haama

BAHIR DAR UNIVERSITY

COLLEGE OF
BUSINESS AND ECONOMICS

ECONOMICS PROGRAM

THE ROLE OF PRIVATE INVESTMENT ON EMPLOYMENT

GENERATION

(THE CASE OF BAHIR DAR CITY)

A SENIOR ESSAY SUBMITTED TO THE ECONOMICS PROGRAM, BAHIR DAR

UNIVERSITY, IN PARTIAL FULFILMENT OF THE REQUIRMENT FOR THE DEGREE OF
BACHLOR OF ARTS IN ECONOMICS.

BY: MASRESHA ASSEFA

ADVISOR: MOLLA WASSIE (MSC)

JUNE 2014

BAHIR DAR, ETHIOPIA

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 ACKNOWLEDGMENT

I would like to grant all of the following individuals.

First of all I would like to thanks to God that everything is possible for me.

Secondly, I would like to thanks to express my sincere graduate to my advisor Molla Wassie
(Msc). His
Intensive guidance, valuable or constructive comments and suggestions during the planning
and his work, in numerable revision and recognized at all stages of the work and especially for
his guidance with patience to enable me accomplish my study.

Thirdly, I would like to thank to extend my profound approach to Bahir Dar City
Administration Investment Bureau, who gives me secondary data which have related with the
study.

The last but, not the least, I am obligated to extent my granted to my family, who were
behind me next to God towards the successful completion in academic education and who
were the source of finance for the study, heartfelt thanks are to my father Assefa Gizaw, my
mother Shewaye Gizaw, my brothers Zegebreal Assefa, Gebra Assefa and all members of my
family who support me by finance, and protection moral support which cannot obtained by
any cost and help in all my endeavors.

Table of Contents

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 Contents Page
Chapter One…………………………………………………………………………………………………………1
Introduction.............................................................................................................1
1.1. Background of the
Study..........................................................................................................1
1.2. Statement of the Problematic.................................................................................................4
1.3. Research Question...................................................................................................................5
1.3.1. Objective of the Study..........................................................................................................5
1.3.2. General objective.................................................................................................................5
1.3.3. Specific Objective................................................................................................................5
1.4. Significance of the Stud...........................................................................................................6
1.5. Scope of the Study...................................................................................................................6
1.6. Limitation of the Study............................................................................................................6
1.7. Source of Data Collection and Methods of Data Collection...................................................6
1.7.1. Sampling Technique……………………………………………………………………………………………………..…7
1.8. Data Analysis Method..............................................................................................................7
Chapter Two……………………………………………………………………………………………………..8
2. Review of Related Literature....................................................................................8
2.1. Definition of Investment..........................................................................................................8
2.2. Basic Investment
Concept.......................................................................................................9
2.3. Kinds of Investment.................................................................................................................9
2.4. Theoretical Literature Review on Investment.......................................................................11
2.4.1. Keynesian Theory of Investment.......................................................................................11
2.4.2. Tobin Theory of Investment...............................................................................................13
2.4.3. Neo-classical Theory of Investment...................................................................................14
2.4.4. AcceleratorTheoryof Investment.......................................................................................14
2.5. Theoretical Literature Review on Employment.....................................................................15

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2.6. Empirical Literature Review on Investment.........................................................................19
2.7. Empirical Literature Review on Employment.......................................................................20.
2.8. Private Investment on Employment Generation..................................................................21.
2.9. The Countries Performance...................................................................................................22
2.10. Ethiopian Investment Policy and Trend of Private Investment since 1960........................22
2.10. Private Investment in the Imperial Regime........................................................................24
2.10.2. Private Investment in the Dergu Regime..........................................................................25
2.10.3. PrivateInvestmentin the Post Reform Period..................................................................27
Chapter Three…………………………………………………………………………………………….31
3. Results and Discussions......................................................................................................................31

3.1. Describe Of the Study Area..................................................................................................31

3.2. Socioeconomic Characteristics of Respondent's..................................................................32
3.2.1. Sex Composition of Respondent's.....................................................................................32
3.2.2.AgeDistributionofRespondent’s.........................................................................................33
3.2.3.MartialStatuesof Respondent's........................................................................................33.
3.2.4. Education Level of Respondent's........................................................................................34
3.2.5. Types of Business Respondent's On Investment................................................................35
3.2.6. The Length of Time Those Investors Started To Operation................................................36
3.2.7. Sources of Capital...............................................................................................................37
3.3. Private Investment and Employment Generation.................................................................38
3.4. Contribution of Private Investment on Employment Generation.........................................38
3.4.1. If You Accept What Is the Extent Of Employment Opportunity........................................39
3.4.2. Sect oral Job Opportunity (2004 - April 2006e.c).............................................................40
3.5. Challenges of Private Investment..........................................................................................44
Chapter Four…………………………………………………………………………………………………45
4. Conclusion and Recommendation....................................................................................................45

4.1.
Conclusion.............................................................................................................................45
4.2. Recommendation..................................................................................................................47

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 Bibliography...........................................................................................................
.......................48
Appendix.......................................................................................................................................50

List of Tables

Table 3.2.1. Sex Composition of the respondents…………………………………………………………………...32

Table 3.2.2. Age distribution of respondents…………………………………………………………………………..33
Table 3.2.3. Marital status of the respondents………………………………………………………………………..34
Table 3.2.4. Education level of the respondents………………………………………………………………………34
Table 3.2.5. Types of business investors by sector……………………………………………………………………35
Table 3.2.6. The length of time those investors started to operation……………………………………….36
Table 3.2.7. Sources of capital…………………………………………………………………………………………….……37
Table 3.4. Number of investors and their awareness of regarding employment generation…….38
Table 3.4.1. Employment opportunity created…………………………………………………………………………39
Table 3.4.2. Sectors of job opportunity…………………………………………………………………………………….40
Table 3.4.3. Sect oral job opportunity in 2004 – April 20006e.c……………………………………………....41
Table 3.4.4. Total Employment opportunity in 2004 – April 2006e.c…………………………..……………41
Table 3.4.5. Total capital approved in each year……………………………………….…………………………..43
Table 3.4.6. Total capital approved in each sector (20004 – April 2006)…………………………………..43

List of figures
Figure 3.1 Growth of employment opportunity………………………………………………….……………………42

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 CHAPTER ONE
1. Introduction
1.1. Back Ground of the Study

Investment refers to the purchase of various types of goods and services that can be used for
production of other goods. Investment increases the productivity capacity of economy.
Ethiopian policy makers in attempt to investment, particularly foreign investment have been
trying to the investment environment. Most developed countries are also encouraging private
investment in order to run or facilitate their economic growth and employment opportunities.
Private investment plays insignificant role in increasing employment opportunities, raise the
level of output produced domestically and increase export to foreign market, increase the level
of per capital income, raise urbanization, reduce poverty etc. in general it faster economic
growth.

Growth and development theories states that investment is one of the primary engine of
economic growth and contribution of for the development of the country but it also intern it
have been constrained by low performance of investment and lack of capital formation.
Currently, the federal as well as the regional developments of Ethiopia devote much of their
efforts on accelerating growth of investment and its diversification. Private investment in
Ethiopia has got great attention. Because of the change of different political regimes with
different economic policies (Ethiopian journal of economics, 2003).

The role of private investment is much higher and thus plays more important role in the
growth of developing countries has received particularly emphasis among researchers and
policy makers in the 1990's. This showing in growth strategy towards improving social over
head capital and poverty alleviating goals is base on two major reasons. First, there has been
growing empirical evidence on the relevant efficiency of private over public investment in the
productive sectors. Second, there is physical complementary between private investment and

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public infrastructure, investment. Private sector is whole thing than public sector which is
fenced by tightened rules and regulations and bureaucracy (Shibesh, 1994).

The most significant time in relation to investment was from imperial regime of Haileselassie
to the current federal government. During the era of Haileselassie (1923-1974) investment was
at its starting point in the sector. But by families or by the government either by foreigners, by
imperial families or by the government (Asfaw, 2006)

After imperial regime, Derg came to power in 1974 with command economic policy, during
this time investment was relatively higher than Haileselassie. It limited the participation of
private investment and public investments were dominant in the country. The development of
public sectors was seems as an appropriate policy response to bring about improvement in the
economy. Accepting the public enterprise is an inevitable part of Ethiopia. The public sector
contributed significantly to the development process. But, the low rate of return on such
investment and the in ability of the government to finance the growing demand for such
industries change the consensus in favor economic liberalization and privatization which forced
the government to introduce mixed economic policy in 1980's. In the context of significance
change in fiscal, monetary, trade and industrial policies. The need for review of the continued
presence of the public sector in a wide range of activities was felt public sector in a wide range
of activities was felt (Annual report of the Ethiopian economy).

A new strategy for encouraging private investment sector was adopted when the transitional
government of Ethiopia (TGE) comes to power in 1991. With new economic policy, it marked a
turning point in policy guidelines. The philosophy of a new economic policy by the state actively
involve private sector in investment and concentrate a those areas where it has special or
unique responsibility. Since, 1991 to enhance the role of private investment in the development
process, various policy measures have been taken by the government. Investment code of the
country had been established and also revised several times. First it was issued in 1992 and
revised by investment code number 37/1996 with the objective of eliminating discrimination
against the private sector and creating conducive environment for them (Kinfe, 1998).

