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Confronting competition - investment response and constraints in Uganda

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  • Reinikka, Ritva
  • Svensson, Jakob

Abstract

Investment rates in Uganda are similar to others in Africa, - averaging slightly more than ten percent annually, with a median value of just under one percent. But the country's profit rates are considerably lower. These results are consistent with the view that Ugandan firms display more confidence in the economy than their counterparts in other African countries. Thus, for given profit rates, Ugandan firms invest more. At the same time, increased competition (because of economic liberalization) has exerted pressure on firms to cut costs. Many of those costs are not under the firms'control, however, so their profits have suffered. Using firm-level data, the authors identify and quantify a number of cost factors, including those associated with transport, corruption, and utility services. Several factors - including crime, erratic infrastructure services, and arbitrary tax administration - not only increase firms'operating costs, but affect their perceptions of the risks of investing in (partly) irreversible capital. The empirical analysis suggests that firms - especially small firms - are liquidity-constrained in the sense that they invest only when sufficient internal funds are available. But given the firms'profit-capital ratio, it is hard to argue that the liquidity constraint is binding in most cases, even though the cost of capital is perceived as a problem.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2242.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2242

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Keywords: Economic Theory&Research; Labor Policies; International Terrorism&Counterterrorism; Decentralization; Payment Systems&Infrastructure; Environmental Economics&Policies; International Terrorism&Counterterrorism; Trade and Regional Integration; ICT Policy and Strategies; Economic Theory&Research;

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  4. Easterly, William, 1997. "The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics," Policy Research Working Paper Series 1807, The World Bank.
  5. Stephen Bond & Julie Elston & Jacques Mairesse & Benoit Mulkay, 1997. "Financial Factors and Investment in Belgium, France, Germany and the UK:A Comparison Using Company Panel Data," NBER Working Papers 5900, National Bureau of Economic Research, Inc.
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  9. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
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  12. Bigsten, Arne, et al, 1999. " Investment in Africa's Manufacturing Sector: A Four Country Panel Data Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 489-512, November.
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Cited by:
  1. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
  2. Eifert, Benn & Gelb, Alan & Borje Tallroth, Nils, 2002. "The political economy of fiscal policy and economic management in oil exporting countries," Policy Research Working Paper Series 2899, The World Bank.
  3. Mackinnon, John & Reinikka, Ritva, 2000. "Lessons from Uganda on strategies to fight poverty," Policy Research Working Paper Series 2440, The World Bank.
  4. Svensson, Jakob, 2002. "Who Must Pay Bribes and How Much? Evidence from a cross-section of firms," Seminar Papers 713, Stockholm University, Institute for International Economic Studies.
  5. Fisman, Raymond & Svensson, Jakob, 2007. "Are corruption and taxation really harmful to growth? Firm level evidence," Journal of Development Economics, Elsevier, vol. 83(1), pages 63-75, May.
  6. Hallward-Driemeier, Mary, 2001. "Firm-level survey provides data on Asia's corporate crisis and recovery," Policy Research Working Paper Series 2515, The World Bank.
  7. Svensson, Jakob, 2000. "Is the bad news principle for real?," Economics Letters, Elsevier, vol. 66(3), pages 327-331, March.
  8. Mary Hallward-Driemeier & Giuseppe Iarossi & Kenneth L. Sokoloff, 2002. "Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-Level Data," NBER Working Papers 8894, National Bureau of Economic Research, Inc.
  9. Reinikka, Ritva & Svensson, Jakob, 1999. "How inadequate provision of public infrastructure and services affects private investment," Policy Research Working Paper Series 2262, The World Bank.
  10. Muwonge, Abdu & Obwona, Marios & Nambwaayo, Victoria, 2007. "Enhancing contributions of the informal sector to national development: The case of Uganda," Occasional Papers 54711, Economic Policy Research Centre (EPRC).

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