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Inventories and risk in African manufacturing

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  • Marcel Fafchamps
  • Jan Willem Gunning and Remco Oostendorp

Abstract

This paper analyses the effects of risk on the holding of inventories and liquid assets by manufacturing firms. 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 of stocks of inputs and, to a lesser extent, the constitution of cash reserves. This is consistent with the role of inventories as a hedge against stockout risk. By contrast, we find that 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

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/1999-19.

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Date of creation: 01 Aug 1999
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Handle: RePEc:oxf:wpaper:wps/1999-19

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  1. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
  2. 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.
  3. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
  4. Tsiang, S C, 1969. "The Precautionary Demand for Money: An Inventory Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 99-117, Jan./Feb..
  5. Milne, Alistair, 1994. "The Production Smoothing Model of Inventories Revisited," Economic Journal, Royal Economic Society, vol. 104(423), pages 399-407, March.
  6. Naish, Howard F, 1994. "Production Smoothing in the Linear Quadratic Inventory Model," Economic Journal, Royal Economic Society, vol. 104(425), pages 864-75, July.
  7. Darling, Paul & Lovell, Michael C, 1971. "Inventories, Production Smoothing, and the Flexible Accelerator," The Quarterly Journal of Economics, MIT Press, vol. 85(2), pages 357-62, May.
  8. Irvine, F Owen, Jr, 1981. "Retail Inventory Investment and the Cost of Capital," American Economic Review, American Economic Association, vol. 71(4), pages 633-48, September.
  9. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
  10. 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.
  11. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
  12. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
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  16. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
  17. Mosser, Patricia C, 1991. "Trade Inventories and (S, s)," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1267-86, November.
  18. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
  19. Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
  20. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  21. 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.
  22. 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.
  23. Blinder, Alan S, 1986. "Can the Production Smoothing Model of Inventory Behavior Be Saved?," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 431-53, August.
  24. Kenneth D. West, 1985. "A Variance Bounds Test of the Linear Quardractic Inventory Model," NBER Working Papers 1581, National Bureau of Economic Research, Inc.
  25. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  26. McIntosh, James, et al, 1993. "Price and Output Adjustment in a Model with Inventories: Econometric Evidence from Categorical Survey Data," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 657-63, November.
  27. 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.
  28. 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.
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Citations

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Cited by:
  1. 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).
  2. 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.
  3. Arne Bigsten & Mans Söderbom, 2006. "What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?," World Bank Research Observer, World Bank Group, vol. 21(2), pages 241-265.
  4. 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).
  5. 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.
  6. Fafchamps Marcel, 2002. "Spontaneous Market Emergence," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-37, June.
  7. 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.
  8. Guasch, J. Luis & Kogan, Joseph, 2003. "Just-in-case inventories - a cross-country analysis," Policy Research Working Paper Series 3012, The World Bank.
  9. Fisman, Raymond, 2001. "Trade Credit and Productive Efficiency in Developing Countries," World Development, Elsevier, vol. 29(2), pages 311-321, February.
  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. 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.

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