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 The private investment is a crucial element for output growth and new employment
generation. The private investment and employment generation have a direct relationship. The
employment generation is potential of private investment remains a central future. Investing in
youth through education would accelerate economic growth and employment generation.
Private investment is to consider three levels of employment generation streaming from the
investment. Such as this directly employed on site to undertake the task, at hand, directly
employed in the manufacture of materials and equipment that are supplied to initiate
investment and induced employment generated by the direct and the indirect jobs created
(Internet investment in Ethiopia).

Now a day, investment improves the existence physical and human resources that increase
productivity through innovation and technological progress. This will continue to be primary
factors in strutting economic growth and employment generation (Todaro, 2009).

Ethiopia's market oriented economic development strategy embraces wide reforms with
inducements with to both domestic and foreign investments. The private sector is encouraged
to invest in almost all areas of the country. Based on this direction the Amhara national regional
state has been formulated its own investment policy using the national strategy as a
framework. Furthermore, by assessing their context, the Bahir Dar metropolitan city
administration enacted its, own local and lease policy, and then regulations are directives (in
order to depend the local level). The investment process is know moving fast, starting from the
end of 1998/99 about 219 investment projects have been identified and 17036 permanent,
contract and casual identified workers are employed (Internet, private investment in Bahir Dar
city).

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 1.2. Statement of the Problem

Most developing countries are going to private investment in order to run or facilitate their
economic growth. Private investment is one of the Maine determinants for the growth and the
development of a country. In other words, without private investment it is difficult to think the
growth of the nation its magnitude depends on the expected profits from the invested capitals.

It is one of the primary engines of growth in all economies and their contribution for the
development of the country, as a whole, is also important. Its magnitude depends on the
expects profits to be more from the invested capital and this leads investment fluctuations in
investment area combined the multiplier process the result is fluctuating level of natural
income and employment (Ethiopian journal of economics, 2003).

Investment is one of the macro variables which affect a variable. The increase investment
leads to increase employment, increase in output and increase income level individual investors
and the country. During Derg regime the government discourages private investment and
encourages public investment, which private investment creates job opportunity for
unemployed. The advantage form of private investment was lost. But after 1991e.c, the
government took some corrective investment in the country, to expand employment
opportunities in the country. During this period the government encouraging private
investment through subsidizing entrepreneur for the objective of expanding social and
economic growth in the country. In contrast the post regimes, pots regime the current
government give more emphasis to private investment as an important mechanism
(instrument) for the expansion of domestic output and accelerate economic growth.

Similarly, the current government gives great emphasis to expand private investment in Bahir
Dar city, though the expansion of social as well as economic growth like infrastructure, road
contraction, expanding water supply, increasing electric power station etc have been
developing in the area and the area is becoming more conducive to investment. There is also

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high mobilization of private investment in Bahir Dar city. Therefore, this paper will Analyses the
relationship between private investment and employment generation and other related issues
like the opportunities and challenges on investment flow and employment.

1.3. Research Question

The paper will answer the following questions

 What are the roles of private investment mainly towards employment generation in
Bahir Dar city?
 What is the relationship between private investment and employment generation in
Bahir Dar city?
 Which sectors of private investment has more shares and generates employment
opportunity?
 What are the Maine problem of private investment and how to avoid this problem?

1.3.1. Objectives of the Study

1.3.2. General Objective

The overall (general) objectives of the study were to examine the role of private investment
on employment generation in Bahir Dar city.

1.3.3. Specific Objective

 To examine the role of private investment mainly towards employment generation in
Bahir Dar city.
 To examine the relationship between private investment and employment generation in
Bahir dar city.
 To examine in which sector a private investment has more share and generate job
opportunity.
 To identify the Maine problem face to private investment and give solution.

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 1.4. Significance of the Study

The Maine significance of this study is providing information about role of private investment
for employment generation in Bahir Dar city. Findings and recommendation for these
concerned officials can gain information on the achievement of investors and progress of
investment in Bahir Dar city. It also helps them to be aware of the acute problems of investors,
so that they can use them as inputs to for solution. This paper can also be uses as a reference to
researcher who wants to undertake studies on a similar topic.

1.5. Scope (Delimitation) of the Study

The researcher conducted in Bahir Dar city on the role of private investment on employment
generation. The study covers the period between 2004 up to 2006e.c to collect information on
investment, employment and other related issues. And to show that other issues different,
from employment and investment relationship.

1.6. Limitation of the Study

In under taking the study, the major limitations is that the researcher faced are financial
constraints, lack of sufficient organized data, shortage of time to carry out the study, shortage
of references materials, problem of data collection method. This limitation may cause the paper
difficult to achieve the desired objectives.

1.7. Sources of Data Collection and Methods of Data

Collection
The researcher used both primary and secondary sources

► The primary data included questionnaires and interviews with investors or project managers
and Bahir Dar metropolitan city administration investment bureau respectively.
► The secondary data are collected from Internet website, different books, reports, journals,
published and unpublished written material and all related topics.

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 1.7.3. Sampling Technique (Method)

The sampling method that the researcher used stratified random sampling by dividing all
investment projects, according to their investment project type and taking a proportional
randomly. The researcher use random sampling from the 642 investors by taking 50 private
investors in Bahir Dar city. Because of several constraints I should like to take 50 private
investors in proportional. The constraint is that financial, availability of data and time were the
major one.

1.8. Data Analysis Method

The data in order to fulfill the objectives of the above methodology study . The researcher

focuses on descriptive analysis of time serious data and application of element statistical
techniques such as percentage, graph, and table.

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 CHAPTER TWO
2. Review of Related Literature
2.1. Definition of Investment

Investment in economics analysis can be defined as flow of expenditure to increase the real
capital. More broadly, it is defined as flow of expenditure devoted to project producing goods
and services which are mostly not intends for immediate consumption where these projects
may take the form of adding both physical and human capital as well as investors. It is also
defined as flow of capital the volume of which as determine by all those projects which will
yield a positive net present value of an internal rate of return greater than investors rate
(Macmillan dictionary of modern economics, 1992).

Investment is the change in capital stock during a period consequently, unlikely capital;
investment is a flow term and not a stock term. This means that while capital is measured at a
point in time, investment can only be measured over a period of time. With the fixed capital the
investment and capital theory is different and more complicated as there seems to be two
decisions that must be addressed the amount of capital and investment. These decisions are
about the desired level of capital stock and rate of investment flow. The decision governing one
will in inevitably affect the other, but it is not necessarily the case that one is reducible to the
other. In some case, the capital and investment theory become one and the same thing. This is,
if all capital is circulating capital, so that it is completely used up with in a period, then no
capital built to during the previous period can be brought over in the next period (Ghura &
Goodwin, 2000).

The word investment having the most common and usual and usual definition in the boarder
sense means he commitment funds with risk assumed. Such funds may be committed to
government or corporate securities. Currently and financial feature real estate and other
vehicles. However, the economists, definition of investment different from more common
usage of the world investment in the most usual sense. Economist’s definition it is replacement

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of and residential purpose by business and non-profit institution. The main reason for this is
May economists argue that this type of investment is capable of increasing demand,
employment creation, technological advancement, enhancement of managerial skill and talent.
It is capable of leading the whole economy to desire development and growth (L. Salving,
2005).

2.2. Basic Investment Concept

 Economic Investment: - Economic investment means net addition to the capital stock to
the society that consists of goods and services in addition to the capital stock means a
increase in building, plant, equipment and inventories over the amount of goods and
services that invested.
 Financial Investment:- refers to funds in various assets such as stock bonds, real estate,
mortgage etc. investment is employment of funds with the aim of achieving additional
income or growth in vale. It involves in the commitment of resources that have been
saved or put away from current consumption in the hope of some benefits would accrue
in the future.
 Commitment Investment: - refers t money commitment to satisfy personal desires since
no rate of return is involved in such investment not capital growth is expected (Babu,
2003).

2.3. Kinds of Investment

Investment can be classified in to private, foreign, public and domestic investment. So

investment is one of the primary engines of growth process especially technological progress,
skill acquisition and talent and development innovation capacity (H. Bran son, 2006).Generally,
according to N. Gregory Mankiw (1995) investment is the spending devoted to maintaining the
stock of capital and hence real or physical capital investment is disaggregated in to three
categories. Thus are:

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 A, Business Fixed Investment

Is the largest piece of investment spending, accounting for about three quarters of the total.
Firms use capital along with labor to produce goods and services for sale. But firms will keep
investing until the value of output producing by adding one more unit of capital in production.
This type of investment consists of business firms spending on durable machines, equipment
structures such as factories and machineries.
B, Residential Investment

It consists of the building of single family and multi-family dew-ling which we call housing for
short. The theory of housing investment starts from the demand for the stock of housing
affected by wealth the interest rate available on alternative investments and the net real return
obtained by owning housing. The price of housing is determined by the stock demand and the
given stock of supply of housing available at any time. So that the rate of housing is determined
by the rate of which builders supply at going price.

C, Inventory Investment

Inventory investment includes goods on store shelves waiting to be sell, cars in show rooms
waiting to be Shoppe and even parts of the products to assemble. More over it consists raw
materials, goods in process of production and completed goods held by firm in anticipation of
their sale.

Investment can also be classified as private and public investment.

