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Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing

  • Admasu Shiferaw

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.

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File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_2.pdf
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Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 2.

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Date of creation: 01 Apr 2009
Date of revision: 30 Jun 2013
Handle: RePEc:got:gotcrc:002
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