Trade Liberalization and Firm Profitability: Insights from Ghana's Manufacturing Sector

The private sector is recognized as an engine of growth; hence a well-developed private sector is deemed as the means to accelerate the rapid industrialization needed in developing countries. In this light, The Government of Ghana over the years has put in place policies to make the private sector flourish. A key strategy was the liberalization of trade through the economic recovery and structural adjustment programmes in the 1980s. However, much is not known about the impact of such policies on the profitability of the private sector especially with respect to trade. Indeed, there is a paucity of research addressing the profitability of firms due to trade liberalization especially the private sector in the African context. This paper fills this gap by investigating how tariffs as a measure of trade liberalization affect the profitability of Ghanaian private firms in the manufacturing sector using firm-level data spanning 1991 to 2001. Profitability is measured as the net profit margin of a firm. A two-step approach was employed in the empirical analysis of the tariff-profitability nexus. The net profit margin of firms was estimated in the first step. After which the effect of tariffs on the estimated net profit margin of firms was examined. The findings reveal that tariff reductions result in increased profitability of local firms. In addition, productivity was found to positively impact firm profitability.