 Private Investment: - this includes purchase of things such as computers, equipments

and inventories business purchase of home by individual’s equipment and of business
investing in inventories (K. Dewitt, 2007).
 Public Investment: - this includes purchase of things or the public expenditure that
added to the public physical. This also includes that building roads, ports, schools,
hospitals etc (K. Dewitt).

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 2.4. Theoretical Literature Review on Investment

Theories of private investment are very immense considerable variation in though exists among
economists as what determines investment behavior. One reason can be complex nature of the
subject itself ordering the techniques in economic research influence investment behavior
another behavior can be disparities among societies in their institution and structural setting
which makes the development of universal theory of invested behavior impossible. Some of the
investment theories are defined as follows.

2.4.1. Keynesian Theory of Investment

The theory of investment of behavior goes back to Keynes (1936) “GENERAL THEORY” he was

the first to attention to the existence of an independent investment decision function in the
economy. He observed that investment depend on the prospecting managerial efficiency of
capital or by reducing interest rate. He further pointed that private investment was intrinsically
volatile since any rational assessment of on the return of investment was bound to highly
uncertain. The “animal sprite” of private investor could be the Maine driving force in
investment decision. In addition expectation of future demand for firms output, velocity of
investments, uncertainty and other non-economic variables I.e. political, social and economic
variable are possible determinants of private investment in general (Serven and
solimano,1991).

The Keynesian approach places for the less emphasis on the adjustment nature of investment.
Instead, they have more behavioral take of the investment decision. Namely, the Keynesian
approach argues that investment is simply what capitalists do. Every period, workers consume
and capitalists invest as a matter of course. This lead Keynesian's to under play the capitalist
stock decision. This does not mean that Keynesian's ignore the fact that investment is defined
as a change in capital stock. Rather, they believe that the main decision is the investment
decision; the capital stock just flows from the investment pasterns rather than being an

11
important thing that needs to be optimally decided up on beforehand. Thus, when business
makes investment decisions, they do not have an optimal capital stock in the back of their
mind. They are more concerned as to what is the optimal amount of the investment for some
particular period. Foe Keynesian's, then, optimal investment not about optimal adjustment but
rather about optimal behavior (Haavelmo, 1960).

The Keynesian theory of investment places emphasis on the importance of interest rate in
investment decision. A change in interest rate should have an effect on the level of planned
investment under taken by private sector business in the economy. A firm will only investment
if the discounted Yield exceed the cost of the project (Baddelly, 2003).

In what follows we shall go through a few a point in each of different types of theories. We
should point out now that our emphasis in theories of investment decision, in its more
production theoretic sense rather than a macroeconomic one. We are not concerned here with
the theory of interest rates in which investment theory play an important role, as that would
entangle us in detail of the monetary theories of wick sell, Robert son, Ohlin, Hayek, Keynes and
others (Haavelmo,1960).

The classical school took for granted that capital made investment. Because they expect to earn
profit in the future depends on good deal on what profit are now. The restrictive assumptions
behind the accelerator theory led Jorgenson (1967) and hall (1971) to formulate the neo-
classical approach.

In this approach the optimal capital stock depends on the level of output and on the user cost
of capital which in turn depends on the price of capital goods the real interest rate and the
depreciation rate. This theory indicates the fact that firm will invest more as the rental cost of
capital fails down but as out in the economic goes up. In addition firms will like to have more
capital stock when they expect higher level of output lags in decision making and delivery
create gab between the current and desired capital stocks, giving rise in to an investment
equation. Such as an equation for the change in capital stock

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The foundation of this approach have been criticized because the assumption of perfect
competition and endogenously given output and inconsistent. That the assumption of static
expectation about future prices output and interest rate is an in appropriate. Since investment
is essentially a forwards looking process and that the lags in delivery are introduce in an
unmannered (Serven and Solimano, 1992).

2.4.2. Tobin Theory of Investment

An alternative view associated with Tobin (1969) is pointed that firms base their investment
decision on the ratio of market value installation of an additional unit of capital to their
replacement cost. This ratio is known in the literature as marginal Q. the value of this ratio may
differ from unit because of delivery lays and adjustments or installation cost. When the increase
in the market value of the additional unit exceeds or decreases so what is used instead is the
ratio of the market value of the entire existing capital stock to its replacement cost or the
average Q ratio (Serven and Solimano, 1992).

Abel (1980), Hay ash (1982) and previous (1985) how ever pointed to problems in average Q. if
firms enjoy economies of enjoy economies of scale or market power they can net sell all they
want, marginal and Q will sentimental differ. More over the consumption of installation cost is
doubtful. The cost of addition to an individual firm’s capital stock is likely to be proportional or
even less than proportional to the volume at investment. Because the lumpy nature of match
investment project (Serven and solimano, 1992).

Tobin argues that firms based their investment decision on the following ratio which is called
Tobin's
= Market value of installed capital
Replacement cost of installed capital
Tobin reasoned that net investment should depend on whether the q is greater or equal to one.
If q is greater than one then the stock market value installed capital at more than its
replacement cost. In this case managers can raise the market value of their firms stock buying

13
more capital. On the other hand if q is less than one the stock market value installed capital at
less than its replacement cost. In this case, managers will not replace capital as it wears out
(Mankiw, 1995).

2.4.3. Neo-classical Theory of Investment

The unrealistic assumption behind the growth models led Jorgenson (1967) and Hall (1971) to
formulate the neo-classical approach to investment that provided another explanation or
investment expenditure in addition to change in output. In this approach investment decisions
are assumed to depend on the level of output. The price of capital goods, the real interest, and
the depreciation rate of capital goods.

As stated above neoclassical argue that investment depend on the rate of interest and the level
of income. Thus the theory that investment depend on the rate of interest focuses heavily on
the cost of finance as the key variable and other costs (including the availability of finance,
economic infrastructure, source of capital, policy) being assumed an important origin. However,
private investment behavior in developing countries can not directly explain by using the
standard approach based on the theory of the firm (Jorgenson, 1971).

2.4.4. Accelerator Theory of Investment

After Keynes the evaluation of the investment theory was linked to simple growth models.
These give the raise to the accelerator theory popular in the 1950 and early 1960 and widely
used even today it can grow exercise. Accelerator theory makes investment a linear proportion
of changes in output. Its extreme simplicity explanations it popularity given an incremental
capital output ratio. It is to compute the investment requirement with a given market for all
output growth. However, the accelerator theory exhibits draw backs with regard to its
assumption of perfect competition and exogenously determined output. The theory also
disregards dynamic expectation with regard to future prices and interest rate profitability and
capital cost (Serven and Solimano, 1992).

14
The accelerator model explains the data will sometimes can be applied to all types of
investment but if workers best for inventory investment. The accelerator model assumes that
firms stock of inventory that is proportional to the firm level of output. Thus, if N is economies
stock of inventories and Y is output then N=BN where B is a parameter reflecting how much
inventory firms wise to hold as a proportion of output. Inventory investment I, is the change in
stock of inventories change in N therefore, I= change in N=B change in Y.

The accelerator model predicts that investment inventory is proportional to the change in
output. When output rises firms want to hold a large stock inventory so, inventory investment
is high. When output falls firms want to hold a smaller stock of inventory so, they allow their
inventory to run down, and inventory investment depends on whether the economy is
spending up or slows down (Mankiw, 1995).

2.5. Theoretical Literature Review on Employment

One aspect of economic performance is how well an economy uses its resources. Since workers
are the main resource and help to increase the country’s GDP, employment creation increases
per capita income of the country. According to fisher and Bush, unemployed person is defined
as one who is out of work and who:

 Has actively looked for work during the previous four weeks or on month.
 Waiting to be recalled to a job after having been laid off.
 Is waiting to report to a new job with in a four weeks or one month.

Unemployment has within Bush pointed out about the Phillips curves; the Phillips curve is an
inverse relationship between the rates of an employment and the rate of increase in money
wages. The higher rate at an employment the lower will be the rate of wage inflation. In other
words there is a tradeoff between wage and unemployment. He states that in the short run of
say three years there is an inverse relationship between inflation and unemployment. In the
short run Phillips curve however does not remain stable. The curve shifts from two reasons in

15
the long run people change their expectation of inflation and unemployment holds only in the
short run (Bush, 2001).

Simply put, unemployment is a situation in which an individual in an economy is looking for a

job and can't find one. That said, economists divide unemployment into a number of different
categories, since defining types of unemployment more precisely sheds some light on why
unemployment occurs and what can be done about it.

Voluntary versus Involuntary Unemployment

At a very basic level, unemployment can be broken down into voluntary unemployment-
unemployment due to people willingly leaving previous jobs and now looking for new ones- and
involuntary unemployment- unemployment due to people getting laid off or fired from their
previous Jobs and needing to find work elsewhere. Not surprisingly, economists generally view
involuntary unemployment as a larger problem than voluntary unemployment since voluntary
unemployment likely reflects utility-maximizing household choices (Internet types of
unemployment).

Frictional Unemployment

The easiest type of unemployment to explain is known as frictional unemployment. Frictional

unemployment is unemployment that occurs because it takes workers some time to move from
one job to another. While it may be the case that some workers find new jobs before they leave
their old ones, a lot of workers leave or lose their jobs before they have other work lined up. In
these cases, a worker must look around for a job that it is a good fit for her, and this process
takes some time. During this time, the individual is considered to be unemployed, but
unemployment due to frictional unemployment is usually thought to last only short periods of
time and not be specifically problematic from an economic standpoint. This is particularly true
now that technology is helping both workers and companies make the job search process more
efficient.

