizing the whole society for industrial development.
The 2002 industry policy has identified priority sectors that deserve attention to build the platform
for the industry to take its key leading role in the economy. These sectors include textile and
garment, leather and leather products industry, chemical, metal, agro-processing industry and
construction industry. The industry policy has continued to be the corner stone for future industrial
development in Ethiopia.

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 Despite this great policy, however, how much has been done to enable and encourage domestic
investment? What are the prospects and challenges of domestic private manufacturing investment
in Ethiopia? Are questions this study deals with?

1.2 statement of the problem

As Adam Smith (1776) underlined Investment is crucial for growth. The belief of many other
economists also shows that the level of income and living standard of nations is a function of
investment and capital accumulation (David, 1817).
Thus the Ethiopian government has implemented a series of re-form measures since 1992 A.D. like
deregulation, privatization, liberalization of foreign ex-change market, elimination of export tax,
lowering of maximum import duties and Provision of adequate incentives to encourage domestic
investment and attract foreign capital . Reduced Custom import duties, exemptions of capital goods
and construction materials from payment of customs duties, income tax holding, tax holidays and
losses carried forward are some among the investment incentives given to investors who are
thought as the driving force of economic growth (Semiret 2013 in Meron ).Nowadays the Ethiopian
government has underpinned its commitment to manufacturing industry by establishing different
institutes like Leather Industry Development Institute ; Metal Industry Development Institute; and
Textile Industry Development Institute. These institutes are intended to eliminate problems of
investors in the manufacturing industry. The government also goes furthest to establish industry
parks in different parts of the country. These parks have been constructed with government fund
and full fill the entire necessary infrastructure. Hence, investors have the opportunity to settle their
and start manufacturing work. Furthermore, the investment incentives given to manufacturing
sector is more than other sectors. For instance the income tax holiday of investors in the industry
parks extends up to 10 years (amended investment regulation 2014).
Consequently, the Ethiopian economy had exhibited 9.8 percent average annual growth during
2010/11-2015/16, registered 8 percent growth in 2015/16 despite challenging Macroeconomic and
weather conditions. Industrial sector showed a 20.6 percent annual growth and accounted for 16.7
percent of GDP. The sector contributed 38.8 percent to the overall economic growth during the
fiscal year. Manufacturing sector increased by 18.4 percent and constituted about 32.4 percent of
industrial output. Annual Report National bank of Ethiopia (2015/16)
However, the performance of the country in the private domestic manufacturing investment is not
that much encouraging. Of 6180 investors who have taken investment license in the manufacturing
sector since January 2013 G. C. 91 (1.47%) projects have been under investment process while

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 159 (2.56) are became operational, but the majority 5938 (95.95%) projects are not implement at
all. This reality shows that there are problems which should be investigated and tackled otherwise
the promotion of private investment and the overall economic development of the country will be
negatively impacted. Hence, the purpose of this study is to assess the prospect and challenges of
private domestic manufacturing investment in Ethiopia with special reference to Addis Ababa and
Addis Ababa area.

1.3. Research Questions

1. What are the challenges and prospects of domestic manufacturing investment in

Addis Ababa?

2. How is the trend of private domestic manufacturing investment in Addis Ababa?

1.4. Objectives of the study.

1.4.1. General objective of the study

The general objective of the study is to assess the prospects and challenges of private
domestic manufacturing investment in Ethiopia with special reference to Addis Ababa.

1.4.2. Specific objective of the study

With the view of achieving the above general objective the study addresses specific
objectives such as:
I. To assess the prospects and challenges of private domestic manufacturing investment
in Addis Ababa.

II. To see the trend of domestic private investment in the manufacturing sector during the
study period.

1.5. Significance of the study

The factor that motivated me to study on this area is why the domestic investors could not
realize their manufacturing investment which has got not only emphasis but given a lot of
incentives by the government. Of course trade and transport business which attract so many
people are not that much difficult but it becomes so competitive. A lot of trucks, construction
machineries and business vehicles should wait for days in different parts of the cities in order to
get business. So the student researcher has got interest to see the issue why the potential
domestic investors get the manufacturing sector instead of stacked in the crowded trade

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 business. It can also be used as a background for other researchers who are interested in
conducting research related to Domestic manufacturing investment.

1.6. Scope of the study

The main focus of this research is assessing the prospect and challenges of domestic private
manufacturing investment in Addis Ababa. The study covers the period 1912 to 2017 G.C.

1.7 Description of the study Area

Addis Ababa is the capital and largest city of Ethiopia. It has a population of 3,384,569 according
to the 2007 population census, with annual growth rate of 3.8%. This number has been increased
from the originally published 2,738,248 figure and appears to be still largely underestimated. As a
chartered (ras gez astedader), Addis Ababa has the status of both a city and a state. It is where the
African Union is and its predecessor the OAU was based. It also hosts the headquarters of the
United Nations Economic Commission for Africa (ECA) and numerous other continental and
international organizations. Addis Ababa is therefore often referred to as "the political capital of
Africa" for its historical, diplomatic and political significance for the continent. It is also referred as
the business hub of the country as it generates the considerable amount of the GDP of the country.
Addis Ababa lies at an elevation of 2,300 meters (7,500 ft) and is a grassland biome, located at
9°1′48″N 38°44′24″ECoordinates: 9°1′48″N 38°44′24″E. The city lies at the foot of Mount Entoto
and forms part of the watershed for the Awash. From its lowest point, around Bole International
Airport, at 2,326 meters (7,631 ft) above sea level in the southern periphery, the city rises to over
3,000 meters (9,800 ft) in the Entoto Mountains to the north (Wikipedia.org.com).
The city is divided into 10 boroughs, called sub cities (Amharic: ክፍለ ከተማ?), and 99 wards. The
10 sub cities are: Addis Ketema, Akaki Kaliti, Arada, Bole, Gullele, Kirkos, Kolfe Keranio, Lideta,
Nifas Silik- lafto and Yeka.
The economic activities in Addis Ababa are diverse. According to official statistics from the federal
government, some 119,197 people in the city are engaged in trade and commerce; 113,977 in
manufacturing and industry; 80,391 Homemakers of different variety; 71,186 in civil
administration; 50,538 in transport and communication; 42,514 in education, health and social
services; 32,685 in hotel and catering services; and 16,602 in agriculture. In addition to the
residents of rural parts of Addis Ababa, the city dwellers also participate in animal husbandry and
cultivation of gardens. 677 hectares (1,670 acres) of land is irrigated annually, on which 129,880

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 quintals of vegetables are cultivated. It is a relatively clean and safe city, with the most common
crimes being pick pocketing, scams and minor burglary. The city has recently been in a
construction boom with tall buildings rising in many places. Various luxury services have also
become available and the construction of shopping malls has recently increased. According to Tia
Goldenberg of IOL, area spa professionals said that some people have labeled the city, "the spa
capital of Africa.
Ethiopian Airlines has its headquarters on the grounds of Bole International Airport in Addis
Ababa.
The construction of the Addis Ababa Ring Road was initiated in 1998 to implement the city master
plan and enhance peripheral development. The Ring Road was divided into three major phases that
connect all the five main gates in and out of Addis Ababa with all other regions.
Intercity bus service is provided by the Lion, Scay, and Sheger city bus services. The city is served
by Addis Ababa Bole International Airport.
Addis Ababa originally had a railway connection with Djibouti City, with a picturesque French
style railway station, but this route has been abandoned. The new Addis Ababa-Djibouti railway
started operation in September 2016, running parallel to the route of the original railway line.
Addis Ababa opened its light railway system to the public on 20 September 2015. The route is a
34.25 km network with two lines; the operational line running from the center to the south of the
city. Upon completion, the east-west line will run from Ayat to the Torhailoch ring-road and from
Menelik Square to Merkato Bus Station, Meskel Square and Akaki.

1.8. Limitation of the study

The student researcher couldn’t get enough resources regarding to domestic investment so the
study would be constrained by empirical literature. The writer also fears that the respondents might
not be willing to give sufficient information or to express their views on the issues. Furthermore as
the writer is an employee for living and head of a household time and other resources would be his
constraints. These compelled the researcher to limit the study to Medium and large Scale
Enterprises thus excluding small and Micro Enterprises whose challenges though comparable,
could be fundamentally different. Even though these limitations are inevitable the researcher will
do his best to handle the difficulties.

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1.9. Organization of The study

This paper is organized in such a manner that the first chapter presents the back ground of the
study, statement of the problem, research questions, and objectives of the study, significance of the
study, scope and limitation of the study. The second chapter presents the review of related literature
and the third chapter is about the methodology. Discussion and analysis of the data gathered is
presented in chapter four and finally the last chapter, chapter five, provides the conclusion and
recommendations.

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 CHAPTER TWO

Literature Review

The Theory of Investment.

According to Bakare (2011), Investment is generally classified into four major components:
private domestic investment, public domestic investment, FDI and portfolio investment.
Private domestic investment refers to gross fixed capital formation plus net changes in the
level of inventories whereas public investment includes investments made by the government
and public enterprises on social and economic infrastructures, real estate and tangible assets.
The combination of private investment and public investment is normally referred to as gross
fixed capital formation and this is distinctive from their counterpart – foreign investment.
When foreign investment is on a tangible asset, it is referred to as a direct foreign investment;
when it is in shares, bonds, securities, etc., it is called portfolio investment. The decision to
invest is a central subject in the analysis of economic behavior mainly because it determines
the accumulation of productive capacity and hence the future growth path of an economy.

There are different theories regarding investor’s behavior on investment decision. The
neoclassical model (associated with Jorgenson, 1960); the accelerator model (associated with
Clarck, 1917); the flexible accelerator model (associated with Keynes, 1936) and Tobin’s Q
model (1969).The oldest and most familiar explanation came from the theory of user cost of
capital by Dale Jorgenson in the 1960s where by the firm maximizes its market value by
adjusting its capital stock to a point where the marginal value product of capital equals the
market interest rate. In other words firms choose investments with positive net present value.
Extensions to the user cost were easily made by incorporating fiscal incentives like taxes on
profits and investment tax credits to make it more realistic.

The other popular model is the accelerator model by Clarck (1917). It is the simplest of them
in which the firm is assumed to keep a stable relationship between the capital stock it desires to
maintain and the level of output. A key implication of this model is that investment (change in
capital stock) is driven by change in aggregate demand. An economic theory that suggests that
as demand or income increases in an economy, so does the investment made by firms.

The neoclassical (flexible accelerator) model suggested by Jorgenson (1967) combines the user
cost of capital and the accelerator effect to explain investment behavior. Subject to lags and

xvi
costs involved in adjusting the capital stock, a competitive firm in the neoclassical model is
supposed to realize only a portion of the desired capital stock in the current period. It is also
important to note that the firm in the neoclassical model is assumed to operate under perfectly
competitive product and factor markets which implies inter alias absence of liquidity
constraints (to adjust capital stock) and a general equilibrium situation with full employment.

Another popular investment model is Tobin's q theory, Tobin (1969) which relates the market
value of the firm with its replacement cost as a guide for investment decision. In its simplest
form, this theory postulates that investment will be worthwhile as long as the value of the firm
in the stock market is higher than the cost of acquiring the firm (its machinery and equipment)
in the product market.

This study on the determinants of Ethiopian domestic private investment in manufacturing

sector tended to start off with the neoclassical model and attempt to reformulate it by
incorporating variables (often on an ad hoc basis) that are supposed to have strong association
with investment.

Constraints to private investment in the poorest developing countries

The literature shows that the better the investment climate the higher the levels of private
investment are likely to be. A good investment climate provides opportunities and incentives
for firms to invest profitably, create jobs and expand output, thereby promoting economic
growth and poverty reduction. The positive link between the investment climate and private
investment/economic growth is well established in the literature. World Bank (2010a) shows
that as a result of investment climate improvements in the 1980s and 1990s, private investment
as a share of GDP nearly doubled in India and it more than doubled in Uganda. The literature
has also looked at the link between the investment climate and the growth of firms.
Dollar et al. (2005) draw on level surveys in Bangladesh, China, India, and Pakistan to
investigate the relationship between investment climate and firm performance and conclude
that accumulation and growth at the firm level are higher where the investment climate is
better. However, in the poorest developing countries, businesses frequently operate in
investment climates that undermine their incentive to invest and grow. The literature highlights
seven investment climate constraints that affect the rate of private investment and the survival
and growth of firms.

xvii
2.2.1 Macro environment constraint
a. Macro level stability

Macro instability (economic, social and political) deters investment by making future rewards
more uncertain and undermining the value of assets. For example, high inflation and volatile
real exchange rates can weaken the position of creditors, making access to credit more
difficult. Moreover, the impact of instability is more likely to be felt by medium and small
firms rather than large firms, because the latter are more likely to have tools at their disposal
to cope with these risks, including better access to dollar accounts, financial instruments, and
credit from overseas (World Bank ,2005a).

