Makerere University

MAKERERE UNIVERSITY

COLLEGA OF BUSINESS AND MANAGEMEMT SCIENCES

SCHOOL OF STATISTICS & PLANNING

ASSESSMENT OF THE FACTORS AFFECTING THE LEVEL OF INVESTMENT

IN UGANDA: A CASE STUDY OF NAMANVE INDUSTRIAL AREA

KAWERE TONNY

15/U/6123/PS

A DISSERTATION SUBMITTED TO THE SCHOOL OF STATISTICS AND

PLANNING IN PARTIAL FULFILMENT FOR THE REQUIREMENT OF THE

AWARD OF DEGREE OF BACHELOR OF SCIENCE IN BUSINESS STATISTICS

OF MAKERERE UNIVERSITY

AUGUST, 2019 .

DEDICATION

I dedicate this report to the Almighty God, my late beloved parents and my dearest sisters

Nakiddu Irene, Nannozi Birungi Rachael, and my elder brothers and friend for their endless care and tireless parental and financial support. May the Almighty God bless them abundantly.

iii

ACKNOLWEDGEMENT

First and foremost, I would like to thank the Almighty God for seeing me through the entire course and more so this research project.

Special gratitude goes to my Supervisor, Mr. Musoke Edward for his tireless support in guiding me throughout this exercise. My sincere appreciation goes to my dearest guardians, my sisters and brothers for their support and prayers throughout my entire course.

I would also like to express my sincere gratitude to all my lecturers at the School of

Statistics and Planning (SSP), Makerere University from whom I have learned from not only the training in my field of study, but they have also contributed positively towards the shaping of my life.

Lastly, let me express my sincere gratitude to all my fellow students and friends, Babirye

Jovia, Kayunga Charles, Nakitende Joan, Mwesigwa Stanley, Nkwenge Samalie, my discussion group mates and the entire BBS Class of academic year 2015 at large for the wonderful experience we have shared throughout the entire course and for their inputs which have positively shaped my life, skills and attitudes to face the challenges in the world and I am looking forward to wonderful friendships in life.

May the Almighty God bless you all.

TABLE OF CONTENTS

DECLARATION ...... Error! Bookmark not defined.

APPROVAL ...... Error! Bookmark not defined.

DEDICATION ...... iii

ACKNOWLEDGEMENT ...... Error! Bookmark not defined.

TABLE OF CONTENTS ...... v

LIST OF TABLES, DIAGRAM AND EQUATIONS ...... viii

ABSTRACT ...... ix

CHAPTER ONE: INTRODUCTION ...... 1

1.1 Background of the study ...... 1

1.2 Statement of the Problem ...... 2

1.4 Objective of the study ...... 3

1.4.1 Specific objectives ...... 3

1.4.2 Research Hypotheses ...... 3

1.5 Scope of the study ...... 3

1.6 Significance of the Study ...... 4

1.7 Conceptual framework ...... Error! Bookmark not defined.

CHAPTER TWO: LITERATURE REVIEW ...... 8

2.1 Introduction...... 8

2.2 How given factors affect the level of investment ...... 9

2.3 Relationship between infrastructure and investment ...... 12

2.4 Relationship between the level of taxation and investment in Uganda ...... 14

2.5 Empirical Framework ...... 16

2.6 Related Cited literature ...... 17

2.7 Research gap ...... 19

CHAPTER THREE: METHODOLOGY ...... 20

3.1 Introduction...... 20

3.2 Research Design ...... 20

3.3 Study area ...... 20

3.4 Study Population ...... 21

3.5 Sampling procedure and Sample size ...... 21

3.5.1 Sampling Procedure...... 21

3.5.2 Sample selection ...... 21

3.6 Data collection methods ...... 22

3.7 Data collection tools ...... 22

3.8 Data Quality control ...... 23

Reliability of the instruments ...... 23

3.9 Data analysis ...... 24

3.10 Ethical Considerations ...... 26

CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION ...... 27

4.1. Demographic characteristics of the respondents ...... 28

4.2 Project ownership ...... 30

4.3 Most appropriate measure of investment ...... 30

4.4 Bivariate Analysis ...... 31

4.4.1 Factors that affect the level of investment in Uganda ...... 31

4.4.2 Relationship between infrastructure and investment ...... 33

4.4.3 Relationship between the level of taxation and investment in Uganda ...... 35

4.5 Multivariate Analysis ...... 37

CHAPTER FIVE: (SUMMARY, DISCUSSIONS, CONCLUSIONS AND

RECOMMENDATIONS) ...... 40

5.1 Introduction ...... 40

5.2 Summary ...... 40

5.2.1 Factors affect the level of investment in Uganda .... Error! Bookmark not defined.

5.2.3 Relationship between infrastructure and investmentError! Bookmark not

defined.

5.2.3 Relationship between the level of taxation and investment in Uganda ...... Error!

Bookmark not defined.

5.3 Conclusion ...... 40

5.4 Recommendation ...... 41

References ...... 42

Appendix 1: Questionnaire ...... 44 vii

viii

LIST OF TABLES AND DIAGRAM

Table 4.1: Demographic characteristics of the respondents...... 28

Table 4.2: Project ownership ...... 30

Table 4.3: Most appropriate measure of investment ...... 31

Table 4.4: Factors that affect the level of investment ...... 32

Table 4.5: Relationship between infrastructure and investment……………………...... 32

Table 4.6: Relationship between the level of taxation and investment……………………34

Conceptual framework…………………………………………………………5

Table 4.7: Coefficients of the Model…………………………………………………..….35

ABSTRACT

A good investment climate provides opportunities and incentives for firms to invest profitably, create jobs and expand output, thereby increasing investment and growth. The purpose of this study was to determine the factors affecting the level of investment in

Uganda with a case study of UIA. The specific objectives of the study were; to examine how given factors affect the level of investment in Uganda, to find out whether there is a relationship between infrastructure and investment and, to identify whether there is a relationship between the level of taxation and investment in Uganda. The study adopted a cross sectional research design. Simple random techniques were also employed in the sampling process. Quantitative data collection methods were also employed in the data collection and data was analyzed using SPSS software and was presented in form of univariate, bivariate and multi-variate analysis. The study found out that favorable macroeconomic and political stability are the main factors affecting level of investment.