16
Frictional unemployment can also occur when students move into the work force for the first
time, when an individual moves to a new city and needs to find work, and when women re-
enter the work force after having children. (Note in the last case, however, that maternity leave
doesn't count as unemployment!) (Internet types of unemployment).

Cyclical Unemployment

It's probably not surprising that unemployment is higher during recessions and depressions and
lower during periods of high economic growth. Because of this, economists have coined the
term cyclical unemployment to describe the unemployment associated with business cycles
occurring in the economy. Cyclical unemployment occurs during recessions because, when
demand for goods and services in an economy falls, some companies respond by cutting
production and laying off workers rather than by reducing wages and prices. (Wages and prices
of this sort are referred to as "sticky.") When this happens, there are more workers in an
economy than there are available jobs, and unemployment must result.

As an economy recovers from a recession or depression, cyclical unemployment tends to

naturally disappear. As a result, economists usually focus on addressing the root causes of the
economic downturns themselves rather than think directly about how to correct cyclical
unemployment in and of itself (Internet types of unemployment).

Structural Unemployment

There are two ways to think about structural unemployment. One way is that structural
unemployment occurs because some labor markets have more workers than there are jobs
available, and for some reason wages don't decrease to bring the markets into equilibrium.
Another way to think about structural unemployment is that structural unemployment results
when workers possess skills that aren't in high demand in the marketplace and lack skills that
are in high demand. In other words, structural unemployment results when there is a mismatch
with workers' skills and employers' needs. Structural unemployment is thought to be a pretty
significant problem, mainly because structural unemployment tends to be largely of the long-
term variety and retraining workers is not a cheap or easy task.

17
Seasonal unemployment is, not surprisingly, unemployment that occurs because the demand
for some workers varies widely over the course of the year. (Pool lifeguards, for example,
probably experience a decent amount of seasonal unemployment.) Seasonal unemployment
can be thought of as a form of structural unemployment, mainly because the skills of the
seasonal employees are not needed in certain labor markets for at least some part of the year.
That said, seasonal unemployment is viewed as less problematic than regular structural
unemployment, mainly because the demand for seasonal skills hasn't gone away forever and
resurfaces in a fairly predictable pattern (Internet types of unemployment).

As an I LO report shows, the problem of unemployment in developing countries is in reality a

range of related problems, some more serious and some less serious. The most important
dimension of these problems that are commonly cited:-

 The shortage of job opportunities

 The underemployment and under-utilization of labors, in addition to open an
employment, and
 The attitudes and job expectations, particularly amongst the your and educated, which
are often sharply at variance with the work available (July, etal, 1973).

It has also been argued that, by most of this measure, the proportional of the labor force, which
is severally affected by the problem of the total unemployment. Greatly surpass the percentage
of openly unemployed in developing countries. When disaggregated by gender, the incidence
of unemployment should that in the urban areas it was females who were seriously affected by
the problem than their male counterparts. However, a significant variation in the problem
between the unemployment males and females is not observed in the rural area (Abebe, 1998).

18
 2.6. Empirical Literature Review on Investment

Recent studies have shown that private investment is more closely associated with growth and
tends embody newer technologies and capital than public investment. This argument is also
supported by analysis verses private sector investment is in developing countries. A comparison
between investment in the public and private sector from 1970-1998 in both high and low
growth developing countries shows that high growth countries invested 15% of GDP in private
sector compared to 10% for low growth countries (Badewi, 2003).

As different studies like, Dejene and Ibrahim (1998) Addis Ababa chamber of commerce (1998)
and (2002) depicts the major constraint of private investment in Ethiopia are access to land and
credit lack of entrepreneurship skill and infrastructure, market difficulties and tax related
problem.

Besides that, the focus on reducing physical deficit for private sector consider development is
the mere reason that the private sector considers the sustainability of the physical adjustment
when making investment decisions. If deficits are perceived to be unsustainable, then the
private sector will expect future tax increase or money creation (inflation tax), which in turn
affects its investment decision (Harvey, 1985).

From a historical perspective of the contemporary words, it is axiomatic that economic

development is in variable directly proportional to industrialization. In this high-technology,
information and industrialization era, it is the industrial products, which are more profitable
and gain more private sector interest. The private sector, to participate, however needs
government leadership and assistance clear policy that targeted to development the sector
(Getachew, 1997).

19
 2.7. Empirical Literature Review on Employment

Employment is directly related to economic performance, which determine the generation of

employment opportunities. In general employment defined as engagement in certain types of
economic activity during short reference period performed some work in wage or self
employment (I LO, 1986).

The united nation conference on trade and development (UNCTAD) in 1994 as a permanent
inter government body. Its main goals are to maximize the trade, investment and development
opportunities of developed countries to help them face challenges arising from globalization
and help them integrate in to the world economy an equitable basic, the marked oriented
economic policy of 1992 recognizes the leading role of private sectors in the economy. In
keeping with this policy the government establishment the Ethiopian private agency (EPA) in
1994 with the mandate to private state owned enterprise in according with modalities
approved by the government. Proclamation number 1461/1998 (as amended in 199) governs
privatization in Ethiopia today the EPA has used the following modalities to private about 220
SOES and their branches.

Assess sale retails out let, hotel, restaurants, manufacturing and mining enterprises
 Employ and management buy outs, retail out lets, hotel and resultants through the
safety net program.
 Joint venture with strategic investor, a tobacco factory.
 Management contract, two textile factories
 Competitive sale of shares, beverage factories and flour factories
 Restricted tender and negotiated sale, three dairy forms and a crop form.

In the year (1995 and 196) the agency private 102 enterprises including hotel, retail business,
warehouses and small and medium factories, however only 64 SOES near private during the
next four years (1997-2000) out of the total of 166 enterprises valued at and 326 million in five
years (1995-2000). foreign direct investment (FID) has been increasing during the last ten years

20
out of the total investment projects licensed during 1992-2002 FID's shares about 20% Ethiopia
remains untapped and unexploited market for investors compare to neighboring countries like
Sudan and Uganda with respect to foreign and domestic investment. The Ethiopian investment
commission (EIC) is responsible for the following tasks.

 Issuing investment permits, work permits, trade registration certificates and business
licenses as a part of its open stop-shop services.
 Promoting and facilitating FDI including the registration of technology transfer
agreement and export oriented non equity based collaborations with foreign
enterprises.
 Monitoring the implementation progress of licensed project in generally monitory policy
and fiscal policy having an important impact on price policies that in turn have
influences an investment (Ethiopian investment agency, 2006/07).

There is no a researcher studied in the role of private investment on employment generation in

the time of 2004 up to 2006e.c, especially private investment in Bahir Dar city towards
employment creation except in Ethiopian case example Zebiba Abdu, 1997 E.C. Currently there
is high flow of private investors in the city. Because Bahir Dar is one of the most conducive
place to investment. Private investment has a various purpose towards the development of a
given country, region as well as a city. Therefore, the study concerned among that one of the
major purpose of private investment on employment generation.

2.8. Private Investment on Employment Generation

In a period of economic decline from 1997 to 1989, the majority of jobs were created in private
enterprises. Finding a job was the single most important factor in explaining transitions out of
poverty. The jobless who lived in a house hold where at least one member had found a job had
a best chance of escaping poverty. In addition to job generation, up grading both jobs and skills
in an important path of poverty. Successful long run development brings with it massive

21
occupational shifts, in the course of which poverty, however defined, is reduced. Upgrading
within sectors (from subsistence agriculture to market agriculture, for example) or shifts
between sectors for instance, from agriculture to manufacturing are key to achieving
development. Up grading jobs and skills is central to these process, and private firms are the
major source of demand for higher levels of skill and jobs (MOFD, 2002).

Investment has a sustainable role in employment generation. Investment in rural areas would
be absorbed the surplus labor in agriculture. While investigating in small scale would create
gain full employment to urban labor force (Admit and Getachew, 1996).

The private investment sector insures private sector employment as the major source of
economic support for majority of workers and their families for it is the largest source of
employment. It helps to allocate a country resource to their most productive uses. It also
enhances general economic welfare and encourages further growth and development (the
Amhara national regional state, trade, industry and urban development bureau).

2.9. The Countries Performance

Due to political and ideological reason private sector investment is depressed in Ethiopia in the
past regime. It was claimed that investment on public enterprise would play a very important
role in the output and employment in the economy. It is after 1993, after economic reforms
implement that private sector. Investors began to play an ignorable role in the economic
(Abraham A 1994) since producers are rational and responses to incentives thy respond to
private incentives that the government give them to encourage investment what happened in
factor market, product and capital market affect investment and performance of investment.

