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Capital adjustment patterns and uncertainty in African manufacturing

  • Shiferaw, A.

Judging by the provisions of its investment code and the apparent stability of the macro-economy, Ethiopia seems to offer a favourable investment climate for the private sector. However, Ethiopian manufacturing has experienced a declining rate of investment since the mid 1990s. Like other Sub-Saharan African countries, more than half of manufacturing firms in Ethiopia have zero investment episodes; episodes that have become more persistent over time. This contrasts badly with high average profit rates in African manufacturing relative to average profit rates in OECD countries. Rather than being smooth and continuous, firm level investment in Africa is less frequent and lumpy. While this pattern of capital adjustment is not unique to Africa, the discontinuity and lumpiness is starker than what is observed in developed countries. The evidence in this paper suggests that such discontinuity and the lacklustre investment performance have more to do with uncertainty and irreversibility. The paper shows that uncertainty, proxied by the volatility of profits, undermines mainly the likelihood rather than the rate of investment. However, the possibility to reverse investment decisions, captured by the scope of the second hand market for machinery, significantly increases the rate of investment.

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Paper provided by International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague in its series ISS Working Papers - General Series with number 18759.

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Date of creation: 01 Jan 2006
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Handle: RePEc:ems:euriss:18759
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  1. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
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  4. 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.
  5. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
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  7. Fafchamps, Marcel, 1997. "Introduction: Markets in sub-saharan Africa," World Development, Elsevier, vol. 25(5), pages 733-734, May.
  8. Admasu Shiferaw, 2007. "Firm Heterogeneity and Market Selection in Sub-Saharan Africa: Does It Spur Industrial Progress?," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 393-423.
  9. Martin Mühleisen & Dhaneshwar Ghura & Roger Nord & Michael T. Hadjimichael & E. Murat Ucer, 1995. "Sub-Saharan Africa; Growth, Savings, and Investment, 1986-93," IMF Occasional Papers 118, International Monetary Fund.
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  12. Shiferaw, A., 2006. "Entry, survival, and growth of manufacturing firms in Ethiopia," ISS Working Papers - General Series 19185, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
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