Macroeconomic stability matters for sustained growth. More recently, Sirimaneetham and
Temple (2009) introduced a new index of the extent of macroeconomic stability and
concluded that growth is positively associated with macroeconomic stability in a sample of
70 developing countries. In a literature review about the importance of macroeconomic
stability, Lopez (2005) concluded that macroeconomic stability is critical for pro-poor growth
and that instability depresses the growth rate by 2 percentage points. Mlambo and Oshikoya
(2001), using a sample of 18 African countries for the period 1970 to 1996 find that fiscal,
financial and monetary policy, macroeconomic uncertainty and trade variables are significant
determinants of private investment in Africa. The study finds that political stability is also a
factor in the determination of private investment rates in Africa.

The literature that looks at the firm level impact of the macro environment (including
political instability, exchange rate instability and inflation) is scarce. Looking at the macro
economy, Bhattacharjee et al. (2002) find that the volatility in the macroeconomic
environment has a role in determining the hazard of firms going bankrupt or being acquired.
Beck et al. (2005) also find that macroeconomic issues (captured by high interest rates and
lack of money in the banking system) significantly reduce firm growth rates and that these
effects remain significant even after controlling for the level of financial development in a
given country. Collier and Duponchel (2010) uses firm level data to investigate the effects of
civil war and post-conflict recovery in Sierra Leone. They find that during the post conflict
phase the growth of firms is slower mainly because human capital has become scarce and it
takes more time to rebuild.

xviii
b. Crime and corruption
Crime and corruption undermines the investment climate as it not only discourages firms
from investing but also increases the costs of business, whether through the payment of
bribes, the direct loss of goods or the costs of taking precautions such as hiring security
guards or installing alarm systems.

Regarding to a national level impact, the relationship between growth and corruption/crime
has been examined thoroughly in the literature. The availability of indices of corruption in the
end of the 1990s stimulated the appearance of empirical studies which generally concluded
that corruption has a negative impact on economic growth Kaufmann et al. (1999). Similar
results were later found by Smarzynska and Wei (2000) fined that corruption reduces inward
foreign direct investment. More recently, Toke et al. (2008) introduce nonlinearities into the
corruption/growth relationship and find that it is mainly in regimes with high quality political
institutions that corruption has a substantial negative impact on growth.

When we come to firm level data, only a few studies have looked at the effects of corruption
on the economic prospects of firms. Gaviria (2002) uses a survey of private firms in Latin
American and European countries to assess the effects of corruption and crime on the
economic prospects of firms. The paper finds that both corruption and crime substantially
reduce sales growth, and that the reported levels of corruption and bureaucratic interferences
are positively correlated at the firm level. Looking only at corruption and its effect on the
growth of employment of firms. Aterido and Hallward-Driemeie (2007) estimate that an
increase in the incidence of bribes of 10 percentage points reduces the employment rate of
large firms by approximately 1.4 points. At the micro level, a study of Ugandan firms by
Fisman and Svensson (2007) finds that a one-percentage point increase in the bribery rate is
associated with a reduction in firm growth of three percentage points, an effect that is about
three times greater than that of taxation.

2.2.2. Institutional constraints

c. Business regulations and licensing

Regulations impose necessary costs on firms such as the need to adapt the business to meet
regulatory requirements or to pay licensing fees, but too often these costs are unnecessarily
high because of rent-seeking behavior, inefficient administration, or poor institutional fit
(World Bank , 2005a), thereby reducing business entry and firm growth. Regarding to the
national level impact, a large academic literature has followed since Djankov et al. (2002)

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recorded the number of procedures, time, and cost needed to start a business in 85 countries.
This literature uses not only the World Bank’s Doing Business Indicators but also other
available data bases include the Index of Economic Freedom, Economic Freedom of the
World, The Corporate Tax Rates Survey (KPMG) and etc…, to examine the effects of
regulatory barriers and business licensing on firms’ dynamics.

Djankov (2009) surveys the literature that links entry regulation on the one hand, and
entrepreneurship and productivity, on the other. He concludes that the evidence points to
economically large and statistically significant effects between entry rates and productivity
growth. Loayza et al. (2005) also examine empirically the overall effect of business
regulation on economic growth. They suggest that high levels of regulation are associated
with lower growth (which is the case for product and labor market regulation), but that the
quality of regulation (i.e. better institutions) helps mitigate, and even eliminate, the adverse
impact of regulation on economic growth.

More generically, World Bank (2005b) use cross country data to show that an improvement
on all aspects of the Doing Business indicators is associated with an estimated 1.4 to 2.2
percentage point’s increase in annual economic growth, and that there is a significant positive
correlation between the ease of doing business ranking and the human development index.

When we see firm level impact, Klapper et al. (2004) use firm level data from Western and
Eastern Europe to show that anti-competitive regulations such as entry barriers lead to slower
growth in established firms. More specifically, Besley and Burgess (2004) find that pro-
worker regulations across Indian states are associated with lower output, employment,
investment, and productivity in manufacturing firms. Using a database of European firms,
Klapper et al. (2006) conclude that regulatory barriers hamper the creation of new firms,
discourage the entry of small firms, and affect even older firms, which grow more slowly and
to a smaller size.

d. Institutions and the legal system

A reliable institutional and legal system is essential for firms to invest as it reduces the risks
and uncertainties that they face when entering into commercial agreements. For example,
delays or uncertainties in the enforcement of contracts governing exchange diminish
opportunities and incentives to invest as firms cannot commit to long term and complex
commercial contracts.

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Regarding to a national level impact, there is strong cross-country evidence in the literature
that weak institutions adversely affect growth, particularly the protection of property rights,
effective functioning of the judiciary, and enforcement of contracts. Knack and Keefer (1995)
find a positive impact of property rights on economic growth. Dollar and Kraay (2003) state
that improvements in the quality of institutions has a positive effect on long term growth; and
Rodrik et al. (2004) find that property rights and the rule of law have a strong positive impact
on economic growth.

When we come to Firm level data, Dabla-Norris and Inchauste (2007) use WBES data and
find that quality of enforcement, measured by the perception of fair and impartial courts,
leads to more growth in formal firms. Using the same data sources, Ojah et al. (2010) provide
robust evidence that property rights enhance East African Community firms’ decision to
invest in fixed capital. The functioning of courts (i.e. judiciary) is also an important
institution for the growth of firms. Johnson et al.(2002) suggest that well-functioning courts
encourage entrepreneurs to try out new suppliers, which facilitate new entry and firm
expansion. Aterido et al. (2007) also find that consistent enforcement helps the growth of all
firms, with particular benefits to small firms. However, Beck et al. (2005) find that although
there is a negative relationship between the reported “general legal system” constraint and
firm growth, not all specific problems of the legal system are equally relevant. For example,
the quickness of courts does not affect firm growth significantly.

e. Taxation

Whilst taxation is necessary to finance public goods and re-distribute income, the process
through which a government collects tax can entail substantial costs in terms of growth. The
most obvious cost is that higher tax rates on businesses can reduce incentives of investment
and risk-taking because post-tax profits would be lower. In addition, the cost of compliance
with the administration of taxes can be high.

Moreover, the cost of higher tax is negative impact on national economy. Lee and Gordon
(2005) analyze the effect of statutory corporate tax on the growth rate of GDP and find that a
reduction in the corporate tax rate of 10 percentage points increases growth rate by 1-2
percent. Similarly, Romer and Romer (2007) find that tax increases are highly contra
dictionary, particularly due to the powerful negative effect of tax increases on investment.

The literature that assesses the impact of taxes on firms also establishes that taxation has a
negative impact on enterprise birth and development. Looking at firm-level data set on

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transition economies, Dabla-Norris and Inchauste (2007) find that growth in formal firms is
negatively affected by both high tax rates and weaknesses in tax administration. More
recently, Djankov et al. (2010) find that corporate tax rate has a large adverse impact on
aggregate investment and entrepreneurial activity. Looking only at firms in Uganda, Gauthier
and Reinikka (2001) find that medium firms pay a greater share of their revenues in taxes
than either small or large firms. This is because small firms can often reduce their tax burden
through informality and evasion, whilst large firms can also reduce taxes because of their
ability to negotiate various tax privileges and to avoid taxes through sophisticated legal
means.

2.2.3 Financial constraints

f. Access to and cost of finance

Firms need to be able to access those financial instruments that they needed in order to
operate efficiently (e.g. payment services) and invest (e.g. loans, quasi debt). Moreover, the
cost of capital needs to be reasonable because, if it is too high, the expected rate of return to
investment after the payment of the cost of capital will be too low (or even negative) and
firms will have no incentive to invest.

There is consensus in the empirical literature that there is a strong positive link between the
functioning of the financial system and long-run economic growth (Levine, 1997). Moreover,
the positive effect of financial sector deepening on economic growth appears to be greater for
developing countries than for developed countries, probably because developing countries
have more room for financial and economic improvement (Calderon and Liu, 2003). The
World Bank (2005a) estimates that a doubling of private credit as a share of GDP is
associated with an increase in average long-term growth of almost two percentage points. The
literature also establishes that increased access to finance contributes to grow that the
individual firm level (Rajan and Zingales, 1998).

More recently, Beck et al. (2005) use WBES data to find that firms that complain about their
lack of access to finance actually have lower growth rates. These cross country results are
also confirmed at the micro level for firms in South Asia and Sub-Saharan Africa. In India,
Banerjee and Duflo (2004) studied loan information of SME borrowers from an Indian bank
before and after they became eligible for a direct credit programme and concluded that firms
expanded after becoming eligible.

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Analyzing firm surveys in countries of the East African Community, Ojah et al. (2010)
provide robust evidence that external and internal finance channels enhance firms’ decision to
invest in fixed capital. Similarly, Nkurunziza (2010) uses microeconomic data on the Kenyan
manufacturing sector to find that firms that use credit grow faster than those not using it.
Looking at cost of capital, Ayyagari et al. (2008) find that although firms perceive many
specific financing obstacles, such as lack of access to long-term capital and collateral
requirements, only the cost of borrowing directly affects firm growth. Beck et al. (2006)
analyzed the nature of obstacles in the financial sector. They find out that, out of twelve
constraints to finance, high interest rates top the list (more than half of the firms in the sample
rate interest rates as the major obstacle), followed the lack of access to long term loans.

The twelve constraints surveyed are: collateral requirements of banks and financial
institutions; bank paperwork and bureaucracy; high interest rates; need for special
connections with banks and financial institutions; banks’ lack of money to lend; access to
foreign banks; access to non-bank equity; access to export finance; access to financing for
leasing equipment; inadequate credit and financial information on customers; access to long
term loans; and whether corruption of bank officials creates a problem.

2.2.4 Infrastructure constraints

g. Infrastructure

Firms need access to a reliable electricity supply, efficient transport links and modern
telecommunications services to have the incentives to invest more. Good access to
infrastructure allows firms to become more productive, reduce costs and expand their
businesses.

Infrastructure contributes significantly to national economic growth. Extensive econometric

work has established a generally robust relationship between infrastructure investment and
national economic growth (World Bank, 2004). For instance, a thorough cross-section study
led to the conclusion that putting an additional 1 per cent of GDP into transport and
communications investment on a sustained basis would lead to an increase of 0.60 percentage
points in the growth rate of per capita GDP (Easterly and Rebelo, 1993). There is also
evidence that the infrastructure is particularly important for growth in agriculture and light
manufacturing (simple technology, labor-intensives sectors such as textiles, leather goods,
food processing) in the least developed countries (UNCTAD, 2006).

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In one of the first efforts to measure the impact of infrastructure on firm growth, Reinikka
and Svensson (2002) collect information on infrastructure services and private investment
data through a firm survey in Uganda, and find that unreliable and inadequate electric power
supply significantly reduces investment in productive capacity by firms. More recently,
Dollar et al. (2005) use WBES data to find that infrastructure is the most important factor in
explaining firm performance in Bangladesh, China, Ethiopia, and Pakistan. Aterido et al.
(2007) conclude that losses associated with the power outages hurt growth of all firms, with
larger firms being hurt relatively more than smaller firms. They also find that the detrimental
impact of outages is felt more keenly by exporting firms. Goedhuys and Sleuwaegen (2009)
point out that the provision of a good transportation network and availability of transportation
are key elements in widening the relevant markets in which firms can grow. However, the
importance of infrastructure is not the same in all countries. Looking at a dataset of 1,500
firms in five Chinese megacities, Hall ward-Driemeier et al. (2006) find that physical
infrastructure is not significantly correlated with firm performance, suggesting that the
positive link between infrastructure and firm performance is particularly strong in countries
with a worse stock of infrastructure.

