Trends of private investment in Ethiopia

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This chapter deals with the studies made in the field of private investment and its current findings. Several hypotheses are assessed in order to explain variations in private investment in economies. The determinant factors of private investment in developing countries, in Africa and in Ethiopia are examined. In addition, the trend of private investment in Ethiopia and its conceptual framework is studied. The lists of variables below are factors of private investment and are the main focus of discussion.

Determinants of private investment

Private investment is a crucial pre-requisite for economic growth because it allows entrepreneurs to set economic activity in motion by bringing resources together to produce goods and services. Rapid and sustained growth is facilitated by a virtuous circle whereby entrepreneurship and investment lead to higher productivity, making it possible to invest larger sums in the future. In the course of this process, jobs are created and new technologies are introduced, especially through international trade and investment linkages. Successful mobilisation of private investment is thus increasingly important for creating employment, raising growth rates and reducing poverty.
The main determinants of investment in a given country can be at a micro and macro level. However, as the study emphasises the micro level, the following discussion focuses mainly the main determinants of private investment on a microeconomic level and using different kinds of literature.

Access to credit and Interest rate

Private investment in developing countries
Nainggolan, Ramli, Daulay and Rujiman (2015) examined the determinants on private investment in the North Sumatra Province of Indonesia using secondary data spanning a 32-year period. The results indicated that in the long and short terms, GDP, exchange rate, and investment credits have a positive and significant effect on private investment, whilst interest rates, government investment, inflation and economic crises have a significant but negative effect on private investment.
Suhendra and Anwar (2014) researched the determinants of private investment and the effect of economic growth in Indonesia using panel data. Their results show that the availability of investment financing in the form of investment loans has a positive and significant effect on private investment. They added that the increase of banks’ role in financing investment through bank loans to business or real sector investment would increase the level of investment. The analysis concluded that there was a positive relationship between the availability of debt finance for investment purposes and the growth of private investment.
Bhaumik, Das and Kumbhakar (2011) studied firm investment and credit constraints in India at the turn of the century using a stochastic frontier approach. The results suggested that the degree of credit constraint of an average firm increased over time during the sample period, despite significant reforms in the Indian banking sector. They also found that the degree of credit constraint decreases with cash flow and assets, i.e. credit constraints are alleviated by cash flows and assets of firms, but aggravated by a high leverage level. Furthermore, a threshold effect of leverage exists and the degree of credit constraint is greater for highly leveraged firms. Finally, the study found that business groups alleviate credit constraints of member firms, but their ability to do so declines over time.
Munir, Awan and Hussain (2010) examined the long run and short run link between investment, savings, interest rate and bank credit in the private sector in Pakistan. They found that the long run results of private investment show that bank credit to the private sector, public investment, and private savings determine the success of private investment. This means that the supply of bank credit to the private sector enhances private investment. In addition to this, private savings speed up private investment and play a complementary role in boosting the private investment. The value of the coefficient of the real rate of deposits, though positive and statistically significant, is very small. The study however found out that results of the short run show that the change in the bank credit to the private sector has a very small impact on the change in private investment in the short run. The short run impact of the change in public investment on the change in private investment is also negative, which shows that public investment crowds out the private investment in the short run. The change in the real rate of interest on deposits also has a negative impact on the change in private investment. Private savings positively affect the change in private investment in the short run.
Karagoz (2010) analysed the determining factors of private investments in Turkey between 1979 and 2005 using the Auto-Regressive Distributed Lags (ARDL) model. The result of their analysis shows that in the long run real GDP, real exchange rate, the ratio of private sector credit to GDP, private external debt, inflation, and trade openness have a significant impact on private investments. The impacts of first and last variables are negative whilst others are positive.
The impact of the interest rate on investment in Jordan was investigated by Bader and Ibrahim (2010) using co-integration analysis. The results of the study showed that the impact of the real interest rate on investment is negative and that the influence of the real interest rate on investment is higher than the influence of income.
Gűnçavdi, Bleaney and Mckay (2008) found out that financial factors are important in the determination of private investment behavior in Turkey. In particular, the borrowing constraints and indebtedness of firms are the most important factors influencing investment demand. In addition to this, they examined the role of financial constraints in the investment process and evaluated the impact of financial liberalisation programmes.
A study by Poncet, Steingress and Vandenbussche (2008) regarding financial constraints on Chinese firms to test the existence of a « political-pecking order » in the allocation of credit, found that private Chinese firms face severe financial constraints while there are no such constraints for state-owned and foreign enterprises. They argued that the discrimination against private firms by financial institutions is at odds with the observation that these firms are the engine of growth in the Chinese economy. The findings are that firstly, private Chinese firms are credit constrained while state-owned and foreign-owned firms are not. Secondly, that the geographical and sectorial presence of foreign capital alleviates credit constraints faced by private Chinese firms. And thirdly, that the geographical and sectorial presence of state firms aggravates financial constraints for private Chinese firms (“crowding out”).
A study by Gűnçavdi and McKay (2003) conducted on macroeconomic adjustment and private manufacturing investment in Turkey examined the main determinants of PIMS and the impacts of structural adjustment (particularly financial liberalisation as an integral part of the reform). The study showed that liberalisation policies in financial markets appear to have positive effects by reducing the stringency or rigidity of quantity constraints on investment while the high-interest rates resulting from financial liberalisation had no significant impact on investment. Macroeconomic instability, proxied by the variability of the inflation rate, seems to have discouraged investment in manufacturing. The study also examined the roles of credit and foreign exchange constraints in the determination of private investment in the manufacturing industry in Turkey and found that private manufacturing investment is affected by different factors in the long and the short run. In the long run, the accelerator effect and credit are the two influential factors in the manufacturing industry. The growth rates of demand (as an accelerator variable) and credit stock to the private sector are also important in explaining the short-run fluctuations in the manufacturing investment. The availability of foreign exchange is important, but not as much as the growth of demand and credit. Macroeconomic uncertainty appeared to have no significant effect.

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1.1. Background of the study
1.2. Statement of the problem
1.3. Research questions
1.4. Objective of the study
1.5. Significance of the study
1.6. Scope and limitations of the study
1.7. Period covered by the study
1.8. Organisation of the study
2.1. Flexible accelerator model
2.2 Neoclassical model
2.3. Tobin’s Q and profit models
2.4. Financial factors
3.1. Determinants of private investment
3.2. Trends of private investment in Ethiopia
3.3. Conceptual framework
4.1. Operational definition and measurement of variables
4.2. Research hypotheses
4.3. Ethics and dissemination
5.1. Description of the study area
5.2. Study design
5.3. Sampling procedures and data collection
5.4. Method of data analysis
5.5. Summary of research design and analysis
6.1. Descriptive statistical analysis
6.2. Results of econometric mode
6.3. Constraints of investors in the production phase
6.4. Summary of results
7.1. Discussions on private investment status
7.2. Conclusions on private investment status
7.3. Recommendations
7.4. Further research areas and the contribution of the study
An Analysis of the Determinants of Private Investment in the Manufacturing Sector: The Case of the State of Tigray, Ethiopia

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