2.10. Ethiopian Investment Policy and Trend of Private Investment

Since 1960
Situation private investment in Ethiopia through Ethiopia has being following different
investment policies and forms and investment for the last many years. The contribution of

22
private investment is still insignificant in the economy and the country remains one of the least
economically developed. Most of the population lives under poverty line with a very low by
inefficient economy policies, which accounted to the low income saving and investment
pictures in the economy. Investment is made for profit these profits are obtained by provides
the goods and services produced to the market. But it there is no market is limited for gods and
services produced to the market. But it there is no market is limited for goods and services
produced the progress investment in accounting will be lower. In Ethiopia investors are always
complaining about the shortage of demand for their products, limited market and they are
inability to compute with to imports the constraints to private investment in Ethiopia and what
explains the poor performance of the sector is all the factors that investors have been
complaining (economic focus, 1991). Befakadu argues that supply enhancing private sectors
developing policies are definitely superior and more rewarding than demand surprising and
restricting real income. He emphasizes the importance of excess demand and engines for
private sectors development and economic growth through higher price and increase in
production than the demand restricting strategies. Investment policies the state of private
investment in Ethiopia begins in the empirical era. At that time weak policies issued by the
government to encourage private investors and investment. But through a change of ideology
the Dergue period dwindled the developments particularly private investment sectors. In this
period the entire economy is expected to work not according to what lone dictate but rather in
the socialist ideological sector by discriminating the private sector investment (Befkadu, 1994).

It is obvious that non economic factors like political instability, uncertainty and risk are ex
thermally important factors and determining the extent of investment in the country. If we look
at explained by such noneconomic factors due to this investors be it domestic or foreign will be
reluctant to commit large expenditure on investment when they are uncertain about the future
political, social and economic environment. The overall political uncertainty in heavenly
influenced investors to invest their capital in the country, particularly the current ethic based
administration discouraged private investment (Befkadu, 1994).

23
 After the above explanation about Ethiopia private investment, the writer wants to discuses
about the private investment policy of the imperial, Dergue and the current government of
Ethiopia.

2.10.1 Private Investment in the Imperial Regime

During this period the private sector played the leading role in economic activities. In this
period the economic policy of the country was based on the principle of free market economy
and every private individual and entrepreneur was guided by the commercial code of Ethiopia
which was published in 1960. In addition, the government placed much faith on the private
investment for the fulfillment of its growth objective and had no minimum requirement on the
establishment and operation of private enterprises (Keymisrak, 1998).

Agricultural land was almost totally operated by private farms except few state farms ranging
between 10000 and 2000 hectares (Itana, 1994).

The government gave much emphasis to private foreign investment and did much effort to
attract investment a result of this, there was a number industries established. However, there
was negligence of small-scale industries during this period. Since investment incentives were
included and made beneficiaries only for medium and large scale (Samson G. & Tadele F.,
2002).

Investment policies of the period more particularly notice for the encouragement of foreign
investment of 1950, gave incentives such as an exemptions for machinery, and profit
reparation although the policy end up with no much response. Thus incentives however, were
given only for foreign investors. It is because the main objective of that notice was attracting
technology and capital though foreign direct investment from abroad (Eshetu, 1991). In
imperial era, there is no provision made to restrict specific sectors for the state that is all
sectors are open for private investment.

24
The 1963 decree for the encouragement of investment must give equal chance for domestic
investor with that of foreign. The decree issue initiatives would be given in agriculture, industry
and transport, mining and tourism sector both for newly establishing and presently established
or existing enterprises. Income tax relief, import duty relief, foreign exchange remittance and
relief of export duty were given as initiatives for investors (Negarit Gazeta, 1966).

In article six of this investment decree 1963, it was issued that when importing raw materials,
machineries and equipment, which are, needed for the production activities of enterprises and
that could not be produced in Ethiopia. Investors should not pay import duties transaction
taxes, custom municipal taxes and other duties.

Article seven of the issue declare that exportable manufacture good, exempted for a certain
period of time, from export duties and transaction taxes on export in order to make firms
competitive and transaction market.

2.10.2 Private Investment in the Dergue Regime

When the Derge came in to power, the policy of investment was, however, directed to
nationalized and public owner ship of most sectors of the country. This goal was achieved by a
succession of proclamation that was decreed. By means of proclamation number 26/1975 (the
nationalization proclamation), large number of private business were nationalized.
Proclamation number 76/1975 issued at about the same time as the nationalization
proclamation restricted private operation to a few lines of activities and impose capital ceiling
on them. The participation of the private sector has been marginalized during the Derge
regime. The mobilization and allocation of resources though central planning and state control
of almost all economic infrastructures in the country has characterized the economic system of
this regime. The private sector had been deprived of its complementary role towards boosting
economic growth and their by improving the standard of living of the population (MOFED,
2002).
Due to socialist ideology of the military government private enterprises has to pass radical
change both in the structure and management ownership. There was a capital calling for

25
private owner ship up to a capital 500000 birr. During this period the objective of investment
policy is growth and development policies of employment income, technology, resource
development, foreign exchange regional development were expelled out and foreign sectors
were reserved for the state defense industry, postal and telecommunication services, air, rail
large marine transport, radio and television services.

In addition entrepreneur have not been allowed to operate income in more than one line of
activity or to establish a branch licenses of new private investment was very problematic and
exhaustive because of the existence of the highly complicated bureaucratic process. The
government had also introduced very heavy rates of profit taxes on private entrepreneur,
which significantly reduced investment. Business incomes over 36000 per annum have been
subject to a very high 89% marginal rate of tax which was introduced with the view of income
redistribution. But such a confiscatory rate of taxation was state deliberately to discourage the
development of the private sector and thus to lasted the transaction towards socialism (World
Bank, 1990).

Only individual business were allowed and were private business are organized in the form of
partnership. Joint venture were allowed in 1983 by issuing the point venture proclamation
number 235/1983 that specifics the conditions and areas in which private capital could be
invested in the country in collaboration with government but the joint venture jointly by
Ethiopian public capital and foreign public or private capital was allowed however, the joint
venture had restricted in time and the share of joint ventures. The government must have the
majority share in all such joint ventures such as the share of Ethiopian share holder must not
less than 51% and that manager of such an enterprise was to be Ethiopian. Because of this and
other conditions that were present in this time, only few joint ventures were established were
over the years. In this regard it has been reported that only six joint ventures were established
between 1983 and 1988. the period of the degree witnessed steady decline of saving rate of
the country from 13% in 1937/74 to 4% by the end of 1980's, which was the reflection of a
dramatic increase in military expenditure and expanded government bureaucracy parallel with
the rise in the government constitution there has been a decline in private consumption from

26
79.8% of GDP during 1974-1978 to 70.8% during 1988-1990 (Ethiopian investment agency,
2006/07).

The government introduced mixed economy during the end of its failure that was
implemented. It is only recently that the present government of Ethiopia, which was found
(formed) after EPRDF came to power declared a new market orientated economic policy and
relaxed some of the policies so that a greater participation of the private sector and a minimum
role of the government to take place. Many changes have been introduced such as trade
liberalization, devaluation, investment proclamations and privatization (MADaC, 1996).

2.11.3 Private Investment in the Post Reform Period

After the demise of military requires transitional government of Ethiopia issued a liberalizing
market oriented economic policy which is basically aimed at encourages the participation of
private investors in the economy. The major feature of this policy including limiting the role of
state to the building of essential infrastructure facing, preparation of sound macroeconomic
and sect oral policies that create favorable conditions for attracting the mobilizing foreign
capital and encouragement of widely participation of private sectors in the economy (Ethiopia
the dynamic of economic reforms).

Understanding the constraints that were impose on the private sector development the
transactional economic policy stressed the need for a change of policy to promote private
capital participation. The policy stated in this regard in order to encourage private capital
participation. The state will:

 Create enabling conditions for the participations of both domestic and foreign capital in
economic activities without any capital limitation.
 Remove all existing bureaucratic procedural and introduce new laws and regulations
and enforce them to enhance domestic and foreign capital participation.
 Provide incentive and encouragement to promote domestic capital participation and
encourage a wider participation of private foreign capital.

27
 The state will work out comprehensive packages of incentives for domestic and foreign
private capital participation. That includes:
 Exemption from duties and taxes on capital goods
 exemption from income tax for two years for expansion of reinvestment of profit
 exemption in export and other duties
Increasing the supply of goods and services and thereby to advancing the benefits of the
country of the investor. In order to materialize the policy of encouraging private section
development proclamation number 15/1992 was promulgated in May 1992. The proclamation
was a major departure from the previous regimes investment specially decree 17/1989 a joint
venture special decree number of 1989.it provides new areas of investment, particularly for
domestic investors such as:

 Banking and insurance business

 Generation and supply of electricity up to 25 mega watt
 Air transport service up to passengers on with care capacity of 2799 kg.

Forwarding and shipping services has been allowed only for domestic investors in order to
control the good performance of the economy and market failure. It allowed foreign investors
to make joint venture with domestic private investors without limiting them to joint ventures to
the government. furthermore the proclamation united the two investment laws (special decree
number 17/1990 and joint venture proclamation number 11/1989) in to one investment law,
which avoids confusion and the proclamation and central level and regulation offices at regional
level on the other hand the proclamation denied the permission of incentives (duty free
exemption of equipment) to investors planning to engage in hotel service activities. After
experiencing proclamation number 15/1992 for about four years, a new proclamation number
37/1996 were promulgated in July 1996 to aimed some of weak, point of the proclamation
15/1992 in the following aspects.
 Clarity with respect to areas reserved for Ethiopia's domestic investments, foreign
investors joint venture investment between foreign and domestic capital and for
government investment (article 5, 6, 7, &8).

