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Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing

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  • Admasu Shiferaw

Abstract

This paper uses firm level panel data from Ethiopian manufacturing to investigate the investment behavior of firms under uncertainty. The paper focuses on the heterogeneity of firm level investment responses to both demand and supply side sources of uncertainty. Accordingly, the investment-uncertainty relationship is examined across groups of firms with varying degrees of investment irreversibility defined on the basis of market structures and access to secondary markets for capital goods. Consistent with theories of irreversible investment, we find evidence that uncertainty undermines the investment responses of firms in less competitive markets and in industries with limited access to secondary markets for capital goods. In comparison with small firms, investment by large firms is more responsive to changes in demand and more in-line with models of partial irreversibility.

Suggested Citation

  • 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.
  • Handle: RePEc:got:gotcrc:002
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_2.pdf
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    References listed on IDEAS

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    Cited by:

    1. K. Farla, 2014. "Determinants of firms' investment behaviour: a multilevel approach," Applied Economics, Taylor & Francis Journals, vol. 46(34), pages 4231-4241, December.
    2. Degol Hailu & Admasu Shiferaw, 2012. "Macroeconomic Determinants of Exit from Aid-Dependence," Working Papers 90, International Policy Centre for Inclusive Growth.
    3. 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.

    More about this item

    Keywords

    Investment; Uncertainty; Irreversibility; African Manufacturing; Ethiopia;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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