2.2.5 Micro-level constraints

Besides the investment climate constraints examined so far, there are also firm level factors
that can have a very significant impact on the birth and development of firms. In order to
grow, firms need to make productive investments - increases in productivity will then make
firms more competitive and this will increase the returns to the investment. However,
improving a firm’s productivity (which is determined by the available technology or know-
how for converting resources into outputs and the way in which resources are organized in
firms to produce goods and services) is limited by technology transfer and quality of
management.

H. technology transfer
Technology transfer is generally counted as one of the most important channels through
which foreign corporate presence can produce positive externalities in the host country.
However, the literature presents mixed views of its impact. Some studies find that foreign
presence has a positive impact on the productivity of domestic firms, whilst others find no
evidence or a negative effect. In a detailed review of the literature, Sinani and Meyer (2004)
find that most studies that use cross-section at industry and firm level often find positive
spillover to domestic firms, whilst most studies employing firm level panel data find no or

xxiv
negative evidence of spillovers to domestic firms. Research in India (Kathuria, 2000) finds
that “local firms do not benefit from a foreign presence, if this presence is measure as a share
of sales, but they do benefit from having foreign capital stock available. Furthermore, when
the sample is divided into scientific and non-scientific industries, spillovers from a foreign
presence are found in scientific industries, but only if local firms invest in innovation
activities”.

I. quality of management

The quality of management is essential to see if managers and firm owners have the
organizational, financial and managerial abilities to manage the scaling up of a firm.
However, in many developing countries the quality of the management is low. For example,
low levels of financial literacy can prevent SMEs from adequately assessing and
understanding different financing options and from navigating complex loan application
procedures. In fact, anecdotal evidence suggests that the success of small firm lending
strongly depends on having a well-trained set of loan officers who are able to assess the
capital needs in the business as managers do not have proper training. Bruhn et al. (2010)
study how the lack of “managerial capital” affects firm growth. After conducting a
randomized control trial in Mexico, they find that consulting services have a positive effect
on firms’ productivity, firm sales and profits.

After in-depth review of the World Bank’s Investment Climate Surveys, Hall ward-Driemeier
and Stewart (2004) summarized the top five constraints perceived by Sub-Saharan Africa
and South Asia firms as indicated in the table below while Ethiopian economic update
4th(2015) identified access to finance, access to land, electricity, and a cumbersome tax
administration constitute as key constraints of SMEs in the business environment and
underlined inadequate supply of skills and poor trade logistics as some of the
key constraints of large firms or FDI .

Table 1:- Top five constraints perceived by Sub-Saharan Africa and South Asia firms
Sub-Saharan Africa South Asia
1 Tax rates Electricity
2 Cost and access to finance Corruption
3 Electricity Tax rates
4 Macro instability Policy uncertainty
5 Corruption Cost and access to finance
Source: Hall ward-Driemeier and Stewart (2004)

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However, the fact that firms perceive that these are obstacles to their growth does not mean
that they are actual constraints. This is because perceptions may be influenced by waves of
pessimism and euphoria reflecting adverse or favorable trends (e.g. a negative or strong
economic cycle), and because firms’ benchmarks may differ by country. Correcting for
possible biases of WBES data, evidence of the relative Ayyagari et al. (2007) present
importance of different factors that are obstacles to enterprise growth. They conclude that
finance, crime and political instability are the only constraints with a direct impact on firm
growth. In further robustness test, they find that financing obstacles are binding regardless of
which countries and firms are included in the sample, and that they have the largest direct
effect on firm growth.

Determinants of private investment in Ethiopia-Empirical Framework

Ambaye, Berhanu and Abera’s (2014) study on the determinants of domestic private
investment in Ethiopia identified that domestic credit given to the private sector reduces
domestic private investment because the credit may be diverted to non-productive activities.
The study further identifies that the appreciation of the real exchange rate discourages
domestic private investment and vice versa. In short, the high value of local currency
constrains domestic investment.

Dawit (2010) showed that the following are the success factors for private investment in
Mekelle City: the maintenance of good accounting records by firms, good managerial skill,
experience, government support and training. The major problems are a lack of proper
planning and feasibility studies, lack of skilled staff, delays in securing bank loans, a lack of
market for output, infrastructure problems and inflation.

A study by Workie (1996) on constraints to entry, operation and expansion of private

investment in Ethiopia using investor level information showed that bureaucratic procedures,
a lack of infrastructure, power supply problems and access to finance were the leading
constraints for operations. The other areas of the business environment (such as
political/policy uncertainty and labor regulations) were relatively less important. The survey
ultimately confirmed that the availability of finance rather than the interest rate is a crucial
determinant of private investment in Ethiopia.

Macroeconomic instability and political/policy uncertainty were not found to be significant

determinants of private investment in Ethiopia. Adugna (2013) undertook a study covering

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the period 1981-2010 using Ordinary Lease Square (OLS) regression to model the
determinants of private investment in Ethiopia.

Findings from the study showed that public investments in basic infrastructures and social
overheads are essential for private investment. In addition, the rising real per-capital income
of the people has a crucial positive effect on private investment by way of increasing market
demand for goods and services. These in turn trigger private investment. Likewise, external
debt has a favorable effect on private investment in countries like Ethiopia where there is a
serious shortage of finance.

A study by Baye et al. (2005) on the macro and microeconomic determinants of private
investment both at national and regional levels in Ethiopia showed that at the micro level the
probability of individuals to invest is significantly and positively influenced by the level of
education, access to land and investment incentives.

The influence of bureaucratic red tape was also found to be negative and significant.
Moreover, Deneke’s (2001) study concluded that unclear land policy, compounded by
investors’ fear of political instability, has impeded PSD.

Getachew (1997) studied the determinants of private industrial investment in Ethiopia using
descriptive statistics to analyze micro-level determinants. He found that the real interest rate
did not have a significant impact on private investment in Ethiopia. The study revealed that
private investment was positively affected by credit disbursement to the private sector in
Ethiopia. It also found that severe constraining factors to private manufacturing investment
were market, financial, infrastructure, policy, technology, and input related ones.

Challenges of the Ethiopian manufacturing sector

Investment can be financed through both domestic and external sources. However, given the
challenges facing African countries in accessing external finance, they tend to rely more on
domestic sources for investment. The development model adopted by GoE relies heavily on
high levels of largely government-led investments (like the Asian model of development),
but faces low saving rates and limited availability of domestic resources (unlike the Asian
model) (World Bank, 2014). Medina &Valdes (1998) find that the availability of internal
funds is a key determinant in the investment decisions of companies. As the rate of domestic
saving increases financing capacity for investment also increases which leads to higher
investment rate.

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Analytical work carried out in 2011 on Africa’s manufacturing experience, in comparison to
China and Vietnam, provided insights and recommendations for developing Ethiopia’s light
manufacturing and labor-intensive industries. Accordingly, the availability and quality of
inputs, to finance and land seem critical constraints to improving competitiveness and
accelerating growth access in selected light manufacturing sectors in Ethiopia (World Bank,
2012). The analysis further underlined that Ethiopia is falling behind its peers in financial
intermediation, the ratio of private sector credit to GDP declined from 15.4 percent in 2003/04
to10.9 percent in 2013/14, and remained below the SSA averages for the period reviewed. In
order to improve productivity of enterprises in Ethiopia, particularly SMEs, it recommended
that access to finance, access to and, reliability of electricity and taxation will need to be
addressed. Similarly, business entry regulations and processes that obstruct firm entry and
dynamism require attention so that young firms are encouraged to establish (World Bank, 2015).

Firms that are fully credit constrained exhibit poorer performance and productivity. Firms in
Ethiopia are more likely to be fully credit constrained than global comparators, including
SSA countries. In Ethiopia nearly half of firms are fully credit constrained. Access to finance
remains a top obstacle for enterprises in Ethiopia. Firms consistently identify access to
finance as one of the top five obstacles to doing business in Ethiopia (Ibid).

In Ethiopia the investment climate tends to favor established and large firms, particularly
FDI, and does not foster productivity growth for domestic SMEs including new comers.
While access to finance, land, liability of electricity, and taxation are the top ranking
constraints highlighted by SMEs, poor trade logistics and skills constraints are key factors
that affect the competitiveness of larger firms that include export-oriented firms and/or FDI.
Availability of land has been cited as one of the top constraints for enterprise development
and expansion especially for firms in Addis Ababa, where there is an unmet gap in the supply
of land vis-à-vis demand. Once land is acquired, the biggest obstacle reported is
infrastructure, particularly in outlying expansion areas. These include electricity,
telecommunication, and access roads (Ibid).

Tax administration is costly and time consuming. On average, firms make 30 payments per
year and spend 306 hours per year filing, preparing, and paying taxes; total taxes paid amount
to 31.8 percent of profit, which is more than benchmark countries (doing business report,
2015). Another challenge relating to tax administration is the difficulty in accessing the tax
appeals tribunal due to lengthy processes and high costs (Ethiopia National Business Agenda,
2014).

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Ethiopia has undertaken multiple steps for improving logistics infrastructure, but important
challenges Remain. According to the Logistics Performance Index (LPI), Ethiopia ranks
104th out of 160 economies surveyed.43Large firms also cite customs and trade-related
regulations as one of the top constraints that drive costs up. It takes up to 44 days to comply
with all procedures needed to export or to import at a cost of US$2,380 and US$2,960
respectively per container (World Bank, 2015b). Also, it is reported by private sector that
there is lack of staff with sufficient experience in custom procedures, and those making
(World Bank, 2014a).

Business entry regulations and processes are consistently highlighted by the private sector as
burdensome and obstructive of firm entry and dynamism. New businesses face complex and
bureaucratic entry procedures that have led to an escalation in time and cost for enterprises
setting up business (Ethiopia economic update, 2015).

Tesfahun (2015) identified the following ten points as the challenges of Ethiopian
manufacturing sector under GTP II: -

1. Absence of transformational leadership qualities within the sector leadership. The

existing leaders in the industrial sector despite their long years of experience and
adequate knowledge, they have hardly the qualities of transforming sectors and reform
it anew.
2. The labor/ skills market in Ethiopia is highly underdeveloped. Hence, the labor
market couldn’t allocate this important industrial input properly. And developing a
properly functioning labor market in the country takes time.
3. Import and distribution of manufactured goods is a highly profitable business
compared to producing them locally which the latter is much onerous and has longer
pay-back period.

The much-expected industrial parks are facing different problems from the start and
addressing them will take several years. The factories in the parks cannot get enough
trainable manpower as much as they need. This is because the pool of labor that have
completed the lower secondary level (i.e., 9th and 10th grades) which is also considered as the
potential industrial trainable workforce are not available in sufficient quantity in these towns
since each of these parks require several tens of thousands of such skilled labor. In addition,
they cannot compete with the other employer to share the existing manpower in the market.
The service sector is growing at a much higher speed than the manufacturing. Hence, it pays
labor higher than many of the manufacturing enterprises operating in the industrial parks.

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Furthermore, the factories operating in Industry Park repeatedly express their dissatisfaction
of the repeated power cuts, erratic water supply, poor custom procedures and long visa/ work
permit procedures, etc...

Lack of clarity on the implementation of the industrial development strategy. The Ethiopian
industrial development strategy clearly puts that local enterprises primarily the micro and
SMEs are the bases for industrial transformation in the country while the GTP II focuses
mainly on the development of industrial parks to attract and house the FDIs (Foreign Direct
Investment) to meet manufacturing targets.
Atakilti, Awet, and Tadesse (2015) examined the challenges and opportunities of
manufacturing private investment in Tigray, Ethiopia. Their results show that the main
bottlenecks of the investors that are involved in the manufacturing sector are; not to create
employment opportunity as per their proposed plan; seasonality of the demand to their
production/service; financial problem; lack of foreign currency; and absence of skilled man
power.

Some of the challenges that the investors faced during land acquisition process are;
bureaucratic procedures, provision of land, access to loans, governance issues and availability
of trained human resources. Problems in the application of technology are related with
electric power problem, shortage of water, lack of skilled labor to run the technology, and
lack of maintenance and accessories. The main factors for dissatisfaction of the investors that
are included in the study with the service provisions of financial institutions are; very weak
and time-consuming banking service, insufficient credit provision and absence of long term
credit, long process during loan provision particularly in the commercial and development
banks, shortage of foreign currency, problem on the supply of credit and LC (letter of credit).