28
  Clarify of projects eligible for investment incentives
 clarify when the investment certificate is necessary
 It lowers the capital requirement from US D 500,000 to US D 500,000 or its equivalent
when foreign investor profits or dividends, drawn from an existing investment. In
addition if a foreign investing in engineering, or other technical consultancy services, the
minimum capital requirement is lowered from US D 500,000 to US D 100,000 or its
equivalent.
 It transferred the power of the regional investment offices to permit investment
incentives to the central investment institution called Ethiopian Investment Authority.
 It allowed domestic investors for selected projects, to benefit from custom, duty
exemptions even when the capital is less than the minimum requirement capital of birr
250,000 and
 It extended activities eligible for daily free exemption to services such as educational
services, health services, hotel and tourism.

The investment policy has also given guaranty for foreign investors against any future
expropriation and allowed profit remittance out of Ethiopia including profit and dividends:
 Compensation played to the investors
 Proceed from sale or transfer of shores or assets and
 Proceeds from sale or liquidation of an enterprise.

In addition to all the above differences, unlike the previous proclamation the new proclamation
attempted to direct investment in specific areas by granting income tax exemption of different
duration for different types of projects. Projects heeled as appointer are exempted from
income tax for long period than projects labeled as promoted activities. The last proclamation
number 280/2002 is issued mainly to give more incentives for domestic investors and to a large
areas that domestic investors can participate I.e. in other words to shrink down investment
areas that are reserved government (the public) only. The proclamation more emphasis, if not
particularly aimed, for domestic private investment.

29
According to this proclamation an investor that produces ago-industry or manufacturing
products or any other production to be determined by the board. The federal investment board
and exports more than 50% of the product or more than 75% of its product delivered to
another exporter a soon inputs shall be exempt from income taxes for 5 years however, if the
investor exports less than 50% of its product or is supply its product for domestic market
totally, he/she shall be eligible for income tax exemption only for two years. Furthermore, the
recent two in codes were proclaimed in February and October 2003. The October's investment
amendment proclamation (i.e. proclamation number 375/2003) was aimed at creating an
efficient and promote service for investors. It included the re-establishment of Ethiopian
Investment Authority (EIA) and as it gives rise to the promote service to licensing (Negarit
Gazeta, 2003).

CHAPTER THREE
3. Data Analysis of the Study
30
 The study analysis using the descriptive method of analysis of the data.

3.1 Description of the Study Area

Bahir Dar or Bahar Dar (Bahir Dar, “sea shore”) is a city in north-western Ethiopia. It is the
capital of the Amhara region (kilil).
Administratively, Bahir Dar is a special zone, a designation in between a chartered city
(astedader akabibi, a first-tier division, like a kilil) such as Addis Ababa and Drie Dawa, and cities
like Debre Marqos and Dessie, which are organized as kebeles.

Bahir Dar is one of the leading tourist destinations in Ethiopia, with a variety of attractions in
the nearby Lake Tana and Blue Nile River. The city is known for its wide avenues lined with palm
trees and a variety of colorful flowers. In 2002 it was awarded the UNESCO Cities for Peace
Prize for addressing the challenges of rapid urbanization.

Bahir Dar is situated on the southern shore of Lake Tana, the source of the Blue Nile (or Abay),
in what was previously the Gojjam province. The city is located approximately 578 km north-
northwest of Addis Ababa, having a latitude and longitude of 11 036'N 37023' E/11.6000 N
37.3830 E/11.600; 37.383 coordinates: and an elevation of about 1,800 meters (5,906 feet)
above sea level.

Bahir Dar's origins date to at least the sixteenth or seventeenth century; Pedro Paez is credited
with erecting several buildings in this city, one of which is "a solid, two-story stone structure,
with an outside staircase" and can be seen in the compound of the present-day Giyorgis church.

Based on the 2007 Census conducted by the Central Statistical Agency of Ethiopia (CSA), Bahir
Dar Special Zone has a total population of 221,991, of whom 108,456 are men and 113,535
women; 180,174 or 81.16% are urban inhabitants, the rest of population are living at rural
Kebeles around Bahir Dar. These areas receive mean annual rainfall of 1170-1600 mm. Most of
the rainfall occurs during 'kiremt' season between June and September. The maximum
temperature rises as high as 32 0c, while the minimum is in the vicinity of 8 oc. All the urban

31
centers in the metropolis are suffering with the effect of high temperature though it is not
throughout the day and the year. Lake Tana to some extent optimizes the effect of high
temperature for Bahir Dar. It contends 17 kebeles but know it divided in to sub towns.

3.2. Socio economic characteristics of the respondents

3.2.1. Sex composition of the respondents

This demographic variable has direct implication for several issues related to socioeconomic
aspects of population such as the trend of population increases, employment labor force ,
female and male population in the productive ages. Is female actively participating like that of
male in investment? Therefore, the sex structure of the population should be considered under
socioeconomic development. The sex composition of the sample investors is analyzed in the
following tables.

Table 3.2.1 sex composition of the respondents

Sex Number of respondents Percentage
Male 35 70%
Female 15 30%
Total 50 100%
Source: field survey, 2006

The above table shows that 70% of respondents are males and 30% of the respondents are
female. This composition implies that the number of male investors exceeds then female
investors in some amount. Also this shows that female investors are growing through time to
time where as not equal to male.

3.2.2. Age Distribution of the Respondents

32
Age distribution is the most important variable in economic activities. This age structure uses to
identify the working group of the population and to know about the productive age groups.
Therefore, any socioeconomic activities consider the age structure. The age distribution of the
same investors is analyzed in the following table.

Table 3.2.2 age distribution of the respondents

Age No of respondents Percentage
18-28 8 16%
28-38 15 30%
38-48 20 40%
Above 48 7 14%
Total 50 100%
Source: field survey, 2006

The above table shows that the major respondent’s ages are between 38-48 years (40%). This
shows that most of investors are accumulate their capitals at the earlier ages. And also thus
investors have a good habit of work and planning of their time usage, so they are a good model
for younger. The other lowest respondent’s ages are greater than 48 years (14%).

3.2.3. Martial States of Respondents

Marital status has its own implication in the study area. It determines the socioeconomic
activities. The first choice of the investors is either married or unmarried. Most of investors are
married. The martial states of the respondents are analyzed as follows from table 3.2.3 from
the table below shows that 60% of respondents are married and 30% of respondents are single
and the rest 10% are divorced.

Table 3.2.3 marital status of the respondents

Marital status Number of respondents Percentage

33
Married 30 60%
Single 15 30%
Divorced 5 10%
Widowed - -
Total 50 100%
Source: field survey, 2006

3.2.4. Education Level of the Respondent's

Order to perform an activity effectively and efficiently educational background has its own
implication in the study area, without education it is difficult to introduce new technologies.
Investors must have a better awareness about education and technology to be achieving their
objective efficiently in the study area. This could be important to create the educated labor
force and skilled professionals in the study area. Education facilities the implication of different
socioeconomic activities. Educational background of the sample investors is analyzed in the
following table.
Table 3.2.4 Educational level of respondents
Educational status Number of respondents Percentage
Illiteracy - -
read and write 1 2%
Grade 8 completed and bellow 4 8%
Grade 9-12 completed 6 12%
Diploma 25 50%
Degree 9 18%
Master and above 5 10%
Total 50 100%
Source: field survey, 2006

The above table shows that there is no private investor who is illiterate. From the whole,
respondents, 2% of respondents can read and write. Whereas 8% of respondents completed

34
elementary education and lower grades. Twelve percent have grade 9, 10, 11 and 12 completed
high schools. Fifty percent of respondents are diploma holders and eighteen percent of
respondents are degree holders and the rest 10% of respondents are masters and above degree
holders. As indicated from the date most of the investors are diploma holders.

3.2.5. Types of Business Respondents Investment

Investors participate in different types of business sectors such as hotel and tourism, social
service, industry, trade, construction and agriculture are exercised in Bahir Dar city. The
following table summarizes the type of business the sample respondents participated.

Table 3.2.5 types of business investors by invest

Types of business Number of investors Percentage
Hotel and tourism 16 32%
Social service 7 14%
Construction 9 18%
Industry 5 10%
Trade 9 18%
Agriculture 4 8%
Total 50 100%
Source: field survey, 2006

The above table shows that 32% of respondents participate in hotel tourism, 14% of
respondents participate in social service, equally 18% of respondents participate in construction
and trade and the rest 10% and 8% of participate in industry and agriculture respectively. Most
of business investors are invest their capital in hotel and tourism. This indicates that Bahir Dar is
one of the leading tourists and there is high demand of people in the hotel. The lowest business
investors are agriculture. Because of agriculture needs wide areas of land and limitation of
necessary materials for agriculture activity such as stored houses and access of modern
agricultural tools.

35
 3.2.6. The Length of Those Investors Started To Operation

The length of time those investors who started their operation is different from one investment
sector to the other. The following table summarizes the length of time the sample respondents
started their operation.
Table 3.2.6 the length of time those started to operation
alternative Hotel and Social Constructio Agriculture industry Trade Total and
s tourism service n percentage
Below 5 5 3 3 4 2 1 18(36%)
years
5 -10 years 4 3 3 - 2 2 14(28%)
10 -15 5 2 1 - 1 1 10(20%)
years
Above 15 3 1 2 - 1 1 8(16%)
years
Total 16 9 9 4 6 6 50(100%)
Source: field survey, 2006

As we have seen from the above table, agriculture, hotel and tourism are the young
investment that is 1-5 years compared with the other sectors. The investors scored 5-10 and
10-15 years is medium. This indicates that most of investments in the city are a young, since a
short period of time the city is growing fast and one of a good business center in the country.
And also the city is a high mobilization of business investors and conducive to investment.

