ABSTRACT

In developing countries, attainment of economic growth depends upon physical capital, in addition to other factors of production. Growth in physical capital entails investment in capital goods which help in the production of other goods and services. The concern in this study was to investigate the determinants of investment in the informal carpentry sub-sector in Kitui town in Eastern Kenya. The data used was obtained from the entrepreneurs owning carpentry workshops in Kitui town.A log-linear model was analyzed. The results of the analysis show that the price of investment goods is the most significant determinant of investment expenditure in the carpentry sub-sector. Other variables that were significant included output of the firm, size of the firm as measured by the number of people employed and age of the business. The results differed according to whether entrepreneurs received a loan or not. However, contrary to our prior expectations, the coefficient of output of the firm, education of the entrepreneur, and that of dummy variable were negative. Some of the variables in the theoretical model were found not to be significant determinants of investment expenditure, although the signs of their coefficients were as expected.  The main conclusion from this study is that, price of investment is the main determinant of investment and not lack of investment funds as has been previously found by other researchers. This implies that, in order to increase investment in the informal carpentry sub - sector, capital goods have to be made affordable to entrepreneurs. Production subsidies can be used to lower prices of these goods. Credit can also be extended to carpenters to enable them purchase the inputs they need as it is an important constraint on investments in the carpentry sub-sector. Where credit is extended to entrepreneurs, it should be tied to purchase of investment goods to avoid fungibility of such credit