Thus macroeconomic, political stability, affordable labor, access to domestic and regional markets were found to significantly affect investment. More so, infrastructure and level of taxation was found to significantly affect level of investment. The study adopted a cross sectional research design where both primary and secondary data was collected. Simple random sampling was employed and a sample of 60 respondents consented to participate in the study. The study further recommended that; the government should impose favorable tax policies so as to increase the level of investment in Uganda, Infrastructural improvement should also be one of the major emphasis in Uganda by the government as it has been seen to affect the level of investment in Uganda and further research should be done on the same topic to identify which specific factors affect the level of investment in

Uganda. x

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

World over, for firms to invest profitably, there is a need to consider a good investment climate thereby creating opportunities and incentives for firms to create jobs and expand output. According to Besley & Burgess, (2004), if there exists good factors favoring investments into a given country at a particular time, there is an expected increase in investments. In other words, he stated that the higher the availability of factors favoring investments, the higher the investments.

More so, Bigsten, (2004), was in agreement in what his fellows Besley & Burgess, (2004) stated in their study but he added that this applies to developed countries where factors like stable political environment exists given other factors, the level of investments are high, however, in low development countries the case is that businesses frequently operate in investment climates that undermine their incentive to invest and grow.

Countrywide in Uganda, the current real gross domestic product (GDP) growth for FY

2018/19 was projected 5.8 % compared to the 3.9 % growth for the FY 2017/18. The size of the economy is now UGX. 101.8 trillion equivalent to USD 27.9 billion and it is driven mainly by industry, services and public infrastructure investment. All sectors of the economy register higher growth.

In contrast to the accelerator principle of investments, it states that the level of investments in a given time depends on the rate of economic growth in a given economy, hence since there is a remarkable shift in the level of Uganda’s economic growth rate from 3.9% in the

1 financial year 2017 to 2018 to 5.8% in the financial year 2018 to 2019, there is an expected high increase in the level of investments living other factors constant. More so, in Uganda, the rate of inflation dropped from about 5.41% in 2018 to about 2.63% in 2019. This decline in inflationary rate accompanied with sustainable levels of economic growth, calls for more investments living other factors constant.

However observed growth in the economic growth rate and current decline in inflation rate as compared to previous years, the level of investments grows at a low rate. Due to this, the researcher found it relevant to carry out a study to assess the factors responsible for this low rate of growth in investments in Namanve industrial area.

1.2 Statement of the Problem

The results from the Regional Programme on Enterprise Development (RPED) surveys have shown that in Africa, macroeconomic reform is a necessary but not a sufficient condition for investment sector growth. There are enterprise-level factors that modulate the growth of existing firms and impede the entry of new ones. Foremost among these factors are low levels of investment in infrastructure and high taxation from government, which in turn leads to lower competitiveness and exports manufactured from Africa (Bhattacharjee,

2002). However, what is puzzling is the evidence that shows a combination of relatively low investment rates, high profit rates, but small profit effects on investment in Sub-

Saharan Africa (Bigsten et al., 1997). Given the low levels of investment in the manufacturing sector in Africa, there is need to understand which factors affect investments in African manufacturing firms. However, little is known about the trend of the factors that affect investment in the Namanve industrial area hence the need for this study.

1.4 Objective of the study

The main objective of the study was to assess the factors affecting the level of investment in Uganda with a case study of UIA.

1.4.1 Specific objectives

Specifically, the study sought to address the following objectives;-

1. To find out whether there is a relationship between infrastructure and investment.

2. To identify whether there is a relationship between the level of taxation and investment

in Uganda.

1.4.2 Research Hypotheses

The study was guided by the following research hypotheses;-

 There is no relationship between infrastructure and level of investment in Uganda.

 There is no relationship between the level of Taxation and investment in Uganda

1.5 Scope of the study

1.5.1 Content Scope

The study covered the factors affecting the level of investment in Uganda with a specific emphasis on examining how given factors affect the level of investment in Uganda, finding out whether there is a relationship between infrastructure and investment and identifying whether there is a relationship between the level of taxation and investment in Uganda.

1.5.2 Geographical Scope

The study took place from Namanve industrial area in Uganda. This place was chosen because it is densely populated with industries and based on observations; most of the investments in Uganda are through the industrial sector.

1.5.3 Time Scope

The study covered a time period between 2010 up to date but relevant previous literatures related to the topic have been used.

1.6 Significance of the Study

The findings of the study will be useful in helping the government and other key stakeholders to make informed decisions.

The study is a contribution to the scientific knowledge available through an empirical investigation. Therefore future researchers will make reference to it.

The study is a bench maker for investors and policy makers.

Figure 1.1: Conceptual framework

Independent Variables  Economic factors Dependent Variable  Political factors Level of Investment  Institutional factors

 Geographic factors  Socio cultural factors

 Others

Source: Google Books

The determinants of the level of investment are highly continuous and emphasized topics in economics. Investment spending depends on the economic, social and political situation of a country that affect the return, but such favorable conditions are often lost for most developing countries in realizing this, there is a growing interest in countries on the factors that influence the pattern of investment activity and some factors identified (Samuelson,

2004).

Investors invest more that will enable them to earn profit. According to “Samuelson,

2004”, there are three main determinates and these include; revenue that is, an investment will bring more product and this encourages investors more and otherwise it discourages.

The second one is cost which is interest rate and government taxes. As it is obvious that investors invest through borrowing funds and if the interest rate is higher, it will discourage investment. The third one is execration were investors predict about the future return on an investment, and if its prediction is negative on its return, then this discourages investment. (Samuel son, 2002) 5

Based on the literature review, this study has identified both dependent and independent variables. It is expected that the dependent variable is affected by multiple factors like economic, social, political, institutional, cultural, geographical and etc. This study, however, focuses on macroeconomic factors affecting private investment (Muhdin M.