The major reasons for governmental offices’ long and very long process service delivery of
governmental offices’ due to lack of responsibility and integrity; low confidence to decide on
issues; lengthy meeting time of officials; unfamiliarity of staff with rules, regulation and
guidelines; absence of integration within/among offices; inaccurate estimation of tax rate
collection period and lack of modern working system. Most of the investors consider the
investment policy is conducive but its implementation is discouraging. Hindering factors for
investors at implementation phase not to start on time are; lack of enough credit/loans and
absence of timely credit provision, shortage of foreign currency, long time to import inputs,
no timely response for land request, infrastructural problems, price increase on construction
materials, and shortage of trained manpower to install/operate equipment.

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Investors’ weaknesses are late to start operation or construction, change of sector after
obtaining of license, financial incapability, they do not use modern technology, lack of
experience, they do not hire professionals, very low wage rate, and inefficient utilization
resources are among others.

Manufacturing Investment opportunity in Ethiopia

Economic Growth & large population

The Ethiopian economy experienced strong and generally broad-based real economic
growth of around 10.6 percent a year on average, i.e., more than double the annual average of
countries in Sub-Saharan Africa (SSA), which reached 5.2 percent (World Bank, 2012).
Economic growth encourages more investment to satisfy the demand triggers by additional
per capital income.

There is a general agreement that, the process of economic growth and investment\capital
formation is closely interconnected. According to World Bank (2013), GDP growth is higher
for those countries, which have relatively higher investment/GDP ratio.

The Ethiopian population has been booming by 2.2 percent a year (CSA, 2015), which can
bring to the economy not only a large labor force but also new consumer groups and thus
potentially one of the largest domestic markets in Africa. There is a significant positive
relationship between manufacturing expansion and internal demand so that, other things
being equal, larger countries tend to have a higher manufacturing share. In others words, as
incomes per capita raise or real GDP raise, share of manufacturing in national income
increases (Samuel & Aram, 2012).

Agarwal (1980) pointed out that firms will increase their investment following up their
increasing sales, as well as domestic investment in a country which rises with its increasing
market size or GDP. Guadagno (2012) shows that the size of the domestic market as well as
trade openness are a constant determinant of industrialization. The higher the import export
rate of a country the greater the market opportunity or trade openness for investors.

Open market

Beyond the domestic market, by virtue of its membership of the Common Market for Eastern
and Southern Africa (COMESA) embracing 19 countries with a population of 400 million,
Ethiopia enjoys preferential market access to these countries. Ethiopia’s proximity to the
Middle East also offers potential market opportunities.

xxxi
The country also qualifies for preferential access to European Union market under EU’s
Everything-But-Arms (EBA) initiative and to USA markets under the African Growth and
Opportunities Act (AGOA) and the Generalized System of Preference (GSP). Thus most
Ethiopian products can enter into these markets quota and duty free. Furthermore, broad
ranges of manufactured goods from Ethiopia are entitled to preferential access under the
generalized System of Preference (GSP) in USA. Most countries of the EU and other
developed countries. No quota restrictions are placed on Ethiopian exports falling under the
4800 products currently eligible for GSP treatment (EIC, 2017).

Infrastructure

Countries with high infrastructure quality usually entails a developed network of roads,
airports, sea ports, supply of water and electricity as well as internet networks and telephones
with these characteristics countries would usually attract investment (Oniyewu and Shareshta,
2005).

Roads play a vital role in transporting people and goods in Ethiopia. Cognizant of its cardinal
role, the government has identified the road sector as top priority for public investment and,
remarkable progress has been made in the expansion of the road network in the country.

Over the past decade, Ethiopia has made significant improvements in access to and quality of
its infrastructure. It is estimated that if Ethiopia’s infrastructure platform could be improved
to the level of the African leader, Mauritius, annual per capita growth rates could increase by
3.8 percent (World Bank, 2010).

Ethiopian Airlines is now one of the three main sub-Saharan African airlines and Bole Airport
serves as a regional air transport hub for passenger and commodity transport (including cash
crops such as floriculture). The quality of Ethiopia’s road network has increased: 80 percent
of the paved network of over 40,000 kilometers is in good or fair condition (ICT, 2011).

Ethiopia’s primary transport corridor is through Djibouti and GoE has recently inaugurated
the national rail way to link Addis Ababa with Djibouti which is part of construction of a
5,000-kilometer national railway network.

To improve the country’s mobile, internet and broad band penetration rates, GoE signed in
2011 a contract with France Telecom to manage the state-owned Ethiopian Telecom
Company (ETC). After almost a five-year ETC serves over 50 million subscribers by 2017,
by extending coverage from 50 to 90 percent. To increase the quality and reliability of

xxxii
service, ETC has completed steps to eliminate faulty power equipment in Addis Ababa, and is
assessing equipment needs in regional states. Ethiopia's fixed-line and internet penetration
rates of 1 and 0.9 percent respectively (2011) rank among the lowest in the region; now ETC
has achieved its five million internet subscriber base by 2015.

Since 2005 electricity access in Ethiopia has been growing rapidly. In 2010, EEPCO
commissioned three large hydro power plants that increased its power generation capacity
from about 850 MW to above 2,000 MW, providing sufficient capacity to service the current
demand26 and allowing high-cost thermal plants to be decommissioned from the grid. New
regional interconnectors to facilitate regional power trade are underway with Djibouti (in
operation since 2010), Sudan (expected in 2012) and Kenya (expected in 2017).

Size of domestic market and Trade Openness

Trade openness refers to a degree of which countries or economies permit or have

international trade with others. Trade activities include import and export, inter countries
investment, borrowing and lending, and repatriation of funds abroad. Open economies mean
greater market opportunities. There is a significant positive relationship between
manufacturing expansion and internal demand so that, other things being equal, larger
countries tend to have a higher manufacturing share. In others words, as incomes per capita
raise or real GDP raise, share of manufacturing in national income increases (Samuel &
Aram 2012). Agarwal (1980) pointed out that firms will increase their investment following
up their increasing sales, as well as domestic investment in a country which rises with its
increasing market size or GDP.

Guadagno (2012) shows that the size of the domestic market as well as trade openness are a
constant determinant of industrialization. The higher the import export rate of a country the
greater the market opportunity or trade openness for investors.

Ethiopia has a large population and thus potentially one of the largest domestic markets in
Africa. Beyond the domestic market, by virtue of its membership of the Common Market for
Eastern and Southern Africa (COMESA) embracing 19countries with a population of 40
million, Ethiopia enjoys preferential market access to these countries. Ethiopia’s proximity to
the Middle East also offers potential market opportunities.

xxxiii
The country also qualifies for preferential access to European Union market under EU’s
Everything-But-Arms (EBA) initiative and to USA markets under the African Growth and
Opportunities Act (AGOA) and the Generalized System of Preference (GSP). Thus most
Ethiopian products can enter into these markets quota and duty free. Furthermore, broad
ranges of manufactured goods from Ethiopia are entitled to preferential access under the
generalized System of Preference (GSP) in USA. Most countries of the EU and other
developed countries. No quota restrictions are placed on Ethiopian exports falling under the
4800 products currently eligible for GSP treatment (EIC, 2017).

Trends of private investment in Ethiopia

The trends of the investment climate in Ethiopia will be reviewed in short during three
distinct periods, the imperial era (prior to 1974), the Dergue Era (1974-1991) and the post-
Dergue period (1991 to date).

During the imperial period, important reforms were introduced and these impacted on
investment development in Ethiopia. The first legislation on investment was introduced and
enacted in 1950 but it did little to encourage high investment. In 1954, agricultural and
industrial expansion proclamations had a good impact on investment because it required
industrial and agricultural investment from both domestic and foreign investors.

The Investment Decree No. 51 of 1963 (Imperial Government of Ethiopia, 1963) was issued
at a time when infrastructure development (road transport, air transport, banks, power
generation, etc.) was taking place at a rapid pace. Private investment was singled out for
attention and this led to the import substitution strategy which was adopted in the five-year
development plans. Consequently, the rate of private investment (both domestic and foreign)
increased. Private investment was expected to play a leading role in mining and housing
while investments in infrastructure, education, health and social welfare were undertaken by
the public sector as part of various development plans between 1968 and 1973.

The notion of investment introduced to the country during imperial era is aborted at its infant
stage when the military ruler took power in 1974. During the Dergue period the focus was
on nationalization and the public ownership of most economic sectors. Proclamation No.
26/1975 (Military Government of Ethiopia, 1975a), was a decree which introduced
widespread nationalization and large numbers of private businesses were nationalized.

xxxiv
Government policies during the Dergue regime strictly limited private sector investment
capital and placed a ceiling amount of Birr 500,000 on investors. They were also not allowed
to hold a license for more than one line of business and this had to be run by only one
individual entrepreneur who did not have any other permanent job.

In 1983, joint ventures were allowed (Military Government of Ethiopia, 1983) but only if
they involved government and foreign capital. According to this proclamation, the
government must have the majority share in all such joint ventures. Consequently, few joint
ventures were established.

In March 1990, there was a change of course when the government chose to pursue the
“mixed economic” policy. Special Decree No. 17/1990 (Peoples Democratic Republic of
Ethiopia, 1990) was issued in May 1990 and it removed most restrictions imposed on
domestic private businesses and foreign investment in previous legislations.

Most of the policy distortions of the Dergue were rectified following the over throws of the
regime in 1991 by EPRDF. EPRDF adopted the new economic policy of Ethiopia that is a
market-oriented economy by rationalizing its role and encouraging greater participation of
the private sector. To revitalize the economy and stimulate growth, the Economic Reform
Program (ERP) was launched in 1992/93 and this was further strengthened by the FDRE in
order to redress the structural bottlenecks of the Ethiopian economy.

In order to realize the policy of encouraging PSD, Proclamation No. 15/1992 (Transitional
Government of Ethiopia, 1992) was enacted in May 1992. The proclamation provided new
areas of investment, particularly for domestic investors, in areas such as air transport,
electricity production and distribution, banking and insurance. Moreover, it allowed foreign
investors to enter into joint ventures with domestic private investors without limiting them to
joint ventures with the government.

In June 1996 Proclamation No. 37/1996 (FDRE, 1996) was enacted. In it, investment
objectives, areas and incentives were defined, as were forms of investment and capital
requirements for foreign investors, investment permits, transfers of technology, loans, the
utilization of foreign currency and remittance of funds, and investment administrative
requirements. This proclamation clarified some of the ambiguities that prevailed in the first
one.

xxxv
The Ethiopian Investment Commission (EIC) was established. The commission was
accountable to the Investment Board which was chaired by the Prime Minister. The
responsibility of the EIC process investment application was to issue investment certificates
and the grant investment incentives provided for in the proclamation. The EIC was
responsible for investors with and above a capital amount of Birr 250,000 for domestic
investors, and USD 500,000 or equivalent for foreign investors.

Investment Proclamation No. 280/2002 (FDRE, 2002) was enacted with the aim to widen the
scope of participation of foreign investors and facilitate conditions which enhanced the
country’s investment activities and made the administration system of investment transparent
and efficient.

The Council of Ministers Regulations No. 84/2003 (FDRE, 2003) outlined investment
incentives and investment areas reserved for domestic investors. It identified the investment
activities eligible for income tax exemption and exemption from the payment of customs
duty. The Council of Ministers Regulation No. 146/2008 (FDRE, 2008) amended the
investment incentives and investment areas reserved for the domestic investor. The current
proclamation and regulation of investment activity is the Council of Ministers proclamation
No.769/2012 (FDRE, 2004) and Regulation No. 270/2012 (FDRE, 2005) respectively. The
proclamation reconstituted the former Ethiopian Investment Agency as the new Ethiopian
Investment Commission, EIC and the regulation amended the investment incentives and
investment areas reserved for the domestic investor.

The Government of Ethiopia (GoE) has recently embarked on an industrial parks (IP)
development program. Industrial Parks are defined as geographically delimited areas that are
administered by a single body, and aim to overcome investment barriers at the national level
by offering services, infrastructure, and incentives for businesses that locate and operate
within the site. The term “Industrial Park” is used generically to describe different forms of
zones (including Industrial Zones, Special Economic Zones, Free Trade Zones, and Export
Processing Zones) that vary in size and scope and operate under different incentive regimes.
The IPs in Ethiopia aim to address the market failures related to land access, infrastructure,
and logistics costs, as well as the high costs of doing business. The IPs can potentially be an
effective instrument that offers investors the chance to operate in an improved investment
climate.

xxxvi
The IP strategy in Ethiopia hinges on attracting FDI in the export-led and labor-intensive
manufacturing sector (Ethiopian Economic update, 2015). Investment during this period is
higher when compared to previous governments. This might be because of the new economic
reform programs and investment codes launched by the government. They measurably
contributed to and promoted the participation of investment sectors in economic activities.

