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Inventories and Risk in African Manufacturing

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  • Fafchamps, Marcel
  • Gunning, Jan Willem
  • Oostendorp, Remco

Abstract

Using a panel data set for Zimbabwe which includes firm-specific measures of contractual risk, we show that contractual risk has a major effect on the holding input stocks and, to a lesser extent, the constitution of cash reserves. This is consistent with inventories being a hedge against stockout risk. By contrast, firms facing more inter-annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long-term market fluctuations as they materialise rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilisation rate.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 110 (2000)
Issue (Month): 466 (October)
Pages: 861-93

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Handle: RePEc:ecj:econjl:v:110:y:2000:i:466:p:861-93

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References

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  1. Bivin, David G, 1986. "Inventories and Interest Rates: A Critique of the Buffer Stock Model," American Economic Review, American Economic Association, vol. 76(1), pages 168-76, March.
  2. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
  3. Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
  4. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  5. Milne, Alistair, 1994. "The Production Smoothing Model of Inventories Revisited," Economic Journal, Royal Economic Society, vol. 104(423), pages 399-407, March.
  6. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  7. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
  8. Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 71-96, July.
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  11. Paul Collier & Jan Willem Gunning, 1997. "Explaining African economic performance," CSAE Working Paper Series 1997-02.2, Centre for the Study of African Economies, University of Oxford.
  12. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
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  20. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September.
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  22. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April.
  23. Lieberman, Charles, 1980. "Inventory Demand and Cost of Capital Effects," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 348-56, August.
  24. Krane, Spencer D, 1994. "The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 117-36, February.
  25. Naish, Howard F, 1994. "Production Smoothing in the Linear Quadratic Inventory Model," Economic Journal, Royal Economic Society, vol. 104(425), pages 864-75, July.
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Citations

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Cited by:
  1. Bigsten, Arne & Soderbom, Mans, 2005. "What have we learned from a decade of manufacturing enterprise surveys in Africa ?," Policy Research Working Paper Series 3798, The World Bank.
  2. Quattri, Maria & Ozanne, Adam & Beyene, Seneshaw Tamru, 2012. "The brokerage institution and the development of agricultural markets: New evidence from Ethiopia," ESSP working papers 36, International Food Policy Research Institute (IFPRI).
  3. Deininger, Klaus & Jin, Songqing & Sur, Mona, 2007. "Sri Lanka's Rural Non-Farm Economy: Removing Constraints to Pro-Poor Growth," World Development, Elsevier, vol. 35(12), pages 2056-2078, December.
  4. Janvier D. Nkurunziza, 2005. "The Effect of Credit on Growth and Convergence of Firms in Kenyan Manufacturing," Economics Series Working Papers WPS/2005-01, University of Oxford, Department of Economics.
  5. Guasch, J. Luis & Kogan, Joseph, 2003. "Just-in-case inventories - a cross-country analysis," Policy Research Working Paper Series 3012, The World Bank.
  6. Fisman, Raymond, 2001. "Trade Credit and Productive Efficiency in Developing Countries," World Development, Elsevier, vol. 29(2), pages 311-321, February.
  7. Marcel Fafchamps, 2003. "Spontaneous Market Emergence," Economics Series Working Papers 138, University of Oxford, Department of Economics.
  8. Rune Jansen Hagen, 2002. "Marginalisation in the Context of Globalisation: Why Is Africa so Poor?," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 28, pages 147-179.
  9. Sundaram-Stukel, Reka & Deininger, Klaus W. & Jin, Songqing, 2006. "Fostering growth of the rural non-farm sector in Africa: The Case of Tanzania," 2006 Annual meeting, July 23-26, Long Beach, CA 21165, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  10. Quattri, Maria A. & Ozanne, Adam & Wang, Xioabing & Hall, Alastair R., 2011. "On The Role Of The Brokerage Institution In The Development Of Ethiopian Agricultural Markets," 85th Annual Conference, April 18-20, 2011, Warwick University, Coventry, UK 108941, Agricultural Economics Society.
  11. Janvier D. Nkurunziza, 2005. "Credit Can Precipitate Firm Failure: Evidence from Kenyan Manufacturing in the 1990s," Economics Series Working Papers WPS/2005-04, University of Oxford, Department of Economics.

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