Batu, 2016). Investment, as it has seen earlier, is an engine for economic growth and is one of the most important weapons in poverty alleviation. It improves the productive capacity of the nation and also creates job opportunity for many people. One of the most important components of investment is private investment in which business institutions engage in the production of goods and services with the twin objectives of profit maximization and improving national economy. That is why due attention has been given to private investment activities. Public investment, in majority of the case, is seen as a complement to private investment and hence promote private sector expansion and development.

Exchange rate, like GDP and public investment, is important in the promotion of private investment. However, countries should take care in their management as the implication is in both directions that is positive and negative. The others variables being interest rate, credit, inflation rate, international trade, and money supply are also slightly important in explaining the performance of investment.

In this regard, reasonable interest rate, broad money expansion and trade liberalization positively contributes to private investment. On the other hand, inflation and miss-targeted credit reduces private investment. Because of poverty, people, sometimes, would borrow to finance other matters like education, healthcare and basic necessities. The study finally recommends that countries should seriously work in creating an enabling environment for private investment.

To promote private sector investment, countries need to improve on the real incomes of people; maintain macroeconomic stability and make public investment in basic infrastructures and institutions that are fundamental to promote private investment.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents related literature to the study topic in relation to the study objectives and concludes by highlighting the research gap in the reviewed literature.

Theoretical Review

According to most financial and economic theories, individual act rationally and think about all accessible information for decision making of investment but behavioral finance believes that investors act irrationally in the stock market. Chen et al., (2005) reported that investor’s psychology, behavioral biases and emotions lead to systematic error in the way in which they process their information about investment.

According to Kahneman & Tversky (1979) also show that decisions of investors are affected by behavioral, emotional and psychological factors. The empirical findings of studies done by Chen et al., (2005) shows that investors make poor trading and investing decisions because of behavioral biases. However a study done by Hunjra et al., (2012) illustrate that behavioral factors have a positive impact on investment decision making.

Over the last decade there has been a transformation in the ownership of the world’s economic infrastructure. The combination of a strong supply of assets and the need for governments and companies around the world to reduce debt has led to $1.7 trillion being invested into infrastructural assets globally. More so, McKinsey stated that Infrastructure is crucially important to foster countries’ economic development and prosperity. Investments

8 in infrastructure contribute to higher productivity and growth, facilitates trade and connectivity, and promotes economic inclusion.

According to the "Keynesian" approach on investment, it places far less emphasis on the

"adjustment" nature of investment. Instead, they have a more "behavioral" take on the investment decision. More so, Keynesian approach argues that investment is simply what capitalists "do". Every period, workers consume and capitalists "invest" as a matter of course. This leads Keynesians to underplay the capital stock decision. This does not mean that Keynesians 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

"follows" from the investment patterns rather than being an important thing that needs to be "optimally" decided upon beforehand. Thus, when businesses make 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 investment for some particular period.

For Keynesians, then, optimal investment not about "optimal adjustment" but rather about

"optimal behavior".

Empirical Evidence

2.2 How given factors affect the level of investment

According to Nyamwange (2007) on the factors affecting investments in Kenya, the objectives of the study were to identify the key factors that influence investment decisions in Kenya and to explore the empirical relationship between Investment and economic growth in Kenya, the findings of the study indicated that the main determinants of

Investment in Kenya are market size (proxied by GDP), stable macroeconomic policies and a level of human capital that is tolerable by investors.

Agiomirgianakis, Asteriou & Papathoma, (2003) indicated that countries that are endowed with natural resources would receive more foreign investment and as well as domestic investment. Very few studies on the determinants of investment control for natural resource availability except for Culem, (1988) and Hartman, (1994). The omission of a measure of natural resources from the estimation, especially for African countries case, may cause the estimates to be biased, Artige & Nicolini, (2005), we therefore include the share of minerals and oil in total exports to capture the availability of natural resource endowments.

Regulatory Decision

The Restrictive Trade governs many countries trade. Practices that seek to block entry into production and that discriminate against buyers are illegal. This puts an unnecessary burden on investors. Antitrust legislation that governs incoming foreign investment through acquisitions, mergers, or takeovers by antitrust legislation prohibits restrictive and predatory practices, which prevent the establishment of competitive markets. Antitrust legislation also seeks to reduce the concentration of economic power by controlling monopolies, mergers, and takeovers of enterprises. Many firms carry the heaviest taxation burden in East Africa. This additional burden has raised the cost of doing business in the region's biggest economy and reduced the competitiveness of its firms. Firms have to contend with different tax payments cutting across different tax regimes thus restricting investors (Hausmann& Fernandez, 2000).

Corruption in the countries and interest rates on investment. We often hear reports that low interest rates have stimulated housing construction or those high rates have reduced it.

Such reports imply a negative relationship between interest rates and investment in residential structures. 10

This relationship applies to all forms of investment: higher interest rates tend to reduce the quantity of investment, while lower interest rates increase it. For corruption, here some investors will be favored and others will not be favored in a such way that some will be given contribution such as land and machinery to initiate their business and others will not depending on different forms of corruption available in the country’s economy (Kravis &

Lipsey, 1982). The economy affects everyone, during tough economic times, household incomes may drop due to economy-related layoffs or cutbacks, resulting in a decrease in the funds available for investments. Alternatively, during an economic boom your income is more likely to increase. If your surplus income rises more than your cost of living, you can afford to increase your level of investment without sacrificing your current lifestyle.

Your cost of living is at least partially dictated by inflation. Inflation occurs for multiple reasons, such as supply constraints or increasing demand for products, but regardless of the cause, it raises your cost of living. As everyday products become more expensive, if your income does not rise to compensate the amount of surplus income you have to invest will decrease.

The Stock of Capital

The quantity of capital already in use affects the level of investment in two ways. First, because most investment replaces capital that has depreciated, a greater capital stock is likely to lead to more investment; there will be more capital to replace. But second, a greater capital stock can tend to reduce investment. That is because investment occurs to adjust the stock of capital to its desired level. Given that desired level, the amount of investment needed to reach it will be lower when the current capital stock is highest, the

Cost of Capital Goods also affect investment for example the demand curve for investment shows the quantity of investment at each interest rate, all other things unchanged.

