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Constraints to Private Investment in a High-Growth Environment: Firm-level Evidence from Ethiopia

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  • Admasu Shiferaw

    () (Department of Economics, The College of William and Mary)

Abstract

Private investment remains relatively weak in Sub-Saharan Africa despite recent improvements in investment opportunities and infrastructure. The median firm in nine African countries has zero investment in any given year since 2005, similar to observations in the early 1990s when most economies in the region were performing poorly. To better understand this outcome, this paper analyzes investment decisions of a panel of Ethiopian firms using initial bank ties and firm size to capture heterogeneity in potential credit constraints. We find that relationships with lenders are persistent and firms with rare access to credit respond vigorously to investment opportunities than constrained ones. Credit access also shortens average durations of investment inaction and lackluster investment episodes. While access to credit increases with firm size, small firms with bank ties are at least as responsive to investment opportunities as large firms are. Such relationships tend to be particularly relevant for import competing and single-product firms that are prone to liquidity constraints as compared to their protected and multi-product counterparts.

Suggested Citation

  • Admasu Shiferaw, 2016. "Constraints to Private Investment in a High-Growth Environment: Firm-level Evidence from Ethiopia," Working Papers 168, Department of Economics, College of William and Mary.
  • Handle: RePEc:cwm:wpaper:168
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    File URL: http://economics.wm.edu/wp/cwm_wp168_rev1.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Financing Constraints; Firm-level Investment; Bank Ties; Lumpy Investment; Ethiopia;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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