As Shown in the table below, the trained of domestic private investment in the manufacturing
sector in the last ten years (20007 and 2016/17) is incremental as a country Ethiopia as well
as a city Addis Abba, albeit not comparable to FDI and there is some fluctuation.

Table 2: Total and sample operational DPMI Projects in Addis Ababa City by subsectors
No Industry Licensed Operational Sample
projects projects #& operational
projects.
No % % No
1 Food and beverage 1325 176 13.2 23.9 52
2 Textile and garment 237 107 45 14.5 33
3 Leather and leather products 203 45 22.1 6.1 15
4 Paper and paper product 284 18 6.3 2.4 5
5 Publishing, printing and Recorded media 864 155 17.9 21 45
6 Chemicals and chemical products 430 50 11.6 6.8 15
7 pharmaceuticals 25 10 40 1.3 4
8 Plastic and rubber 1059 90 8.4 12.2 26
9 metal and engineering 330 51 15.45 6.9 15
10 Electronics 21 1 4.7 0.1 -
11 Furniture 346 18 5.2 2.4 6
12 Construction materials production 202 28 13.8 3.8 4
Total 5326 763 14.3 30 220

As revealed in Table 2 above from the total 5326 domestic private manufacturing investments
that took investment license only 763 (14.3%) were become operational. This shows that
there are serious obstacles that hinder project conversion to operation.

Four hundred and seventeen of the total operational investments were companies form while
346 are sole proprietorship. This is a good indicator that people have been learning how to
build up capital and making business together instead of taking the risk sole proprietorship.

Based on the data obtained from Addis Ababa City Investment Agency, from the total 763
operational investments 176 investments are Food and beverage, 155 are printing and
Recorded media, 107 Textile and garment, 90 Plastic and rubber, 51metal and engineering, 50

xxxvii
Chemicals and chemical products, 45 Leather and leather products, 28 Construction materials
production, each Paper and paper product, and furniture manufacturers were 18, while only
10 pharmaceuticals investments were become operational.

The aforementioned data shows that the trend of domestic private manufacturing
implementation is in line with the government priority area even if the overall investment
conversion rate is low, that is only 14.3 per cent. According to the data, all the largest number
of operational investments, but printing and recorded media are among the government
priority areas. The main reason for the low conversion rate are lack of finance and land
provision as expressed by investment office experts during the interviews.

xxxviii
Table 3: Trend of private domestic manufacturing investment in Addis Ababa (1985-
2009E.C.)

Roll Investment Number of Capital

1 No. years
1985 63investment 19113440
2 1986 52 0
21074590
3 1987 29 0
15705000
4 1988 29 0
14364740
5 1989 30 0
25225270
6 1990 17 0
15698550
7 1991 24 0
14894620
8 1992 25 0
20338160
9 1993 21 0
10765350
10 1994 7 0
91931200
11 1995 20 32501948
12 1996 34 0
22975200
13 1997 27 0
18732400
14 1998 12 0
11245800
15 1999 14 0
87321910
16 2000 5 0
36146000
17 2001 5 57373000
18 2002 7 63530000
19 2003 21 11819460
20 2004 35 0
71050494
21 2005 15 0
41115550
22 2006 41 50330169
23 2007 33 0
26663271
24 2008 116 0
27960587
25 2009 59 10
67308979
0

Graph 1: Investment Trends (19985E.Cto 2009E.C)

xxxix
 CHAPTER THREE

Methodology

3.1. Operational Definition of variables

Even though many variables have been indicated by literatures as determinants of DMIN, it is
not possible to include all of them due to the availability of data and fitness to a specific
model therefore I selected few of them depending on the strength of the variables . The main
variables in the analysis are:
Dependent variable: Private domestic manufacturing investment

The dependent variable in this study is medium and large ‘Private domestic operational
manufacturing Investment (DMIN)’, which is proxy for the performance of private sector in
the economy. It captures domestic private investments in the country over the period under
consideration. The industrial sector comprises manufacturing, mining and construction.
Manufacturing which has been defined as the physical or chemical transformation of raw
materials into new products has however been identified as the part of industry that provides
opportunities for poverty eradication, job creation and economic growth (UNCTAD/UNIDO,
2011).

Independent variables:

Level of education: This variable shows the level of formal education attended by the private
investors in the sample group and its delay impact on quality of management. The quality of
management is essential to see if managers and firm owners have the organizational, financial
and managerial abilities to manage the scaling up of a firm. However, in many developing
countries the quality of the management is low. For example, low levels of financial literacy
can prevent SMEs from adequately assessing and understanding different financing options
and from navigating complex loan application procedures (Nathan, 2011).

Investment areas: This refers to a type of product line within the manufacturing sector
which an investor already invests in, for example, food, beverages, textiles and textile
products, leather and leather products, wood products, paper and paper products, printing,
chemical and chemical products, rubber and plastics products, other non-metallic mineral
products, basic metals, fabricated-metal products, electrical products, and other industries.

xl
The variable therefore investigates which investment area is more challenging in the
manufacturing sector.

Inflation: - It is a persistent tendency for prices and money wages to increase. The dictionary
of economics said “inflation is measured by the proportional changes over time in some
appropriate price index, commonly a consumer price index or a GDP deflator” inflation
occurs when the general price level is rising. High and unpredictable inflation alters the
information system of the relative prices and attached with high riskiness of the projects.
Thus, leaves negative impact on the long term investment prospects (Green and Villanueva
1991).

Market openness:-Trade openness refers to a degree of which countries or economies permit

or have international trade with others. Trade openness may lead to boom-bust cycles of
investment supported by self-fulfilling expectations. In this sense, globalization destabilizes
the economy.
Tan et al (2011) analyzed the determinants of private investment in Senegal and he found a
significant negative relationship between investment and trade openness. One can argue that
there would be a negative relationship between import penetration and manufacturing sector
performance as foreign competition should restrain the exercise of market power by domestic
firms in the domestic(Tan et al 2011). In addition there is market problem relates to non-
patronage of locally produced goods by the society who preference for imported goods.

Access to credit & the cost of finance: This refers to the possibility that individuals or
enterprises can access financial services like credit, deposit and other related services. Access
to loans by financial institutions (availability of bank credit to private investors) significantly
affects private investment. The higher the cost of capital the lower the expected rate of return
to the entrepreneur. Studies show that firms able to access external finance are more likely to
survive, invest and grow than those denied access (Nathan, 2011).

Infrastructure: Firms need access to a reliable electricity supply, efficient transport links and
modern telecommunications services to have the incentives to invest more. Good access to
infrastructure allows firms to become more productive, reduce costs and expand their
businesses. Countries with high infrastructure quality usually attract investment flows
showing a positive relationship (Oniyewu and Shareshta, 2005).

xli
Taxation: Excessively high rates of tax exact a high cost in terms of lower private investment
and growth. They reduce the incentive to invest because the after tax returns to investors are
lower. In addition, the cost of compliance with the administration of taxes can be high. The
literature shows that lower rates of tax can increase investment and growth. Higher rates of
tax can decrease business entry and the growth of established firms, with the medium sized
firms hit hardest, as the small can trade informally, and the large avoid taxes. As well as
reducing tax rates, policies that broaden the tax base, simplify the tax structure, improve
administration and give greater autonomy to tax agencies help to reduce this constraint
(Nathan, 2011).

Raw materials: non-availability of raw materials locally – high dependence on imported raw
materials & foreign exchange costs

3.2. Research design and methodology of data analysis

As stated on the objective of the study, the emphasis of this research is assessing the
challenges and prospects of domestic private manufacturing investment in Addis Ababa. To
have a better understanding about the research problem and objective, the research adopted
mixed research approach. Quantitative method is supplemented by the qualitative method of
inquiry. The researchers will use various descriptive statistics such as the measures of
averages (mean, median and mode), measures of variability, correlation, percentages, tables,
graphs, etc… to analyze the quantitative part and interview and review of literatures is
conducted for the qualitative method.

3.3 Population

Population is the whole groups of individuals, phenomenon, or things that the research aims
to generalize results on. In this study the target population is licensed investors that are
involved in the manufacturing sector, key informants from Addis Ababa investment agency.
The total population is 825 investments which comprise nine sub-sectors namely, food and
beverage (18%); textiles and apparel (14%); leather and leather products (15%); wood, paper
and pulp (6.2%); chemical and chemical products (5.5%); rubber and Plastic (12%); other
non-metallic mineral products (5%); publishing and printing (10%); and finally metal and
engineering products (14.3%) (Addis Ababa investment Agency, 2017).

xlii
3.4 Sample Size and Sampling Techniques

The choice of sampling techniques/design by the researcher depends on the type of research
and type of conclusion that she/he would like to draw (Kothari, 1995). Therefore, the
researcher employed cluster sampling followed by random sampling technique for selection
of samples. The samples used for analysis will be selected from the total population of 735
based on the proportion of each sub-sector (cluster). For the selection of sample experts
purposive sampling technique will be used to get a person from the aforementioned agency.

3.5 Sample Size Determination

The sample size is computed based on the formula proposed by (Hollader, 1999) for single
population. The formula for determining sample size is:
n = n’/1+n’/N
Where:
n = S2/V2
n’ = Sample size from an infinite population
n = Sample size from a finite population
N = Total population
S2 = the variance of the population elements (a maximum value at P = 0.5,
S2 = P (1-P) = 0.5 * 0.5 = 0.25
P = the proportion of population elements that belong to the defined class
V = Standard error of sampling population, that is:
V = (0.05/1.96) = 0.0255 (for a total error of 0.05 and confidence level of 95%, t = 1.96)
Therefore, based on the above sample size formula:
n’ = S2/V2 = 0.25/(0.0255)2 = 0.25/0.00065 = 384.6
n = n’/1+n’/N = 384.6/1+384.6/735 = 385
Accordingly, the sample size is 385(52.3%) of the total population. But this statistical result is
too large to manage due to time and other constraint. So the researcher will take 220 firms
that are 30 per cent of the population as a sample. Adopting proportional allocation, the
sample sizes for the different cluster are calculated as follows:

Food and beverage 45 (18%); textiles and apparel 35 (14%); leather and leather products 37
(15%); wood, paper and pulp 15 (6.2%); chemical and chemical products 14 (5.5%); rubber

xliii
and Plastic 30 (12%); other non-metallic mineral products 12(5%); publishing and printing 25
(10%); and finally metal and engineering products 35 (14.3%).

3.6 Data type, source and collection method

This study will employ both quantitative and qualitative types of data that obtained from
primary and secondary data sources. The reason being, the researcher gathered and analyzed
qualitative primary and secondary data to complement & elaborate the quantitative type of
data. Questionnaires will be administered on the entire 248-size sample through personal
delivery and interview will be held with two Addis Ababa city Investment office experts. The
questionnaires will be pre-tested for reliability and validity through a pilot test because the
quality of the questionnaire partly determines the quality of the research. Necessary
modifications will be made on the basis of the results. In addition to this, for background
discussion and theoretical explanation, the researcher has depended on secondary sources of
data such as Proclamations, annual reports, statistical reports, research documents and
publications.

3.7 Research Hypothesis

The empirical literature on private investment behavior in developing countries seems to have
focused on testing several hypotheses advanced to explain variations in private investment
(Oshikoya, 1994). The hypotheses to be tested in this study are that challenges/constraints
mainly influence the domestic private manufacturing investors in Addis Ababa City.
Specifically the researcher hypothesize a relationship between domestic private
manufacturing and the seven identified variables: Access to finance and its cost, Access to
land, Availability of good infrastructure, Availability of good government bureaucracy,
availability market and management skill.

3.8 Analysis of the data

To establish a clear picture of the characteristics of the sample units, the study will be applied
Descriptive statistics to analyze the data's gathered. The statistical techniques used in the
analysis of the data for this research include frequency distribution, percentage, and the
distribution of means, Pearson chi-square, and contingency table. The Statistical Package for
Social Sciences (SPSS) will be used in the analysis of the data.

xliv
The chi-square test statistic and the distribution of means will be used in the testing of the
hypotheses. The justification for the use of chi-square distribution, with k-1 degrees of
freedom, where k is the number of categories, is driven by the fact that the responses fall into
categorical data. This is to say that once a respondent states that infrastructural problem is his
greatest drawback he cannot again claim that access to finance is his greatest challenge.
Similarly, those who rated managerial capacity as their greatest problem could not at the
same time rate access to finance or any other factor for that matter as their greatest challenge.