A change in a variable held constant in drawing this curve shifts the curve. One of those variables is the cost of capital goods themselves. If, for example, the construction cost of new buildings rises, then the quantity of investment at any interest rate is likely to fall. The investment demand curve thus shifts to the left (Bond et al., 2003).

2.3 Relationship between infrastructure and investment

Infrastructure is a heterogeneous term, including physical structures of various types used by many industries as inputs to the production of goods and services (Chan et al., 2009).

This description encompasses “social infrastructure” (such as schools and hospitals) and

“economic infrastructure” (such as network utilities). The latter includes energy, water, transport, and digital communications. They are the essential ingredients for the success of a modern economy and profitable investment, the availability of these infrastructures encourages investment and their absence reduces investment.

Portugal-Perez and Wilson (2012) assessed the impact of four infrastructures related to investment physical infrastructure ICT, border and transport efficiency, and the business and regulatory environment—on the export performance of 101 developing economies.

Unlike previous studies that used principal component analysis, this study used factor analysis to derive the aggregate indicator. Accordingly, physical infrastructure was found to have the greatest impact on exports on investment.

Conceptually, infrastructure may affect aggregate output of an investment in two main ways: (i) directly, considering the sector contribution to GDP formation and as an additional input in the production process of other sectors; and (ii) indirectly, raising total factor productivity by reducing transaction and other costs thus allowing a more efficient

12 use of conventional productive inputs. Infrastructure can be considered as a complementary factor for economic investment and growth.

The empirical literature is far from an unanimous, but majority of studies report a significant positive effect of infrastructure on investment, productivity, or long-term growth rates. Infrastructure investment is complementary to other investment in the sense that insufficient infrastructure investment constrains other investment, while excessive infrastructure investment has no added value. To the extent that suboptimal infrastructure investment constrains other investment, it constrains growth (Newbery, 2012).

Interconnection and complementarities across different infrastructure sectors are key elements for increasing service efficiency, supporting the adoption of innovative technologies and supporting growth. Good connection between cities and airports, via rail, roads and underground, decrease the travel time and costs and increase airports’ appeal for both airlines companies and passengers. Other examples include broadband and ICT, which play a critical role in the development, installation and operation of the smart grid across countries: in UK smart grids manage the supply and demand of power through the national distribution network more effectively by introducing high-tech communication to the system. Interconnection also influences the implementation costs and feasibility of a given project and this will increase the level of investment because there is a surelity of economic growth.

Other studies that have applied the gravity model also emphasized the crucial role of infrastructure on investment. Shepherd and Wilson (2009) discovered that investments and trade in SouthEast Asia were affected by transport infrastructure, mainly ports and ICT.

Hoekman and Nicita (2008) found that poor roads and ports, poorly performing customs agencies and procedures, weakness in regulatory capacity, and limited access to finance 13 and business services affected investment. Wilson, Mann, and Otsuki (2005), when extending the gravity model to trade facilitation measures and to a larger sample of 75 economies, posited that port efficiency and the proxies for infrastructure quality for the services sector, such as the use, speed, and cost of the internet, significantly affected investments in trade. Wilson, Mann, and Otsuki (2003) also found out that improving port and airport efficiency could positively impact intra-APEC investment trade.

Adopting the study by Limao and Venables (2001), Nordas and Piermartini (2004) investigated the role of infrastructure on investment in the clothing, automotive, and textile sectors. Indicators included the quality of airports, roads, ports, and telecommunications, and the time required for customs clearance. In addition, it incorporated bilateral tariffs.

Their study proved that trade performance was significantly affected by infrastructure quality, especially port efficiency. Timeliness was more significant for export competitiveness in the clothing sector, while access to telecommunications in the automotive sector was more significant. It also concluded that, even after the quality of infrastructure was included, distance remained a significant factor.

2.4 Relationship between the level of taxation and investment in Uganda

Taxes are one of the major revenue for a country where taxes are collected from citizens, companies, investors and so on to generate the economy. There are several impacts of taxes due to economic growth, whether it is positive or negative impacts. According to

Bofah (2003), taxes refer to the revenue that is collected by the government to provide services and finance themselves. According to the theory of tax competition, the government will reduce the taxes on mobile asset through the occurrence of globalization

14 due to rise in economic growth in a country. Change in tax rate also will give the different impact to an open economy and this will also increase on the level of investment.

According to Bretschger (2010), he found negative impacts of corporate taxes on openness and total tax revenue to the economic growth in 12 OECD countries. He also mentioned on the tax competition theory that argues that, when tax rate of capital is reduced, it will cause the capital inflow to a country. This is because; the tax rate is one of the cost for capital holder (Bucovetsky, 1991 and Wilson, 1991). These two researches were found that private return on investment is influenced by the changes in capital taxes.

There are more than 20 studies which look for evidence on tax rates and economic growth in the United States and internationally. In all of the studies, it was concluded that reduction of all marginal rates by 5% and average tax rates by 2.5% leads to an increase from 0.2% to 0.3% of long-term investment. Christina and David (2007) conducted a study of the impact of changes in the level of taxation on investment and economic growth in which they investigated the effects of tax on GDP in United State in the post-World War II period. The study found out that a tax increase by 1% leads to reduced 2% to 3% of GDP in United State.

Usually, the tax rate on capital is measured by stock of capital or capital flows that related to the FDI. One of the earliest studies by Hartman (1984) was a study on the relationship between FDI, after-tax rate of return by foreign investors and capital in United State. From his study, he suggested that the tax has a strong relationship with FDI. The tax regime in

Mexico and United State has responded to the U.S’s FDI. Two of the previous studies give the direction about the impact of taxes on FDI which are study by Scholes and Wolfson

(1992) and Hines (1999). Based on Scholes and Wolfson (1992), a tax will affect the decision of foreign investors to invest in a country caused by the changing in rates of 15 return on assets. They argue that a high tax will reduce the rates of return and discourage the FDI in-flow to a country. Hines (1999) found out that FDI is sensitive with the tax, in which high tax rates can change the foreign investment rapidly. He concludes that reduction of only 10% on tax rates will increase more than 10% in FDI.

