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Is investment in Africa low despite high profits?

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  • Jean-Louis Warnholz
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    Abstract

    To my knowledge this study undertakes the first comprehensive and systematic empirical test of the hypothesis that while returns to invested capital in Sub-Saharan Africa are high compared to select Asian and South American markets, investment rates are low. I investigate three sources: detailed World Bank surveys of 6,500 manufacturing firms, a new panel constructed from financial statements of 6,900 quoted industrials and performance indicators of emerging stock markets. I find returns to be high throughout. Micro-evidence and sectoral FDI data confirm that investment remains low outside the mining industry and that the link between past profitability and current investment is weak in Africa. Low investment despite high returns poses a puzzle and I evaluate several possible explanations under assumptions of both symmetric and asymmetric information. After allowing for risk premia and other factors, my findings suggest that we observe a temporary disequilibrium, largely due to an information deficit on African markets.

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    File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/2008-31text.pdf
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    Bibliographic Info

    Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2008-31.

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    Date of creation: 2008
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    Handle: RePEc:csa:wpaper:2008-31

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    Related research

    Keywords: Africa; Profitability; Investment; Emerging Markets; Risk; Expectations.;

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    1. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
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    Cited by:
    1. Giorgia Giovannetti & Elisa Ticci, 2013. "Foreign Direct Investment in Sub-Saharan Africa: Drivers and the Challenge of the Land-Energy Nexus," Working Papers - Economics wp2013_09.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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