An analysis of the determinants of private investment in the manufacturing sector: the case of the state of Tigray, Ethiopia

Abstract

Economic and political reforms have been introduced in Ethiopia and these have boosted private investment over the last two decades. Reforms have brought about measurable improvements, but the progress of the status of private investment has remained slow. This study was conducted with the objective of investigating the microeconomic level determinants of private investment in the manufacturing sector. These micro-level determinants of private investment in the State of Tigray, Ethiopia, were analysed using both descriptive and econometric methods. Thus, an econometric method of data analysis using a duration model was applied to analyse the microeconomic data collected. In addition, descriptive analysis was employed to analyse the survey data. Here, a chi-square test and factor analysis were used to analyse the relationship between variables and their constraints on the operations of the manufacturing sector. The major microeconomic determinants of private investment status in the State of Tigray were found to be investment areas, access to credit, infrastructure facilities, the judicial system, corruption, investment incentives and bureaucratic red tape. The econometric result revealed that infrastructure facilities, the judicial system, and investment areas negatively and significantly delayed the entire private investment status. However, interest rates and investment location were positively and significantly supported to continue their status of the entire private investors in the manufacturing sector. Infrastructure facilities, investment incentives, and investment areas were negatively and significantly related to the started group of investors’ progress. However, investment location was related positively and significantly to the started group and the ability of the implementation and operation statuses of private investors to proceed to operation status. In the case of the non-started group, infrastructure facilities and investment areas are related significantly and negatively to investment status delay. By contrast, interest rates and investment location significantly and positively affect private investment status delay. According to the descriptive analysis, access to credit, bureaucratic red tape and corruption were the additional major factors that hinder private investment from progressing from one xii status to the next. The investor’s level of education, access to land and political instability risks in the survey were not determinants of private investment status. In addition, the survey of private investors for those who have already started production shows that infrastructural, technological, and economic and financial factors have the highest absolute value of the loading factors that hinders operations in the manufacturing sector. The results of this study revealed that most of the problems encountered in the manufacturing sector were institutional but some were related to the private investors themselves. Thus, the government should take measures to establish a true, independent and efficient institution so as to create access to credit and provide infrastructure facilities to the private sector. This could be done by minimising corruption and ensuring transparent investment regulations. Thus, the State of Tigray, Ethiopia, must attract and encourage private investors by applying and improving policies which promote private investment. In this way they will actively contribute to the overall development and growth of the Ethiopian economy. Finally, as this study is made on the causes of delay in each phases of investment, it contributes a new knowledge to all investment sectors in the developing countries as whole and particularly to all regions of Ethiopia for advanced polices and strategies development on investment decisions. Then, based on the results of the study and solving these identified problems of investment phases, all actors of investment can retain and encourage the existing and attract new private investors to enhance the economic development of the society. The findings from this study have important implications for prospective business owners, lenders, and policy makers on how to improve private investment and create conducive business environment.