2.5 Empirical Evidence

The empirical research on determinants of the level of investment has in variably been limited in the developed countries. However many studies have been made in developing countries recently and have been conducted about the determinants of investment activity in different countries. Corruption can affect investment activity and there by lowering the economic development (Mauro, 1995). Corruption is a specific measure of illegal activities within the political system. The opportunity for corruption occurs when public officials are the gate keeper of public goods and services. Shaum’s (1999) has set the process for evaluation and selecting long term investment in long term asset such as property, plant and equipment or resource commitments in the form of new product development, market research, refunding and replacement decisions such as replacement of existing facilities with new facilities

Makubuya, (2004) has tried to model the determinant of the level of investment activity in

Uganda following the argument that investment is externally constrained in developing countries and it is affected by risk and unattained variables. The model tries to determine the investment activity, effects of external financial constraints, domestic and international risk variables, public investment in infrastructure and out on the private investment. In this research we concluded that the determinants of investment activity include availability of finance, the real exchange rate, investment policy, debt service payment and the debt over hanging. It is important to examine the main determinants of the level of investment.

Based on the literature review, this study has identified both dependent and independent variables. It is expected that dependent variable is affected by multiple factors like economic, social, political, institutional, cultural, geographical and etc. This study, however, focuses on macroeconomic factors affecting the level of investment.

Understanding the status and determinants of investment is essential for the successful and effective implementation of sustainable development goals (M. Muhammed HusseinBatu,

2016).

2.6 Review of Related Literature

Many scholars and academicians have defined the term of investment differently.

According to Mankiew, investment is defined as spending today for future benefits and it’s the component of national income that links with future”. (Mankiew, 2002). Investment has been viewed and defined in different ways. It has different meaning in finance and economics. In economics investment is related to saving and deferring consumption It involved in many areas of the economy, such as business management and finance whether for households, firms or government. In finance investment is putting money into something with the expectation of gain, usually over a longer term. The term investment refers to a sum of funds committed on the physical and human cavity by both profit and no profit oriented individuals and institutions. It is applied to production of goods not meant for immediate consumption but further production of goods and such goods are referred to as investment goods. The investment of business firms usually comprises of capital goods and inventories (Baddely, 2005).

According to Dr. Mohammad, Investment is the flow of capital which is used for productive purposes. There is a great emphasis on investment for being the primary instrument of economic growth and development for a country.

Investment means an increase in capital spending and it helps in creating a robust economy

(Dr. Mohammad Shafi, 2014). In economics, investment can be defined as the purchase of plant, equipment or inventory. In lay terms investment is the acquisition of an asset such as a stock or a bond. Once an individual receives income, there are two alternatives, that is to spend it or to save it. Regardless of how you use your income, investment can be defined as postponed consumption. Individuals may postpone their current consumption to accumulate for the sake of accumulating. For any or all of these reasons individuals save part of their income rather than spend all of their income. The above analysis shows that investment has a strong relationship with saved income. But the extent of investment also depends on the level of consumption. As Mayra observes “there is no other road of economic development than a compulsory rise in the share of the nation’s income which is withheld from consumption. In an economy where living standard of the masses is too low, to curb consumption, it is difficult to mobilize and allocate resource into investment activity (mayrad, 2003). As investment activity is affected by social, political and economic condition, there are some criteria that have to be considered before starting up an investment activity. In Uganda, foreign and direct investment has been steadily both the federal and regional government encourages investment: they provide favorable incentives such as; tax holding, an improved bureaucracy at the federal and regional investment office. The Ethiopian government special focus on investment and private investors both

Ethiopian and non-Ethiopian national undertaken investment activities in the agriculture, construction and manufacturing sectors, flower farm, cement factory, steel melting and rolling mills are becomes more and more common in Uganda. Investment is the current commitment of dollar (birr) for period of time in order to drive further payments that will

18 compensate the investors: the time the funds are committed, the expected rate of inflation and the uncertainty of the future payment.

From this we can answer the question about why people invest and what they want from their investments. They invest to earn a return either income or capital appreciation from saving due to their deferred consumption. Investment emphasizes that capital be used for investment as well as the risk associated with investment in two ways. The first one is

Investment is the commitment of funds with the view to minimize risk and safeguarding capital while earning return (investment constructed with speculation). The other one is investment is the commitment of something other than money to a long or term interest or project (Caves 1993).

2.7 Research gap

Though majority of the studies have identified factors leading to low investment, all the objectives to this study have not been yet done, that is the relationship between infrastructure and investment, relationship between taxation and investment and non has been done in Uganda hence the need for this study.

CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter presents the methodological aspects used in this study. The chapter includes the research approach and design, area of the study, the population of the study, sampling procedure and sample size, data collection methods, validity and reliability of Research

Instruments, research ethical consideration, and data analysis which will be employed in this study.

3.2 Research Design

A research design is a plan for collecting, organizing and analyzing data with the objective of combining the relevance of the research with the economy in procedure (Kothari, 1985).

In this study a cross sectional study design will be adopted whereby data (both primary and secondary) will be collected at a single point in time. This will provide a snapshot of ideas, opinions, and information and so on (Bryman, 2001; Creswell, 2009). It was most preferred because of its broad scope and can incorporate many variables of interest to the researcher. The research will be an industrial-based cross-sectional study through an exit interview of investors and government officials and it will be quantitative in nature.

3.3 Study area

The researcher conducted his research in Namanve industrial area located in Wakiso district in central region in Uganda. Namanve lies in Bweyogerere Ward, in southeastern

Kira Municipality, in Wakiso District, Central Uganda. It is located approximately 15 kilometers (9.3 mi), by road, east of downtown Kampala, Uganda's capital and largest city.