3.2.7. Sources of Capital

36
These investors get capital from different sources of capital such as gift borrowing from bank or
person, private saving, property sales and others the respondents are summarized the source
of capital in the table below.

Table 3.2.7 sources of capital

Alternative Hotel and Social Constructio Industry trade agriculture Total
s tourism service n &percenta
ge
Gift 1 - 1 3 2 - 7(14%)
Borrowing 1 1 2 1 6 2 13(26%)
Private 5 3 1 1 3 1 14(28%)
saving
Property 4 - 4 2 2 3 15(30%)
sales
Others - - - - - 1 1(2%)
Total 11 4 8 7 13 7 50(100%)
Source: field survey, 2006

The above table shows that 30%, 28%, 26%, 14% and 2% of respondent’s source of capital is
from property sales, private saving, borrowing, gift and other sources respectively. The highest
of initial capital was property sales. This indicates that they have a good management of
property and use of properties for their necessities and in order to improve their capital. And
they have a good experience to save this shows they have a goal to change their life in a good
way, saving and investment are interrelated. Without saving not only investment but also it is
difficult to manage present and future situation of an investor’s project as well as individual
person. Because saving by it indicates a plan to use or do something for future or present-day.

3.3. Private Investment and Employment Generation

The linkage between unemployment and poverty, it is still remains true that one of the major
mechanisms for reducing poverty and unemployment problem in less developed nations is the
provision of productive employment opportunity and apply economic and social measures are

37
essential. The provision of more work and wider share of workers that is available would
entirely go along away to wards solving true problem (Todaro, 1992). In the city investors
create job opportunity with parallel to their capital accumulation. The city trade and industrial
office and investment office promote private investment in order to alleviate poverty and
unemployment or to create employment opportunity. The private investment and employment
generation has a direct relationship in the city. The private investment solves the problem of
unemployment, improve the living standard of the employee, increase output level provide
infrastructure of the city private investment needs labor to achieve specific objective of the
investors.

3.4. Contribution of Private Investment on Employment Generation

The expansion of private investment has a contribution towards employment generation. The
following table summarizes the increasing number of investors and their awareness of
regarding employment generation.
Table 3.4. Number of investors and their awareness of regarding employment generation
Alternative Hotel and Social Constructio Agriculture Industry Trade Total and
s tourism service n percentage
Accept 13 10 5 2 10 5 45(90%)
Not 2 1 - 1 - - 4(8%)
accept
Indetermi 1 - - - - - 1(2%)
nate
Total 16 11 5 3 10 5 50(100%)
Source: field survey, 2006

The table shows that large number of investors engage in each sector saying increasing private
investment has a great contribution on creating employment opportunity. 90% of the sample
investors agree with this idea. This indicates that after private investment expands in the city

38
employment level has been increasing. In other words, if there was no investment in the city
the unemployment rate would be high.

3.4.1. If the answer to the above question is accept what is the extent of
employment opportunity opened for the unemployed by your investment.

Table 3.4.1 employment opportunity created

Alternative Hotel and Trade Agriculture Industry Constructio Social Total and
tourism n service percentage
High 10 5 - 6 4 5 30(60%)
Medium 4 2 - 3 1 2 12(24%)
Low 3 - 2 - 2 1 8(16%)
Total 17 7 2 9 7 8 50(100%)
Source: field survey, 2006

The above table reveals that agriculture sector open low employment opportunity in the city in
contrast to hotel and tourism. It is because agriculture is infant growth in the city. Hotel and
tourism sector open the highest employment opportunity to the others. Because it needs more
employee to facilitate or to give efficient service to the customer.

Table 3.4.2 sectors of job opportunity

Sectors Total job opportunity
Hotel and tourism 300
Social service 150

39
Construction 280
Industry 160
Trade 200
Agriculture 100
Total 1190
Source: field survey, 2006

The above table shows that construction is the second most important sector to create job
opportunity. Hotel and tourism sector creates more job opportunity than other sectors. Both
construction and hotel and tourism sector create more job opportunity than other sectors. It is
because the sectors are labor intensive. They depend on man power to provide goods and
services to their customers and less depend on modern technology. But industry, social service
and agriculture create less employment opportunity. Because industry is technology intensive
was as social service and agriculture is low distribution of finance constraint and low access of
land and difficult environmental condition to do their activities in the city.

3.4.3. Sect oral Job Opportunity (2004- April 2006e.c)

The creating of job opportunity of the investment was different form one investment sector to
the other. The following table summarizes that the total job opportunity record in the city
investment bureau from 2004 - April 2006 by each investment sector.

3.4.3. Sect oral job opportunity in 2004 – April 2006e.c.

Sectors Job opportunity
Permanent Temporary Total and percentage
Hotel and tourism 2950 3014 5964(11.77%)
Social service 1789 1172 2961(5.84%)

40
 Construction 2054 5135 7639(15.08%)
Industry 9717 14915 24632(48.61%)
Trade 3745 3824 7569(14.94%)
Agriculture 1070 830 1900(3.75%)
Total 21775 28890 50665(100%)

Source: Bahir Dar metropolitan city administration investment bureau, April 2006

The above table shows that 48.61% of industry sector create more job opportunity than other
sectors. This was because the industry sector is growing rapidly, so this sector employees more
person. The second most important sector to create more job opportunity is 15.08% of
construction. Since Bahir Dar city is one of the fastest growing city in Ethiopia. Know a day,
Bahir Dar city construct so many buildings, roads, and infrastructures. 14.94% and 11.77% of
Trade and hotel and tourism sectors are provides employment opportunity next to
construction. But 5.84% and 3.75% of social service and agriculture sectors provides less
employment opportunity.

Table 3.4.4. Total employment opportunity 2004 – April 2006

Year 2004 2005 April 2006

Job opportunity 5301 19359 28998
Source: Bahir Dar metropolitan city administration investment bureau, April 2006

As we can understand from the above table the employment opportunity planed to be
provided in each year was not the same. But fluctuation from year to year. In 2006 the
employment opportunities high this indicates employment opportunity is increase through time
to time and also number of projects are highly human intensive. But in 2005 and 2004 the
employment opportunity is less compare to 2006. Because of the number of investors starting
their investment is different from year to year.

FIGURE 3.1. GROWTH OF EMPLOYMENT OPPORTUNITY

41
 Object 1

Source: - Bahir Dar City Administration investment Bureau

The above graph shows that job opportunity planed to be provided was relatively the highest
periods of 2006. this was because the government has been making structural transformation,
deregulation, revising investment code, simplify the bureaucracy of the metropolitan city
investment bureau and Ethiopians rapidly changing image at home abroad positively
investment climate was crated. The mainPoint is that employment created great depends on
the number of investment project accommodate the labor force but these situation was
different in each year.

Table 3.4.5. Total capital approved in each year

Year 2004 2005 April 2006
Total investment 694539714.98 3775643165.19 1379901292.94
Number of investors 138 311 193

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 Source: Bahir Dar metropolitan city administration investment bureau, April 2006

The above table shows that the amount of investment approved to be invested 693,539,714.98,
3,775,643,165.19 and 1,379, 901,292.94 birr in 2004, 2005 and April 2006 respectively by 642
investors. The highest capital recorded in 2005 which compared to other time period with
regard to investment capital. There is low level of investment capital during 2004 has a positive
pattern in the number of investors to be invest their capital and the demand of investors.
Table 3.4.6. Total investment capital approved in each sector (2004-April 2006e.c)
Sectors Number of investors Total Investment capital and
percentage
Hotel and tourism 47 1321244112.2(22.58%)
Social service 24 594262369.4(10.15%)
Construction 120 818195643(13.98%)
Trade 304 1754325398(30%)
Agriculture 6 230895752(3.94%)
Industry 141 1131160898.7(19.35%)
Total 642 5850084172(100%)

Source: Bahir Dar metropolitan city administration investment bureau, April 2006

The above table shows that trade sector has the highest investment capital with large number
of investors. This indicates Bahir Dar is the major commercial center in Amhara region and has
many customers (demand) in the city as well as came from the surrounding rural areas. Hotel
and tourism is the second highest investment capital, so that Bahir Dar is the leading of tourist
and site to visit different manmade and natural historical places and heritages near by the city,
region as well as the country.

3.5. Challenges of Private Investment

According to the respondent there were different problems of investment in opening
opportunity. Such as shortage of water supply, increase cost of raw materials or inputs, skilled
man power and manageress, lack of market demand, transportation problem, increase import
duties on importers, lack of sufficient supply of cements, lack of enough tale service and

43
network connection problems, shortage of investment capital, implementation of technology
problem, the research concluded that the city administration investment bureau head and
other responsible person actively participate in order to reduce the problem of private
investment in opening employment opportunity.

Investors respondent to give suggestion to the investment office such as access of land,
expanding credit scheme, facilitate different types of inputs with in comparative minimum cost,
to increase private investors reducing the rate of interest and avoiding bureaucracy
administration problem, providing fertilizer and training, priority in loan, to increase foreign
exchange rate peace to promote private investment and create employment opportunity.

According to the city administration investment office head, the city investment did different
activities or efforts to reduce unemployment through creating the means of employment
opportunity. The city administration investment office believed medium extent of contribution
has been done by domestic private investment in employment generation. The number of
employed people increases due to the increasing number of private investors and projects.

