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Inventories, Liquidity, and Contractual Risk in African Manufacturing

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  • Marcel Fafchamps Jan Willem Gunning
  • Remco Oostendorp

Abstract

This paper tests whether the stockout/precautionary motive applies to inventories and liquid assets held by Zimbabwean manufacturing firms. The evidence indicates that involvement in imports and exports is a major source of contractual risk. Concerns about the timeliness of input deliveries and late payment by clients are primary motives behind the accumulation 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. We find little evidence of inventory and liquidity build-up against market risk, but this may be an artifact of the way fluctuations in sales are measured in the data. Perfect fungibility between various inventories and between inventories and liquid assets is rejected. Implications for policy are discussed.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 97020.

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Handle: RePEc:wop:stanec:97020

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Cited by:
  1. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.
  2. Paul Collier & Jan Willem Gunning, 1999. "Why Has Africa Grown Slowly?," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 3-22, Summer.
  3. Paul Collier & Marcel Fafchamps & Francis Teal & Stefan Dercon, 1998. "Contract flexibility and conflict resolution: evidence from African manufacturing," Economics Series Working Papers WPS/1998-21, University of Oxford, Department of Economics.
  4. Arun Khanna, 2004. "Corporate Investments, Liquidity and Bank Financing: Empirical Evidence from an Emerging Market," William Davidson Institute Working Papers Series 2004-649, William Davidson Institute at the University of Michigan.
  5. Guasch, J. Luis & Kogan, Joseph, 2001. "Inventories in developing countries : levels and determinants - a red flag for competitiveness and growth," Policy Research Working Paper Series 2552, The World Bank.

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