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Adjustment Costs and Irreversibility as Determinants of Investment: Evidence from African Manufacturing


  • Bigsten Arne

    (Göteborg University)

  • Collier Paul

    (Oxford University)

  • Dercon Stefan

    (Oxford University)

  • Fafchamps Marcel

    (Oxford University)

  • Gauthier Bernard

    (HEC Montréal)

  • Gunning Jan Willem

    (Free University, Amsterdam)

  • Oostendorp Remco

    (Free University, Amsterdam)

  • Pattillo Catherine


  • Söderbom Måns

    (Oxford University)

  • Teal Francis

    (Oxford University)


In this paper we investigate if the predictions of three different models of capital adjustment costs are consistent with the observed investment patterns among manufacturing firms in five African countries. We document a high frequency of zero investment episodes, which is consistent with both fixed adjustment costs and irreversibility and inconsistent with quadratic adjustment costs. We model the decision to invest using a dynamic discrete choice model and find evidence of irreversibility and not fixed costs. We finally model the investment rate as a function of the size of the capital disequilibrium. The results confirm that irreversibility is an important factor affecting the investment behaviour of African manufacturing firms. Some implications of this finding are discussed.

Suggested Citation

  • Bigsten Arne & Collier Paul & Dercon Stefan & Fafchamps Marcel & Gauthier Bernard & Gunning Jan Willem & Oostendorp Remco & Pattillo Catherine & Söderbom Måns & Teal Francis, 2005. "Adjustment Costs and Irreversibility as Determinants of Investment: Evidence from African Manufacturing," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-29, October.
  • Handle: RePEc:bpj:bejeap:v:contributions.4:y:2005:i:1:n:12

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    References listed on IDEAS

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    Cited by:

    1. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
    2. Alan Harding & Måns Söderbom & Francis Teal, 2004. "Survival and Success among African Manufacturing Firms," Development and Comp Systems 0409046, EconWPA.
    3. Chan, Rosanna, 2008. "Financial constraints, working capital and the dynamic behavior of the firm," MPRA Paper 27153, University Library of Munich, Germany, revised Aug 2010.
    4. Shiferaw, Admasu & Bedi, Arjun S., 2009. "The Dynamics of Job Creation and Job Destruction: Is Sub-Saharan Africa Different?," IZA Discussion Papers 4623, Institute for the Study of Labor (IZA).
    5. Admasu Shiferaw, 2009. "Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 2, Courant Research Centre PEG, revised 30 Jun 2013.
    6. Marco Grazzi & Nadia Jacoby & Tania Treibich, 2016. "Dynamics of investment and firm performance: comparative evidence from manufacturing industries," Empirical Economics, Springer, vol. 51(1), pages 125-179, August.
    7. Shiferaw, Admasu, 2009. "Survival of Private Sector Manufacturing Establishments in Africa: The Role of Productivity and Ownership," World Development, Elsevier, vol. 37(3), pages 572-584, March.
    8. repec:eee:respol:v:46:y:2017:i:5:p:1020-1038 is not listed on IDEAS
    9. Abiola Babajide Ph.D, 2012. "Effects of Microfinance on Micro and Small Enterprises (MSEs) Growth in Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(3), pages 463-477, July.

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