Finally, content analysis will be used to analyze the qualitative data to triangulate and support
the quantitative results.

xlv
 CHAPTER FOUR

Data Presentation, Analysis and Interpretation

4.1 Response Rate

In this study the researcher selected 220 respondents for questionnaires out of which 217
respondents were owners (managers) of investment enterprises while the remaining three
were experts of Addis Ababa Investment Agency. From the total respondents of the 220 that
were provided with questionnaires eight investment enterprises owners/managers were failed
to fill the questionnaires.

Regarding the interview, seven randomly selected investment enterprises representatives

participated and properly responded to the interview questions. The response rate was 95%
since from the total 220 respondents only eight were failed to respond.

4.2 Demographic Characteristics of the Respondents

The socio-demographic characteristics of the respondents have distinction among the

respondents. As depicted in Table 1, 90% of the respondents are males while the remaining
10% were Females. The majority of the respondents ‘age falls in the category of 26-30 and
31-35 years which corresponds to 47% and 36% respectively. The age category 30-40 is 7%
and age of the respondents greater than 40 are only 5%.

As to the educational background of the respondents, 20% of the respondents were Diploma
holders, 52% were Degree holders and 6% of the respondents were masters ‘degree holders.
The work experience of the respondents are presented in Table1, As shown in Table 1, 53.%
of the respondents have 6-10 years of experience,41% of the respondents have 11-15 years of
experience and 5% of the respondents have 16 and above years of experience. The
respondents were qualified and experienced and hence the information provided by them was
reliable. As the data in Table 4 showed the majority of the performer are male well educated
young age groups (90% males, 90% of the respondents are between 25 to 40 years ages. The
respondents are qualified and experienced and hence the information provided by them is
reliable.

xlvi
Table 4: Socio-Demographic Characteristics of the Respondents
Respondents’ Soscio-demographic Number of percentage
Background characteristics respondents
Age 20-25 years 12 5.2
26-30 years 108 46.55
31-35 years 85 36.2
36-40 years 16 6.8
Above 40 years 12 5
Sex Male 209 89.6
Female 24 10.4
Educational Level Certificate and below 46 22
College Diploma 42 20
First Degree 109 52
Master’s Degree and above 12 6
Work Experience Below five years - -
6-10 years 125 53.44
11-15 years 96 41.7
16 years and above 12 5

4.3 Investment process rate and Status of operational Domestic Private

Manufacturing Investment (DPMI) Projects in Addis Ababa City by
Sectors

Private investment has three statuses: pre-implementation, implementation and operation.

Private investors receive investment permits and investment land in the pre-implementation
status. Those who have started practical activities (such as civil engineering works, the
construction of factory buildings or installation of purchased machinery and equipment) are
considered to be in the implementation status. Those who have started with production are in
the operation status (Hussien, 2000).The focus of this study is the third one, operational status
because they could give good information as they passed all the statuses.

According to the information in Table 5 below, only 17% of the respondents complete the
investment process within a year and started operation. Twenty three percent of the
respondents had taken two to three years to begin operation while 53% of the respondent
took four to five years and 7% of the respondents took more than five years.
Overall, 60% of the total respondents were delayed to begin operation as most of the local
investment is not that much big, for instance 23.9 % were food and beverage while only 1.3
% was pharmaceuticals. This is also confirmed by the majority of the respondents. More than
84% of the respondents thought that their investment area they have been engaged were not

xlvii
challenging, while only 15% of the respondents thought that their investment area were
challenging by itself.
Table 5:- Time taken to complete investment process and difficulty level of the areas.
Question Responses Frequency Percent
How long time the investment a) One year 35 17
process took? b) two to three years 48 23
c) four to five years 111 53
d) More than five 19 7
Totalyears 209 100
Do you think that your a) yes 32 15.5
investment area is b) No 177 84.5
Total 209 100
challenging by itself to
operate effectively?

4.4 Source of and access to Finance of private Investors

The financial source for the investors in the manufacturing sector were analyzed and the data
is presented in Table 6 below. More than 85% of the respondents replied that the main source
of finance for their investment was their own contributions. And 6% of the respondents used
share contribution as source of finance while around 7% of the respondent secured fulfilled
their capital needs from banks. Only 1.4% of the research participants employed internal
sources (e.g. money lenders, family/friends) to secured finance.

The information in Table 6 below also shows the difficulty level of accessing finance from
external sources. Twenty-five percent and 39 % of the respondents who used external sources
of finance were found financial supply very difficult and difficult to obtain respectively.
According to only 6 % of the respondents external sources of finance were not difficult to
access. And significant number of the respondents (30%) did not try external source of
finance.
Table 6: Source of finance and difficulty level to access.
Question Responses Frequency Percent
What source of finance a) Own contributions 178 85.1
b) Share contributions 13 6.1
did you employ to realize
c) Formal financial institutions (banks and 15 7.24
this establishment? d Micro finance)
)Internal financial sources (e.g. money 3 1.4
e)Other sources - -
(Please circle one or lenders, family/friends)
Total 209 100
more) a) very difficult 52 25
b) difficult 82 39

xlviii
If you used external c) Not difficult 12 6
d) I have never used 63 30
source of finance, how do
The complexity of securing a bank loan for those private investors who requested credit was
also studied. Accordingly, around 85% of the respondents replied that bank
paperwork/bureaucracy or delays in loan delivery and inadequate credit for the investment
were the major problems experienced in securing loans from financial institutions.
Collateral requirements by financial institutions and the corruption of officials were the next
most commonly cited difficulties to securing bank loans. By contrast and on average,
interest rates and the need for a detailed feasibility study (business plan) from the customer
were not obstacles to acquiring bank loans for investment activities as seen in Table 7.

Table 7: Constraints of private investors due to bank loan access

N Constraints Attribut Frequency Percent

o. e
Collateral requirements of yes 115 55
1. banks/financial institutions No 94 45
Bank paper work/bureaucracy/delay Yes 178 85
2. in loan delivery. No 31 15
3. High interest rate Yes 100 48
No 109 52
4. Corruption of bank officials Yes 121 58
No 88 42
5. Inadequate credit/finance Yes 176 84
No 33 16
Banks require detailed feasibility Yes 73 35
6. study information on customers No 136 65
(Source: compiled from Survey Questionnaire, 2017)

The problems in acquiring bank loans are presented below, ranked according to their
severity. According to Table 8, Bank paperwork and inadequate credit were identified as the
first severe problem of 49% of the respondents. The corruption of bank officials working for
financial institutions was the second biggest problem for 30% of the respondents, and
interest rates were the third biggest hurdle for 21% of the respondents.
Table 8: Ranking of problems experienced when trying to secure a bank loan

Level of difficulty Frequency Percent

Bank paperwork (1) 44 21
Inadequate credit (1) 58 28
Corruption of bank (2) 63 30
Interest rate (3) 44 21
Total 209 100

xlix
 In addition to the above difficulties in securing a bank loan, private investors identified other
challenges in the interviews. These are:
i. The long time it takes to process bank loan applications from private investors and
the resulting delay of private investment status.
ii. According to the investment loan policy, if investors could not cover 30% of the
initial cost, the Development Bank of Ethiopia (DBE) could not extend loans on time
for the remaining 70% of the investment cost. In addition DBE does not provide loan
amount below one million birr which can buy a manufacturing machines for medium
scale factories.
iii. Construction and the installation costs of investment are not always accepted by
banks as collateral for bank loan requests.
iv. Due to a shortage of cash experienced by the financial institutions, banks priorities
within the type of investment as per the policy of the government and minimise the
credit requests made by the investors.

4.5 Cost of Finance

As per the survey results, Table 6 below shows that the bank interest rate was difficult to
pay back for 45% of the respondents in total while it was not difficult for 55% of the
respondent. Therefore, cost of capital is not easy for significant number of local private
investors in the manufacturing sector.

Table 6: the view of investors towards Bank interest rate

Attributes Frequency Percent
very difficult to pay back 46 22
difficult to pay back 48 23
Not difficult to pay back 115 55
Total 100

The interview with private investors brought additional information to light concerning the
interest rate of bank loans. Some of the relevant points are summarized below. The
interviewee’s opinions on the interest rate are that:

i. It is fair compared to the benefits the loan offers to their investment activities.

ii. If the loan is properly utilized for the intended objective, the interest rate does not
have a negative impact.

l
 iii. Compared with other financial institutions, the interest rate of commercial banks is
low.

iv. The interest rate is fair, but the loan application procedure and limits on the loan
amount is not, and does not meet the investor’s requirements.

v. It promotes economic development.

Conversely, other participants in the interview felt that the interest rate level stated that

Interest rates of bank loans were high because:

i. They were required to pay as per the regulation of the commercial banks and the
NBE.

ii. Inflation has its own impact on the interest rate increment.

iii. Bank officials, and especially engineers of the banks, are highly corrupt.

iv. The repayment period of the loan is too short.

v. In relation to the ability of the loan to increase productivity and output, the interest
rate is deemed high.

4.6. Infrastructure facilities

The variables used to evaluate the quality and efficiency of infrastructure service deliveries to
private investors in the manufacturing sector are discussed below. These infrastructure
establishments are: road authority, telecommunication authority, and electric power
corporation and water agency.

According to Table 7 below, 42 % of the respondents consider electricity problem as minor

obstacle to the current operations of this establishment while 31% and 27% of the
respondents consider the electric problem as serious and very serious respectively. Therefore,
the problem of electricity is needed to be tackled. The other infrastructure which hinders the
operation of the local manufacturer is telecommunication services. Seventy five percent of
the respondents believed that telecommunication services were problematic. However, water
and access road were not considered as a problem for the majority of the respondents. Ninety
seven of the respondents confirmed that they had access road. Regarding to water supply,

li
38% of the respondents replied that water was not a problem while it was a minor problem
for 40% of the respondents.

lii
Table7: Quality of Infrastructure facilities
Attributes Response Freque Percent
ncy
To what degree is electricity an obstacle to the current No obstacle - -
minor 88 42
operations of this establishment? serious 65 31
Very serious 56 27
Total 209 100
How much serious is the water supply problem to the current No problem 79 38
Minor problem 84 40
operations of this establishment? serious 27 13
Very serious 19 9
Total 209 100
How much serious is telecommunication service problem to No problem 52 25
Minor problem 75 36
the current operations of this establishment? serious 57 27
Very serious 25 12
Total
Have you access road to your establishment? yes 203 97
No 7 3

Total 209 100

4.7. Access to land

Table 8 below presents the problem of access to land and considers the land tenure system,
bureaucratic procedures and lease price of land for private investors in the manufacturing
sector. To summaries, 64 % of the respondents did not face problems during land acquisition
course while 36 % of the respondents disclosed that they encountered problem during land
acquisition process. Around 82% of respondents said that the existing land tenure system
and bureaucratic procedures were obstacles to accessing land for their investment while half
of these respondents reported that the land lease price was not a problem to gaining land for
investment purposes.
Table 8: Land Access
Attributes Response Frequency Percent
Did you encounter any problem during land acquisition? Yes 75 36
No 134 64
Total 209 100
If you experienced problems during land acquisition, what
was it?
a) Land tenure system Yes 171 82
No 38 18
c) Bureaucratic procedure Yes 173 83
No 36 17
c) High Lease price Yes 107 51
No 102 49

liii
According to the information obtained from the interview held with officers the means of
access to land by the investors were:
i. Some of the private investors used their own land.
ii. Some got the land for investment through purchase and through a lease.
iii. There are no complicated procedures for accessing land.
iv. Some of the investors got the land from the foreclosure of bank bids.

4.8. Judicial system

The respondents were also asked to comment on the efficiency of the judicial system in
relation to their investments, for example the lack of independence, inability to enforce
rulings, delay in court rulings, lack of motivation and corruption. In this way, the influence of
the efficiency of the judicial system on the operation of private investors was studied.
As indicated in table 9 below more than 80% of the respondents cited lack of independence,
inability to enforce rulings and corruption as problems of the judicial system in relation to
their investment operation. Delayed court rulings and Lack of motivation also the problems
of the judiciary as underlined by 74% and 57% of the respondents respectively.

