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Adjustment Costs and Irreversibility as Determinants of Investment: Evidence from African Manufacturing

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Author Info

  • Arne Bigsten

    (Göteborg University)

  • Paul Collier

    (Oxford University)

  • Stefan Dercon

    (Oxford University)

  • Marcel Fafchamps

    (Oxford University)

  • Bernard Gauthier

    (HEC Montréal)

  • Jan Willem Gunning

    (Free University, Amsterdam)

  • Remco Oostendorp

    (Free University, Amsterdam)

  • Catherine Pattillo

    (IMF)

  • MÃ¥ns Söderbom

    (Oxford University)

  • Francis Teal

    (Oxford University)

Abstract

In this paper we investigate if the predictions of three different models of capital adjustment costs are consistent with the observed investment patterns among manufacturing firms in five African countries. We document a high frequency of zero investment episodes, which is consistent with both fixed adjustment costs and irreversibility and inconsistent with quadratic adjustment costs. We model the decision to invest using a dynamic discrete choice model and find evidence of irreversibility and not fixed costs. We finally model the investment rate as a function of the size of the capital disequilibrium. The results confirm that irreversibility is an important factor affecting the investment behaviour of African manufacturing firms. Some implications of this finding are discussed.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): contributions.4 (2005)
Issue (Month): 1 ()
Pages: 12

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Handle: RePEc:bpj:bejeap:v:contributions.4:y:2005:i:1:n:12

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Web page: http://www.degruyter.com

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Web: http://www.degruyter.com/view/j/bejeap

Related research

Keywords: investment; adjustment costs; irreversibility; hazard function; African manufacturing;

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Cited by:
  1. M. Grazzi & N. Jacoby & T. Treibich, 2013. "Dynamics of Investment and Firm Performance: Comparative evidence from manufacturing industries," Working Papers wp869, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Shiferaw, Admasu & Bedi, Arjun S., 2010. "The Dynamics of Job Creation and Job Destruction: Is Sub-Saharan Africa Different?," Proceedings of the German Development Economics Conference, Hannover 2010 59, Verein für Socialpolitik, Research Committee Development Economics.
  3. Alan Harding & Måns Söderbom & Francis Teal, 2004. "Survival and Success among African Manufacturing Firms," Development and Comp Systems 0409046, EconWPA.
  4. Shiferaw, Admasu, 2009. "Survival of Private Sector Manufacturing Establishments in Africa: The Role of Productivity and Ownership," World Development, Elsevier, vol. 37(3), pages 572-584, March.
  5. Admasu Shiferaw, 2009. "Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 2, Courant Research Centre PEG.
  6. Gebreeyesus, Mulu, 2009. "Inactions and Spikes of Investment in Ethiopian Manufacturing Firms: Empirical Evidence on Irreversibility and Non-convexities," UNU-MERIT Working Paper Series 061, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology.
  7. Abiola Babajide Ph.D, 2012. "Effects of Microfinance on Micro and Small Enterprises (MSEs) Growth in Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(3), pages 463-477, July.
  8. Jidoud, Ahmat, 2012. "The Sources of Macroeconomic Fluctuations in Subsaharan African Economies: An application to Côte d'Ivoire," TSE Working Papers 12-346, Toulouse School of Economics (TSE).
  9. Chan, Rosanna, 2008. "Financial constraints, working capital and the dynamic behavior of the firm," MPRA Paper 27153, University Library of Munich, Germany, revised Aug 2010.

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