Namanve is bordered by Seeta to the east, Namilyango to the southeast, Lake Victoria to the south, Kirinnya to the southwest and Bweyogerere to the west and northwest. The coordinates of Namanve are: 0°21'27.0"N, 32°41'39.0"E (Latitude: 0.357500; Longitude:

32.694167). Portions of Namanve lie within the boundaries of Mukono Town Council.

3.4 Study Population

Study population included industrial directors and workers managing and working in industries established in Namanve Industrial area. The workers were our primary respondents and directors were our secondary respondents.

3.5 Sampling procedure and Sample size

3.5.1 Sampling Procedure

The sample is a part of the target population that is procedurally selected and simple random sampling was used to select the respondents especially workers while purposive sampling was used to select managers. A sample size of 60 respondents particularly workers were selected.

3.5.2 Sample selection

This sample size was calculated using Kish Leslie’s (1965) formula as shown by the equation 3.1 below;

퐙ퟐ 퐩퐪 퐧 = ……………………………………………………………………..Equation 3.1 퐞ퟐ

Where; n = Total sample size selected. 21

Z=Statistic of normal distribution

α = Level of significance usually set at (5%) ≈ 0.05

2 Therefore, Z0.025=1.96 (obtained from normal distribution table), (1.96) =3.8416 e= Maximum probability error which the researcher is likely to commit, this will be taken to be 14.05%. p=0.5, is the proportion of respondents who will be willing to participate in the study.

Therefore q = 0.5. Since p+q=1 (respondents have equal chances of accepting or refusing to participate in the study)

By substituting these values in equation above.

(1.96)2∗0.5∗0.5 n = = n=59.65, ≈ 60 Respondents……………………Equation 3.2 (0.1405)2

Therefore the sample size comprised of 60 respondents.

2.6 Data collection methods

The study employed primary data collection methods. The researcher conducted data primarily from the field. Quantitave data was collected using the instrument discussed in the preceding section.

2.7 Data collection tools

Data was collected by the researcher using pretested interviewer administered questionnaire. The data collection instrument had four different components. The first part will include socio-demographic characteristics, factors affecting the level of investment, effect of infrastructure on the level of investment and effect of taxation on the level of investment.

The researcher employed the questionnaires in data collection because it is easy and quick to collect information compared to other methods of data collection such as observation and literature review.

2.8 Data Quality control

For purposes of data quality control, the research ensured validity and reliability of the research instruments

Validity of the instruments

Validity means checking the accuracy of the study’s findings (Creswell, 2014). According to Saunders et al (2009), the validity of a questionnaire was concerned with the extent to which a questionnaire measures what it was designed to measure. To ensure validity for the study, the researcher carried out a pilot study which includes five respondents in order to check for relevancy of the data collection tool. This assisted the researcher to remove unclear questions and only leave those relevant for the study objectives.

Reliability of the instruments

Reliability as applied to this study was defined as the extent to which a research instrument yields consistent results across the various items when it is administered again at a different point in time (Sekaran, 2003). The objective of reliability was to be sure that, if a later investigator followed the same procedure as described by an earlier investigator and conducted the same case study all over again, the later investigator should arrive at the same findings and conclusions (Yin, 2009).

To measure reliability under this study, the instrument was piloted on five people from

Namanve industrial area. Responses were entered into SPSS and a reliability analysis performed.

3.9 Data analysis

Statistical analysis was carried out with SPSS, version 16.0. Frequencies of participant’s characteristics were computed. Numerical data was summarized using means and standard deviation for normally distributed data or medians and interquartile ranges for continuous but skewed variables. Data was collated using frequency tables and figures. More so, the researcher sub divided the analysis as below;

Univariate Analysis

Under this study, a Univariate analysis was used to observe how one variable behaved.

Therefore no causes or relationships were derived and its major purpose was to describe; summarize data and find patterns in the data on a single variable. This was applied to the demographic characteristics of the respondents and the factors affecting the level of investments. Under this, data was summarized in form of distribution tables with frequency and percentages.

Bivariate Analysis

Apart from the Univariate analysis, the bivariate analysis considers the relationship that exists between two variables. Therefore under this analysis, the researcher was interested in finding the relationship that existed between level of investments and infrastructure, level of investments and level of taxation. Significance of the level of relationship that existed between these different pairs of variables was tested for using a chi-square test statistic.Conclusions on the p-values were made at the 5% level of significance.

Multivariate Analysis

Under this analysis, we mainly focus on the behavior of one variable given a number of other variables that is behavior of a dependent variable in this case the level of investments in Namanve industrial area given the independent variable which are the level of infrastructure and level of taxation at a given time. So under this study, a multiple regression analysis was employed to find out how the level of investments behaved given level of taxation and the level of infrastructure in Namanve industrial area at a given time.

Hence a multiple regression model was used and data was run in SPSS under regression analysis and estimates for the variables estimated. More still, the cause and effect relationship of the independent variables, that is the level of taxation and level of infrastructure at time “t” were derived and presented in chapter four. The multiple regression model was written as below and the model used in this study hypothesized that level of investment is a function of level of infrastructure, level of taxation and the error term (Ɛt).

It = βo + β1Inft + β2Tt + Ɛt;…………………………………Equation 3.3

From the above equation;

“It” is defined as level of investment at a given time;

“Inft” is level of infrastructure at a given time;

“Tt” is level of taxation at a given time;

βo = is the value of level of investment when all variables are at zero (Inft + Tt)

β1= is the change in level of investment due to a unit change in level of infrastructure keeping the level of taxation constant.

β2 = is the change in level of investment due to a unit change in level of taxation keeping the level of infrastructure constant and “Ɛt” is the error term.

3.10 Ethical Considerations

Before carrying out the study, the researcher obtained authority to conduct research from the University. Thereafter, the researcher had to seek permission from the industry administration to meet the participants. The study involved mostly human subjects hence; the researcher ensured that the privacy of the individuals was maintained. Respondents voluntarily chose to participate in the study. The respondents were provided with adequate information pertaining to the study, procedure that was to be followed, objectives of the study, and the benefits of taking part in the study, manner in which the findings would be disseminated. These enabled participants to make informed decisions on whether to participate or not. Anonymity (identity of individual) was protected by avoiding the use of names of the participants on the questionnaires. In regards to the analysis, the researcher ensured that the analysis was done objectively, no fabrication, falsification, plagiarism, was applied in this study. The study results were shared with all interested respondents and management of the industries.

CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.1 Introduction

A study on assessment of the factors affecting the level of investment in Uganda was carried out among staff members of Namanve industrial area. Fifty six members consented to participate in the study and a total of 56 questionnaires were distributed to them and returned. Their responses are presented in this chapter in 3 sections that is demographic characteristics, factors affecting the level of investments and relationships that exist between the level of investments and the level of investments and level of taxations in form of tables.

4.1. Demographic characteristics of the respondents

Table 4.1: Demographic characteristics of the respondents

Age Frequency Percent

15-25 5 9

26-36 27 48

37-47 15 37

48 & above 9 16

Total 56 100.0

Education

Diploma 12 21

Degree 35 63

Master’s degree 9 16

Total 56 100

Work experience Frequency Percent

Less than 5 years 39 70

6-10 years 10 18

Above 10 years 7 13

Total 56 100

Source: Primary data

Results from the table above, indicate that majority of the respondents 27(48%) were in the age bracket of 26-36 years. This implied that majority of the respondents’ were still in their youth stages. On education, results indicated that majority 35 (63%) of the respondents had attained a degree as the highest level of education then followed by those who had a diploma 12 (21%) and the least had a master’s degree 9 (16%). This indicates that UIA contains more educated people than the least educated ones. Results indicated that majority

39 (70%) of the workers in UIA have a work experience of less than 5 years followed by those who had a working experience of 6-10 years 10 (18%) and the least had a working experience of above 10 years 7 (13%).

4.2 Project ownership

Majority of the respondents confirmed that the company was local 35 (63%), 12 (21%), as foreign and 9 (16%) as Local private or joint stock Company an indication that majority of the companies in Namanve industrial area are owned locally by local people who are senior band true citizens of Uganda.

Table 4.2: Project ownership

Company ownership Frequency Percent (%)

Foreign 12 21

Local 35 63

Local private or joint stock company 9 16

Total 56 100.0

Source: Primary data

4.3 Most appropriate measure of investment

Table 4.3 below, indicates that the most factor influencing level of investment was

Availability of goods and services (55%) followed by reduced cost of goods and services

(34%) and the least reported Availability of jobs (11%).

Table 4.3: Most appropriate measure of investment

Factor Frequency Percentage (%) a) Availability of goods and services 31 55 b) Reduced cost of goods and services 19 34 c) Availability of jobs 6 11

Total 56 100

Source: Primary data

4.4 Bivariate Analysis

4.4.1 Factors that affect the level of investment in Uganda

Thirty four percent (34%) of the respondents who reported that investment is measured by availability of goods and services also reported that favorable macroeconomic and political stability is the factor affecting level of investment, 4% reported who reported that investment is measured by reduced cost of goods and services also reported that favorable macroeconomic and political stability is the major factor that affects investment and 63% is who reported that availability of jobs is the most appropriate measure of investment also reported that favorable macroeconomic and political stability is the most factor affecting the level of investment. Considering affordable labor as the factor affecting the level of investment, 71% reported that investment is measured by availability of goods and services, 14% reported that investment is measured by reduced cost of goods and services and lastly 15% reported that investment is measured by availability of jobs. Considering

Access to domestic and regional markets as a factor that affects the level of investment, 4% reported that investment is measured by Availability of goods and services, 5% reported that investment is measured by reduced cost of goods and services and finally 91% is

31 measured by Availability of jobs. The overall responses in table 4.4 indicate that the

2 factors affecting the level of investment significantly affect investment (  =24.088a, DF=2 and P=0.001)

Table 4.4: Factors that affect the level of investment

Investment

Availability of Reduced Availabil P-value goods and cost of ity of

services goods and jobs

services Total

Favorable 35 24.088a 0.001 19 2 56 macroeconomic Df=2 and political 63% 100.0 34% 4% stability %

Affordable labor 40 8 8 56 0.000

15% 100.0 71% 14% %

Access to 2 3 51 56 0.000 domestic and 91 100.0 4% 5% regional markets %

Source: Primary data of Taxation, infrastructure and investments

4.4.2 Relationship between infrastructure and investment

Results in table 4.5 below, indicated that 30% of the respondents who reported that

Transportation infrastructure affects investment in Uganda also reported that investment is measured by the availability of goods and services, then 41% reported that investment is measured by reduced cost of goods and services and 11% reported that investment is measured by the availability of jobs. Those who reported energy as an infrastructure that affects level of investment in Uganda, 71% reported that investment is measured by

Availability of goods and services, 7% reported that investment is measured by reduced cost of goods and services and 21% reported that investment is measured by Availability of jobs . For those who reported Water system as one of the infrastructures that affect investment, 27% reported that investment is measured by Availability of goods and services, 9% reported that investment is measured by reduced cost of goods and services and finally 64% reported that investment is measured by Availability of jobs. For communication network, 45% reported that investment is measured by Availability of goods and services, 9% reported that investment is measured by reduced cost of goods and services and finally 46% reported that investment is measured by Availability of jobs. The

2 overall responses were all significant at 95% level of significance ((  =14.088a, df=3 and

P=0.003)

Table 4.5: Relationship between infrastructure and investment

Investment

2 Availability of Reduced Availabil  P-value goods and cost of ity of

services goods and jobs

services Total

Transportation 6 14.088a 0.003 17 23 56 infrastructure Df=3

11% 100.0 30% 41% %

Energy 40 4 12 56

21% 100.0 71% 7% %

Water system 15 5 36 56

64 100.0 27% 9% %

Communication 26 25 5 infrastructure

45% 9% 46%

Source: Primary data

4.4.3 Relationship between taxation and investment in Uganda

Considering responses on unfavorable tax, 36% reported that investment is measured by