Table 9: Judicial system and the investment

Attributes Response Frequency Percent
Have you ever any experience with the legal system like yes 178 85
No 31 15
contract enforcement, dispute resolution etc…
Total 209 100
Shortcomings
Lack of independence yes 171 82
No 37 18
Inability to enforce rulings Yes 178 85
No 31 15
Delayed court rulings Yes 155 74
No 54 26
Lack of motivation Yes 119 57
No 90 43
Corruption Yes 171 82
No 37 18

This survey also ranked the level of the shortcomings related to the judicial system in order of
their severity. Accordingly, the most acute shortcoming for the inefficiency of the judicial

liv
 system is a lack of independence. The second-worst problem is the inability to enforce rulings
and the third most acute shortcoming is a delay court in rulings for all private investors.
The major reasons for the problems related to the legal system stated in the interview are
summarized as:

i. There are poor legal systems in place that open the door to corruption.

ii. The legal system is not efficient enough to fight corruption.

iii.Sometimes private investors felt that it would be better to pay a bribe in order to get their
work done faster.

iv. Investors always complain, and this is a clear sign of the prevalence of corruption.

4.9. Bureaucratic Red Tape and corruption

The study also investigated bureaucratic red tape and corruption in relation to manufacturing
investment. How was the service delivery in investment licensing, bank loans, vehicle
registrations, police services and utilities?
As indicated in Table 10 below, all of the respondents replied that they were subjected to
bureaucratic red tape in one or another way in getting public services. Accordingly, around
three-fourths of the respondents said that land, bank loans and utility services (like water,
electric power, and telephone lines) providers were the major challenging places to obtain
services. But, the other public services (like investment licenses, vehicle registrations and
police services) were not that much problematic in order to get services.
Furthermore, more than half (56%) out of the total respondents reported that their investment
activities was negatively influenced by the high challenge of corruption in the state to get
different services.

lv
 Table 10: Bureaucratic red tape and investment

Attributes Response Frequency Percent

Have you ever been subjected to delays in getting yes 209 100
public services like investment license, bank loans,
No - -
land, and infrastructure utilities due to the bureaucratic
red tape? Total 209 100

From the public services listed below, for what services

do you subjected to delay due to bureaucratic red tape?
To get investment license yes 15
No 85
To get bank loans Yes 77
No 23
To get land Yes 80
No 20
To register vehicle Yes 13
No 87
To get police services Yes 12
No 88
To get utilities (water, electric and telephone) Yes 79
No 21
In relation to your investment activity how is the level challenging 117 56
Not 92 44
of corruptions in Addis Ababa
challenging

In addition to the above, private investors and officials interviewed mentioned the poor
delivery of the following public services due to bureaucratic red tape.
i. Inefficiency of customs and duty authority in facilitating taxes, customs duties, etc.

ii. Inadequate services by the transport authority in granting licenses and other services.

iii. Inefficiency of the municipal office, especially in construction permission processing.

iv. Unwillingness of the investment office in permitting them to invest as per their interest.

v. Inadequate service by the telecommunications authority, especially the internet service

problem.

Regarding to corruption, more than half (56%) out of the total respondents reported that their
investment activities was negatively influenced by the high challenge of corruption to get
different services.

lvi
Moreover, the interviewees added that a corruption level in the country is still at a lower level
than other developing countries. Nevertheless it has the following negative effects on
investment:

i. It affects the economic, political and social conditions and so can create crises in the
country.

ii. It hampers development and consumes the public wealth.

iii. It enhances a rent-seeking attitude and hinders poverty reduction endeavors.

iv. It affects the quality of production and competition.

v. It could discourage potential private investors to come investment activities.

4.10. Investment incentives

The investment incentives given by the government to private investors were also studied so
as to ascertain whether these incentives promote the investment or not. Here, income tax
holidays, customs duty, access to low land lease prices and market incentives are considered.

The relevant information is presented in Table 11 below. Eighty-nine per cent of the
respondents disclosed that they have enjoyed the investment incentives given to the sector.
Accordingly, around three-fourths of the investors replied that income tax holidays, customs
duty, and access to low lease price of land were significant motivators while access to bank
loan underlined by 65% of the respondents as investment promotion factor. On the other
hand, 56% of the respondents replied that market incentives did not motivate them much to
invest. Regarding to the satisfaction of the respondent with the investment incentive, 40% of
them replied that they did not satisfied, 27% satisfied, 22% very satisfied and 11 % partially
satisfied respectively. Of course around sixty percent of the respondent have got satisfaction
in different degree but significant number (40%) of the respondent did not satisfied so it
needs due consideration.

lvii
Table 11: Investment incentives and its promotion value
Attributes Response Freq Percent
uenc
y
Have you ever enjoyed the investment incentives such as yes 186 89
No 23 11
construction materials and capital goods custom duty free,
income tax exemption and land access etc…? Total 209 100
Do the following investment incentives contribute to
encourage the manufacturing investments?
Custom duty free importation of construction materials and yes 158 76
capital goods No 51 24
Yes 176 84
No 33 16
Access to low lease price of land
Yes 150 72
Income tax holidays No 59 28
Yes 136 65
Access to bank loan No 73 35
Market incentives Yes 92 44
No 117 56
How much do you satisfied with the implementation of the Very satisfied 41 22
investment incentive? satisfied 50 27
Partially satisfied 21 11
Not satisfied 74 40

4.11. Political instability, Erratic Policy and Investment

The risks of political instability and frequent policy change like security systems, trade
restrictions and public offices, as well as unnecessary interference are examined in this
section.

As shown in Table 12 below, 16% of the respondents worried of political instability may
negatively affected their investment while the majority 84% were not concerned about the
issue. Out of those who replied that there is a risk of political instability, 97% reported that
unnecessary interference from officials were the major causes of political instability and risk
while security systems and trade restrictions were not deemed risky for private investors in
the manufacturing sector. Business and Investment requires consistent policies but we
observe some inconsistency in Ethiopia and more than 50% of the respondents confirmed that
their investments were affected by erratic government policy while 46% of the respondents
replied that they were not affected by policy change.

lviii
 Table 12:- Political instability risk and investment.
Attributes Response Frequenc Percent
y
Do you think that political instability like security systems, yes 33 16
No 176 84
trade restrictions and public offices risk investments in
Addis Ababa? Total 209 100

Causes of political instability risks to private investors

yes 2 6
Weak Security system No 31 94
Yes 6 19
High trade restrictions No 27 81
Yes 28 86
Unnecessary interference of government bodies No 5 14
How much Policy Inconsistencies like too many very much 44 21
much 69 33
government agencies at the ports, midway policy reversals
not at all 96 46
by government etc. affect your work?

4.12. Raw material supply and product market

The supply of raw materials and the demand for products of domestic manufacturing
investment were also included in the study. As Table 13 below shows, the availability of raw
materials was not god as replied by 71% of the respondents. The supply of the raw materials
was good for 24% of the respondents while 15% of the respondents claimed very good raw
material supply. Regarding to the demand for locally produced goods, the research
participants responded as follows. The market was not good for locally produced goods as
replied by 71% of the respondents. However, the market was good and very good according
to 20% and 27% of the respondents respectively. The study shows that the two pull factors of
investment were not good to transform more investors from home

lix
Table 13: Raw materials product market availability
Attributes Response Frequen Percent
cy
How is the raw materials supply for your factory? Very good 15
good 24
Not good 71
Very good 27
How is the demand for your product in the market? Good 20
Not good 53
If the market for your product is not good, what do you think
the reason/s is/are?
a) Non patronage of locally produced goods by government 52 25
agencies and departments
b)The
b) Thesociety
society preference
preference for
forimported
importedgoods
goods 111 53
c) Lack of access to export market and market information. 21 10
d) Lack of subsidy and incentives 25 12

4.13. Feed Back

The respondents were asked about if they had any idea on the challenges of the domestic
manufacturing and recommendations. According to the majority (more than 85%) of the
respondents finance, land and trade logistics were the critical constraints to improve
competitiveness and accelerating growth domestic manufacturing investment sectors in
Ethiopia.

4.14 Summary of the chapter

This research was successful as 95% of the sample population responded to the
questionnaire.
The background information of the respondents was 10 % female and 90 % male. The age
frequency of the study indicates that the majority of the study group, which was 82 %, was
between 26 and 35 of age. The educational background of the research subjects indicates
that more than 75% attended higher education. All of the respondents have experience in
the sector. Fifty three percent of the respondents have 6-10 years of experience and more
than 45% of the respondents’ experience exceeded eleven years.
The focus of this study was investments which already operate the manufacturing activities.
More than 60% of the participants took more than 4 years to complete the investment process
and to start the operation.

lx
Four hundred and seventeen of the total operational investments (the study population) were
companies while 346 are sole proprietorship. This finger represents only 14.3 per cent of the
total investors who took investment license. So the challenges summarized in terms of
variables such as access and cost of finance; infrastructure facilities; land access; judicial
system; bureaucratic red tape and corruption; Political instability and erratic Policy; raw
material supply and product market availability.
Only around 7% of the respondent secured capital needs from banks while more than 85% of
the respondents replied that the main source of finance for their investment was their own
resource. According to around 85% of the respondents, bank paperwork, bureaucracy or
delays made loan delivery inaccessible. The cost is also not easy for 45% of the respondents
while the other 55% took it easy.
When we come to infrastructure electric power supply was a serious problem for 58% of the
respondents. Telecommunication services were problematic for 75% of the respondents.
However, water and access road were not considered as a problem for the majority of the
respondents.
According to 82% of the respondents the existing land tenure system and bureaucratic
procedures were obstacles to accessing land but only half of the respondents complained on
the land lease price.
More than 80% of the respondents cited lack of independence, inability to enforce rulings and
corruption as problems of the judicial system in relation to their investment operation (table
9). Around three-fourths of the respondents underlined that land, bank loans and utility
services (like water, electric power, and telephone lines) were subjected to bureaucratic red
tape.
Unnecessary interference from officials was the major causes of political instability and risk
as reported by 97% of the respondents. And more than 50% of the respondents confirmed that
their investments were affected by erratic government policy.
The supply of raw materials and the demand for products were also another headache to the
domestic manufacturers. The raw materials accessibility and the demand for their product
were similarly not good for 71% of the respondents.

However, around 60 % of the respondents have satisfied in different degree with the
government intervention via investment incentives.

lxi
Regardless of the above mentioned challenges, investments in general and domestic
manufacturing investment in particular have good prospects in Ethiopia. Of course the
current priority of the Ethiopian government is export oriented foreign direct investments of
the manufacturing sector and does every intervention in that respect. But the local
manufacturing has the opportunity to benefit from the spillover. Some of the benefits of the
local manufacturing investors are lessons on technology and management obtained from
foreign investment. The foreign investors come with new technology and management skill
so that the domestic investors have the opportunity to snatch these technology and skills. The
domestic investor can also use the opportunity prepared for foreign investors. The
government has been constructing big power source, transport infrastructure specially the
railway construction and the widening global destination of Ethiopian Airlines which
facilitate the fast delivery of imported goods for investments and the fast export of products
to the market.
The government influences the foreign investors towards export so that the large and fast
growing domestic market offers good prospects to domestic investor’s .Besides; they are free
and encouraged to join the export market, too.
Ethiopia has an increasing opportunity of global market access for the destination of export
products. It is located in the Horn of Africa at the crossroads between Africa, the Middle East
and Asia, within easy reach of the major ports of the Horn. It‘s Membership of the Common
Market for Eastern and Southern Africa (COMESA) embracing 23 countries with a
population more than 300 million. Ethiopia also enjoys the benefits of preferential tariff rates
on exports to these countries. Ethiopia is an ACP member (African, Caribbean and Pacific
Group) and accession to the WTO is under negotiation.
Duty and quota free access into the U.S. (AGOA) and EU (EBA) markets. Export products
from Ethiopia to the EU market are entitled to duty reductions or exemptions and are free
from all quota restrictions under the terms of the Lome Convention. The trade preference
accorded Ethiopia includes duty free entry of all industrial manufactured products. Under the
generalized system of preferences (GSP), a wide range of Ethiopia's manufactured products
are entitled to preferential duty treatment in the United States, Canada, Japan and most EU
countries.
Furthermore, significant investment incentives have been given to investment in general
manufacturing investment in particular. Income tax exemptions, 100% Customs Duty free
importation of capital goods (plant and construction machineries; vehicles) construction
materials, etc.) With 15 % spare parts and construction materials; laboratory and work shop

lxii
equipment. In addition, raw materials needed for the production of export goods are
exempted from custom duty and tax and export goods, too.

lxiii
 CHAPTER FIVE

Conclusion and Recommendations

5.1 Conclusion

The very essences of the study were to assess challenges, prospects and trend of domestic
private manufacturing investment in Addis Ababa.