Generally, the type of incentives or subsides was given to the private investors to reduce
unemployment or to create employment opportunity by the city administration investment
office , like increase credits schemes, solving infrastructural problem, access to land, providing
fertilizer, better seeds, exception from custom duties on important of raw materials and capital
goods, excellent assistance and promotion of investment office. The metropolitan city
administration investment office was proved the above listed and other socially, economically
favorable condition for the investors to reduce unemployment or to generate employment
opportunity in the city.

CHAPTER FOUR
4. Conclusion and Recommendation
4.1. Conclusion

44
Investment refers to the purchase of various types of goods and services that can be used for
production of other goods. There were different investment policies declared in different
regimes of the Ethiopian government. During Dergue regime the private investment were reach
its maximum. Investment can be classified in to different groups by different writers (authors).
According to economics investment is the spending devoted to maintaining the stock of capital
and hence real or physical investment is disaggregated in the three categories. These are
business fixed investment, residential investment and inventory investment.

Investment especially private investment is very crucial for economic and social development of
Bahir Dar city. It is an increasing capital stock which is essential means for the developing the
city and helping people to become prosperous, but fluctuates different factors of problems.
Such as cost of inputs, marketing problems, implementation of technology capital accumulation
of the investors.

The level of investment and employment opportunity provided have similar and positive trend.
The highest employment opportunity of investment is industry followed by construction. And
the highest capital accumulate investment sector is trade followed by hotel and tourism. This
indicates that the city is growing rapidly and conducive to investment, commercial center,
tourist leading, and also there have been human capital resource. This indicates a direct
relationship between investment and employment. But the investors planed to provide job
opportunity for limited persons and this implies low capacity of investment in providing
employment opportunity.

 Even if incentives and facilities are produced by the concerned body to these activities
provided is not sufficient enough to enhance the investment activity of the study area.
 Lack of credit availability, water supply, transportation, capital problem, market
integration, cost of raw materials and electric power and taxation are the major and
serious problems faced by all investors in the area under investigation.

45
 Form the major constraints the poor infrastructure of the city had been lag behind the
private investment to score high economic growth and to create more employment
opportunity.
 The construction sector needs a higher capital because the sector expand higher costs of
cement, building cost transaction costs and other raw material costs and also crate
more employment opportunity next to industry in the city.
The industry sector is the highest job opportunity, as it indicates Bahir Dar is one of the
industrialized city and conducive to expansion of industry as well as necessary inputs for the
industry.
 The expansion of private has a great contribution towards employment generation.
 Most of investors in the city are males, medium age, married and educated. They get
capital from different sources. Such as gift, borrowing, private saving, property sales and
others.

4.2. Recommendation

46
 To increase the number of investors in the city, governmental bodies of the city should
give great deal of emphasis in enhancing advance and well functioning infrastructure,
better transport service and controlling traffic methods and illegal activities, better
communication service, enough water supply, better electric flow and generation, credit
available in all part of the city and reduce rate of interest for the creditor.
 The incentives and facilities provided are not sufficient enough to enhance the
investment activity. So the investment office should engage in making the investment
climate over conducive for investment.
 One of the problems of domestic private investors in the metropolitan city is that of
identifying profitable and productive opportunity. So that the official administration
body should give effective training for investors to address the problem.
 Government body should be give attention to creation of conducive and enabling
investment environment by providing a clear and stable policy of investment.
 Identification of land of available for investment and its price should determined before
hand and quick leasing of land to investors have to be introduced.
 More projects are inactive due to finance problem, lack of resource and restriction of
credit, if this problem is solved by the responsible city administration investment bureau
head and city government bodies to continue the project and increase private investors.
 The city capacity building programs in human resource must be accelerated in order to
solve problems of skilled labor that are required in new investment project.
 Access to electricity power and water supplies for investors has to be easy and should
available within short period of time.
 Compared to men investor’s female investors are low, so the metropolitan city
administration investment bureau give attention to increase the number of female
investors in the city by giving different incentives to female investor

Bibliography

 Abebe Haile (1998), proceedings of eight annual conferences on Ethiopian economy.

47
 Asfaw (2006), problems of private investment in south Gonder zone, unpublished, Arba
Minch, University.
 Bahirdarcity.net/index.php?option=comcontent---id---
 Befkadu Degefa (1994), Strategies and macro economics policies for the development of
private sector in Ethiopian, paper presented r on third annual conference of Ethiopia
economy, Addis Ababa university press./
 Dorn bush (2001), Principle of Macroeconomics, Chicago University, USA.
 Ethiopian Investment Agency (2006/07), “Investment Guide to Ethiopia (1991-
2005/06)”.
 Getachew Mekonnen (1997), determinants of private industrial investment in Ethiopia,
the school of graduate studies of Addis Ababa University unpublished master thesis.
 Ghura D. and Goodwin B. (2002), determinants of private investment: cross regional.
Empirical investigation, applied economics.
 Http://economics.about.com/od/unemploymentcategory/a/typesofunemployment.htm
 Harvey C. (1985), Macroeconomics in Africa. London Macmillan education limited
 I LO (1986), the challenges employment and basic needs in Africa.
 Jorgenson, D.W. (1971). Econometric studies of investment behavior: a survey. Journal
of economic literature.
 Kinfe Abraham (2001), Dynamics of economics reform, Addis Ababa Ethiopia.
 Keymisrak Birhanu (1998), Private investment, policies and determinants in Ethiopia”.
 Keynes (1936), the general theory of employment, interest and money, MacMillan,
London.
 MacMillan dictionary of modern economics,1992
 Ministry of Ethiopia Development and Corporation (MEDaC), 1999, “Survey of the
Ethiopian Economy”.
 Ministry of finance and economic development(MOFED), 2002, sustainable
development and poverty reduction program, Addis Ababa, Ethiopia
 Negarit Gazeta (2003), FDREHPR (2003) Investment incentives and investment area
reserved for domestic investment proclamation, Addis Ababa Ethiopia.

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 Negarit Gazeta (1992), FDREHPR (1992) A Proclamation proved for encouragement,
expansion and coordination of investment, Addis Ababa Ethiopia.
 N. Gregory Mankiw (1995), macroeconomics Types of investment 4 th edition, New York.
 Ramush Babu (2003), the strategic of economic development.
 R. Schiller Badewi (2003), the economy today, 9th edition hill.
 Serven Luis and Andres Solimano (1991), Economic adjustment and investment
performance in developing countries, was legion
 Serven Luis and Andres Solimano (1992), Investment behavior and macroeconomic
adjustment, surveyor, research observer val.7(1):98
 Shibesh Gebra (1994), Determinants of investment, paper presented on third annual
conference Of Ethiopian Economy.
 Stephen L. Sal vine (2005), economics 2nd edition.
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 World Bank (1990), Developing the private sector, Washington

APPENDIX

Bahir Dar University

College of Business and Economics

49
 Department of Economics

This questionnaire is prepared by third year economics student and its aim is to prepare
graduating paper on the role of private investment on employment generation in Bahir Dar city.
Information you give essential to complete the study successfully. I will like to thank you in
advance for your cooperation.

 Sex A, Male B, Female

 Age A, 18-28 B, 28-38 C, 38-48 D, Above 48

 Martial statues of investors

A, Married B, Single C, Divorced D, Widowed
 Education level
A, Illiteracy B, Read and Write C, Grade 8 completed and bellow
D, Grade 9-12 completed E, Diploma F, Degree G, Masters and above
 In which type of investment are you involved?
A, Social service B, Hotel and tourism C, Trade
D, Construction E, Industry F, Agriculture
 How long is the time since you started investment?
A, Bellow 5 years B, 5-10 years C, 10-15 years D, Above 15 years
 What was the initial capital to start the investment?
A, Bellow One million B, One-Five million C, Five – Ten million
D, above Ten million
 Do you think that the expansion of private investment in the city have contribution
towards employment generation?
A, Yes B, No C, I do not know
 If the answer to question number 8 is yes what is the extent of employment opportunity
open for the unemployment by your investment?
A, High B, Medium C, Low D, if other specify

50
  How many people do you generate job opportunity in this sector? _____________.
 In what case (source) of income (finance) during establishment?
A, Gift B, Borrowing C, Private saving
D, Property sales E, Others
 What type of incentives is given for you by the city administration investment bureau?
_____________________________________________________________________
 To expand investment there should be increase the number of investors in the city, do
you have suggestion? A, Yes B, No
 If your answer for question number 13 is yes what types of improvement have been
made?
______________________________________________________________________
 In the city what do you think that hinder private investment in opening employment
generation?
____________________________________________________________________
 What are the problems faces in this investment sector?
________________________________
 Howsolvethis problems?
_____________________________________________________.

Question for Bahir Dar City administration Investment Bureau.

 What are the activities do the city administration investment bureau to increase
employment generation?
___________________________________________________________________

51
 What is the extent of the contribution of private investors towards reducing
unemployment in the city?
A, High B, Medium C, Low D, If others specify
 What is the extent of employment opportunity created by private investors yearly?
___________
 What type of incentives or subsidy is given to the private investors to reduce
unemployment by the city administration investment bureau?
__________________________________________
 Generally what are the favorable conditions that the city administration investment
bureau proved for the private investment?
________________________________________________
________________________________________________________________________
___.

Thank you for your cooperation!

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