Availability of goods and services, 41% reported that investment is measured by reduced cost of goods and services and 13% reported that investment is measured by Availability of jobs. For the responses on moderate tax paid, 48% reported that investment is measured by Availability of goods and services, 23% reported that investment id measured by reduced cost of goods and services and 29% reported that investment is measured by

Availability of jobs. Finally those who reported that they pay favorable tax, 27% reported that investment is measured by Availability of goods and services, 9% reported that investment is measured by reduced cost of goods and services and finally 64% reported that investment is measured by Availability of jobs. The overall responses indicated that taxation significantly affects the level of investment in Uganda at 95% level of significance

2 (  =7.068a, df=2 and P=0.042)

Table 4.6: Relationship between the level of taxation and investment

Investment

2 Availability of Reduced Availabil  P-value goods and cost of ity of

services goods and jobs

services Total

Unfavorable 7 7.068a 0.042 20 23 56 Df=2

13% 100.0 36% 41% %

Moderate 27 13 16 56

29% 100.0 48% 23% %

Favorable 15 5 36 56

64 100.0 27% 9% %

Source: Primary data

4.5 Multivariate Analysis

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.260

R Square 0.598

Adjusted R Square 0.051

Standard Error 0.347

Observations 56

R-square equals to 0.598 this implies that 59.8% of the variations on the level of investments can be explained by level of infrastructure and level taxation. Hence the model is a good fit.

Table 4.7: Coefficients of the Model

Model Unstandardized Coefficients Standardized T Sig.

Coefficients

B Std. Error Beta

(Constant) 3.87 1.371 3.637 0.001

Infrastructur

e 0.15 0.271 0.256 0.542 0.029

1 Taxation 0.39 0.089 0.164 0.443 0.038 a. Dependent Variable: Investment

Model;

Investment =3.637+0.15*infrastructure + 0.39*taxation

When level of infrastructure and level of taxation of the respondents are equal to zero,

the average level of investment would be3.87.

A unit increase in level of infrastructure would on average lead to 0.15unit increases level

of investments keeping other factors constant. This is statistically significant at 5% level of

significance. Since the p-value (0.001<0.05), thus we reject null hypothesis and accept the

alternative and conclude that level of infrastructure has a significant effect on the

investment in Uganda.

A unit increase in level of taxation would on average lead to 0.39unit increases in level of

investment keeping level of infrastructure constant. This is statistically significant at 5%

38 level of significance. Since the p-value (0.038<0.05), thus we reject null hypothesis and accept the alternative and conclude that level of taxation has an effect on the level of investment in Uganda.

In conclusion, level of infrastructure and level of taxation are significant factors in determining the level of investments in a given economy at a given period of time.

CHAPTER FIVE

(SUMMARY, DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS)

5.1 Introduction

This chapter presents a summary, discussion, conclusion and recommendations of the main findings in relation to the stated objectives and results obtained from chapter four.

5.2 Summary

The conceptualized factors of favorable macroeconomic and political stability, affordable labor and access to domestic and regional markets were found to significantly affect

2 investment (  =24.088a, df=2 and P=0.001).

Infrastructure factors considered here were; Transportation infrastructure, Energy, Water system and Communication infrastructure. Results indicated that factors were significant at

95% level of significance (( =14.088a, DF=3 and P=0.003)

The tax payment was categorized into different types and that is Unfavorable, Moderate and Favorable. The results from 4.5 indicated that taxation significantly affects the level of investment in Uganda at 95% level of significance ( =7.068a, DF=2 and P=0.042).

5.3 Conclusion

The summary indicated that the factors considered in this work together to affect investment in Uganda that is the factors of favorable macroeconomic and political stability, affordable labor and access to domestic and regional markets, infrastructures of

Transportation infrastructure, Energy, Water system and Communication infrastructure were all found to significantly affect level of investment in Uganda and finally also taxation was found to significantly affect the level of investment.

5.4 Recommendation

1. The government should impose favorable tax policies so as to increase the level of

investment in Uganda

2. Infrastructural improvement should be one of the major priorities for the

government as it has been seen to affect the level of investment in Uganda.

3. Further research should be done on the same topic to identify which specific factors

affect the level of investment in Uganda

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Appendix 1: Questionnaire

TITLE OF THE THESIS “factors affecting the level of investment in Uganda with a case study of UIA

”

Dear Participants;

With sincerity i would like to extend my deep appreciation to your company and the staff for the willingness and cooperation in undertaking this valuable research. i ask your kind cooperation in answering the questions as truthfully as possible and your response will be highly confidential. For further questions pertaining to this project, please contact Makerere University. Yours Sincerely

Thank you for your assistance

By: KAWERE TONNY

Mobile: -

Supervisor: Dr. Martin Mbony

SECTION A PART III PERSONAL DETAILS OF THE RESPONDENT

What is your age? ______

Your work experience/service year/ in this company

______

Educational background:-

______

PART II PROFILE OF THE COMPANY/ORGANIZATION

Project type______

Project ownership

Foreign

Local

Local private or joint- stock companies

Country of origin? (Tick the most appropriate) a) India b) Singapore c) United states of America d) China e) Others (specify)……………………

Years of existence in Uganda a) < Less than one year b) 1-5 years c) Above 5 years

Tick the most appropriate factor affecting private investment in Uganda d) Favorable macroeconomic and political stability e) Access to domestic and regional markets f) Affordable labor

SECTION B: FACTORS AFFECTING THE LEVEL OF INVESTMENT

Tick the most appropriate factor affecting private investment in Uganda a) Favorable macroeconomic and political stability

45 b) Access to domestic and regional markets c) Affordable labor

SECTION C: EFFECT OF INFRASTRUCTURE ON THE LEVEL OF INVESTMENT

What is the most important infrastructure that affect the level of investment?

a) Transportation infrastructure

b) Energy

c) Water system

d) Communication infrastructure

SECTION C: EFFECT TAXATION ON THE LEVEL OF INVESTMENT

How is the tax charged by government on investors?

a) Unfavorable

b) Moderate

c) Favorable

Thanks for your participation