Addis Ababa is the capital and largest city of Ethiopia. It has a population of 4,548,577
according to the 2007 population census, with annual growth rate of 3.8%. This number is
largely underestimated. As a chartered (ras gez astedader), Addis Ababa has the status of
both a city and a state. It is where the African Union is and its predecessor the OAU was
based. It also hosts the headquarters of the United Nations Economic Commission for Africa
(ECA) and numerous other continental and international organizations. Addis Ababa is
therefore often referred to as "the political capital of Africa" for its historical, diplomatic and
political significance for the continent. It is also referred as the business hub of the country as
it generates the considerable amount of the GDP of the country.

The city is divided into 10 boroughs, called subcities (Amharic: ክፍለ ከተማ,), and 99 wards.
The 10 sub cities are: Addis Ketema, Akaki Kaliti, Arada, Bole, Gullele, Kirkos, Kolfe
Keranio, Lideta, Nifas Silik- lafto and Yeka.

The researcher used the mixed methods of research where both qualitative and quantitative
methods are effectively employed to meet the research objectives. The researcher selected the
samples from a group of experts working in investment office. The method of selection is
purposive sampling in which experts with better proximate with investment were selected.

There were 220 sample respondents out of which 209 were those that correctly responded to
the questionnaires. In addition to the above samples, two officials from Addis Ababa
Investment Office were selected for the interviews.

According to the data from Addis Ababa Investment Office there are 6180 that obtained
investment licenses in the manufacturing sector, however there are only 741 operational
projects that distributed in twelve subsectors. There is delay in projects pertaining to
organizational inefficiencies of project owners and other factors external to the organizations.

lxiv
Regardless of the potential to investment, the actual investment activities are not as expected.
The very reason for low investment performance of the city is that many investors did not
enter the operation stage after taking the investment license. This research tried to assess the
challenges underling it.
Therefore, the owners/managers mentioned lack of finance, electric power shortage and
interruptions, institutional bureaucracy, corruption, market inaccessibility, lack of skilled
labor and land rent and lease price as challenges with a varying degree of severity from high
to negligible.

5.2. Recommendations

a. Private investors should critically study the opportunities and challenges of the investment
areas they have chosen prior to getting an investment permit, with a particular focus on
efficient manpower in all phases. They should develop a thorough business plan and
consult with professionals and experienced experts in the selected investment areas before
starting with their investment activities.

b. Private investors should first identify sources of finance. Clear and open discussions with
the banks must take place to establish the investment areas allocated for loan access set by
government policy.

c. In addition, the investment agency office of the state should carefully assess the feasibility
of all possible types of investments first and only then select and grant investment permits
for a specific investment area.

d. Access to credit for private investors should be made more accessible by banks and should
be timeous and through the establishment of fair collateral requiring credit schemes,
efficient bank paperwork, and the supply of a sufficient amount of credit. In addition, the
government should increase its budget and efforts towards assisting the private sector
through the issuing of credit which goes a long way to boosting private investment.

e. There is still a need for the city administration and federal government to develop the
infrastructural base of the economy and so boost the private sector. Therefore, improving
the availability and quality of utilities such as electricity, water, and telecommunications is
important to encourage domestic private manufacturing investment.

f. The government should allocate development funds as incentive for domestic private
investors to invest and start operation as per the standard.

lxv
 g. The establishment of comprehensive, reliable and timely information on corruption in the
business sectors is needed. Finally, the strengthening of institutions like the judiciary and
legislature is required to minimise corruption.

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 LEAD STAR UNIVERSITY COLLEGE
FACULTY OF BUSINESS AND LEADERSHIP
GRADUATE DEPARTMENT OF BUSINESS LEADERSHIP

APPENDICES

Appendix A: Survey Questionnaire

To be filled by Owners/Managers of Domestic Private Investment in manufacturing sector.

Dear Respondents,

My name is Abraham Lemma an employee in Ethiopian Investment Commission while I am

a student of Lead star University College for Master of Business Administration. And, I am
undertaking a research study on “An assessment of the challenges and prospect of Private
Domestic Investment in the Manufacturing sector: The case of Addis Ababa, Ethiopia”. The
objective of the study is to identify the challenges and prospects of the domestic private
investors in the manufacturing sector in Addis Ababa city.

The objective of the research is for academic purpose to achieve my partial fulfillment of
master’s degree in the field of study stated above. Your cooperation by responding to the
questionnaire is decisive in order to complete my study. In order to ensure confidentiality do
not put down your name on the questionnaire but please answer the questions as honestly and
objectively as possible.

Thank you in advance for your time and consideration.

1. Background Information

1.2. Name and address of the firm: Name: _________________________

1.3 Address: Region Addis Ababa, sub city: _____________, Woreda: _________

1.4. Position of the interviewee (Please circle one):

a) Owner only b) Manager only c) Owner and Manager

1.5 Gender of the respondent (Please circle one): 1) Male 2) Female

1.6. Age of the respondent: _____________ years

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1.7. Educational level of the respondent: ______________ grade

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2. Basic business information

2.1. How long did it take to complete the investment process and to start
operation/production?

2.2. What is this firm’s current legal form? Please circle one.

a. Sole proprietorship

b. Partnership

c. Private Limited company

d. Share Company

e. Others (specify) _________________________

2.3. What are the investment areas (types) of your firm? Please circle one or more

a. Food industry
b. Beverage industry
c. Textile and textile products industry
d. Leather and leather products industry
e. Wood products industry
f. Paper and paper products industry
g. Printing industry
h. Chemical and chemical products industry
i. Basic pharmaceutical products and pharmaceutical preparations industry
j. Rubber and plastics products industry
Other non-metallic mineral products industry
k. Basic metals industry (excluding mining of the mineral)
l. Fabricated metal products industry (excluding machinery and equipment
m. Computer, Electronic and optical products industry
n. Electrical products industry
o. Machinery/Equipment industry
p. Vehicles, trailers and semi-trailers industry
q. Others (specify) __________________________________

2.4. Do you think that your investment area is challenging by itself to operate
effectively?

a) Yes b) No
3. Source and access of Finance

3.1. What source of finance did you employ to realize this establishment? (Please circle
one or more)

a) Own contributions b) Share contributions c) Formal financial institutions (banks

and Micro finance)

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 d) Internal financial sources (e.g. money lenders, family/friends)
e) Others (specify)

3.2. If you used external source of finance, how do you judge the level of difficulties to
access?

a. very difficult b) Difficult c) not difficult

3.3. If experience any difficulty in accessing finance, what were the problems? (Please
circle one from listed number under Yes or No).

No. Problems Yes No

1 Collateral requirements of banks/financial institutions 1 2
2 Bank paper work/bureaucracy/delay in loan delivery. 1 2
3 High interest rate 1 2
4 Corruption of bank officials: 1 2
5 Inadequate credit/finance 1 2
Banks require detailed feasibility study information on
6 customers 1 2
7 Others (specify) _______________________ 1 2

3.4 .From the problems to access finance in question No. 3.3 above, what are the first
three most severe problems (please put from most severe to the next respectively) ,
, and .
4. Cost of Finance
4.1 How difficult is the interest to pay back?
a) very difficult b) Difficult c) not difficult

5. Quality of Infrastructure facilities

5.1. Over the last two years, did this establishment submit an application to obtain an
electrical connection? a) Yes b) No

5.2 To what degree is Electricity an obstacle to the current operations of this

establishment?

a) No obstacle b) minor obstacle c) moderate obstacle d) Major obstacle e) very

severe obstacle

5.3. If you have ever experienced it, How much serious is the water supply problem to the
current operations of this establishment?

a) No problem b) minor problem c) moderate d) Major problem e) severe problem

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 5.4. If you have ever experienced it, How much serious is telecommunication service
problem to the current operations of this establishment?

a) No problem b) minor problem c) moderate d) Major problem e) severe problem

5.5. Have you access road to your establishment?

a) Yes b) No

5.6. If your answer to the above question is No, what is the reason (please specify)
.

5.7. How much satisfactory is the telecom service to your operations?

a) Very good b) good c) satisfactory d) it is not satisfactory e) bad

6. Access to land
6.1 Do you encounter any problem to access land?

a) Yes b) No

6.2. If you experienced problem, what was it?

a) Delay b) costly lease price c) access denied d) other (please specify)

7. Judicial/Legal System
7.1. Have you any experience with the legal system like contract enforcement, dispute
resolution etc…

a) yes b)No

7.2. If your answer for question no 7.1 is yes, have you observed following problem/s?
No. Shortcomings Yes No
1 Lack of independence 1 2
2 Inability to enforce rulings 1 2
3 Delayed court rulings 1 2
4 Lack of motivation 1 2
5 Corruption 1 2
6 Others (specify) ___________________ 1 2

7.3. From the legal system shortcomings in question No. 7.2 above, list from the first to
the third most severe shortcoming. (Please fill the number on the given black space)
_____, _____ and _____

8. Bureaucratic Red Tape

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 8.1. Have you been subjected to delays in getting public services like investment license,
bank loans, land, and infrastructure utilities due to the bureaucratic red tape?
a)Yes b) No

8.2. From the public services listed below, for what services do you subjected to long
delays due to bureaucratic red tape? (Please circle one from listed number under Yes
or No)
No. Public services Yes No
1 To get investment license 1 2
8.3. In 2 To get bank loans 1 2 your
3 To get land 1 2
4 To register vehicle 1 2
5 To get police services 1 2
6 To get utilities (water, electric and telephone) 1 2
7 Others (specify) _________________ 1 2
perception, does corruption in this city to get different services like bank loan,
investment permit and license, municipality works, infrastructure facilities that are
related to your investment was high and worsen investment status delay?
a) Yes b) No
9. Investment incentive structure
9.1 Have you ever employed the investment incentives such as income tax holidays,
construction and capital goods custom duty free and access to bank loan and land?
a) Yes b) No
9.2. If your answer for question No.9.1 is yes, how much is/are helpful for your
investment?
a) Very helpful b) Helpful c) not enough

9.3. How much do you satisfied with the implementation of the investment incentive?

a) very satisfied b) satisfied c) partially satisfied d) not satisfied

9.4. Which one of the following investment incentives promotes you much to invest?
(Please circle one from listed number under Yes or No)
No. Investment incentives Yes No
1 Income tax holidays 1 2
2 Custom duty 1 2
3 Access to bank loan 1 2
4 Access to low lease price of land 1 2
5 Market incentives 1 2

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 6 Other (specify) ______________ 1 2

10. Policy Inconsistencies & bureaucracy

10.1 How much Policy Inconsistencies & bureaucracy – CAC delays, too many
government agencies at the ports, midway policy reversals by government etc. affect
your work?
a) very much b) sometime c) not at all

11. How much Raw materials are available for your product?

a) Very much b) available c) not available

12. How is the market of your product?

a) Good b) It not good

13. If your answer for question no 12 is letter "b” what do you think the reason/s is/are?

a) Non patronage of locally produced goods by government agencies and departments,

b) The society preference for imported goods, c) lack of access to export market and
market information. d) Lack of subsidy and incentives

14. How much the Macroeconomic uncertainty e.g. inflation, exchange rate, foreign currency
supply challenge your production?

a) Very much b) much c) moderately d) little e) not challenging

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15. How much Management related problems such as poor leadership, family interference,
no training, no succession plan poorly educated workforce, lack of motivated staff, no
business plan etc. challenge the business?

a) Very much b) much c) moderately d) little e) not challenging

16. How much shortage of modern technology such as lack of current information about
production material, method of production no preservation or storage facilitate for fresh
fruits, foods, poor quality products etc. etc.,

a) Very much b) much c) moderately d) little e) not challenging

17. Feed back

17.1If there were other problems (other than the described one), would you please list out
them?

__________________________________________________________
__________________________________________________________
__________________________________________________________

17.2. What do you suggest as a solution for the above-mentioned problems?

__________________________________________________________
__________________________________________________________
__________________________________________________________

I thank you again for your cooperation

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Appendix B: Interview Questions

1. In the questionnaire, most of the respondents were replied that they had a problem of
credit access from banks. Why?

2. Some investors replied that banks did not give adequate credit as per their proposal for
the investment or as per their request. Why?

3. Out of the private investors were reported that infrastructure facilities such as electric,
telephone, and water are the obstacles for the progress of investment status. What is your
opinion?

4. Most of the investors were engaged in specific investment areas such as food industry.
What are the reasons?

5. Is there any practice made before to create awareness on the existing issues of investment
like its rules, policies, procedures, taxes to private investors?

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