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Confronting competition - investment response and constraints in Uganda

Author

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  • Reinikka, Ritva
  • Svensson, Jakob

Abstract

Investment rates in Uganda are similar to others in Africa, - averaging slightly more than ten percent annually, with a median value of just under one percent. But the country's profit rates are considerably lower. These results are consistent with the view that Ugandan firms display more confidence in the economy than their counterparts in other African countries. Thus, for given profit rates, Ugandan firms invest more. At the same time, increased competition (because of economic liberalization) has exerted pressure on firms to cut costs. Many of those costs are not under the firms'control, however, so their profits have suffered. Using firm-level data, the authors identify and quantify a number of cost factors, including those associated with transport, corruption, and utility services. Several factors - including crime, erratic infrastructure services, and arbitrary tax administration - not only increase firms'operating costs, but affect their perceptions of the risks of investing in (partly) irreversible capital. The empirical analysis suggests that firms - especially small firms - are liquidity-constrained in the sense that they invest only when sufficient internal funds are available. But given the firms'profit-capital ratio, it is hard to argue that the liquidity constraint is binding in most cases, even though the cost of capital is perceived as a problem.

Suggested Citation

  • Reinikka, Ritva & Svensson, Jakob, 1999. "Confronting competition - investment response and constraints in Uganda," Policy Research Working Paper Series 2242, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2242
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mackinnon, John & Reinikka, Ritva, 2000. "Lessons from Uganda on strategies to fight poverty," Policy Research Working Paper Series 2440, The World Bank.
    2. Mary Hallward-Driemeier & Giuseppe Iarossi & Kenneth L. Sokoloff, 2002. "Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-Level Data," NBER Working Papers 8894, National Bureau of Economic Research, Inc.
    3. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
    4. Habiyaremye, Alexis, 2016. "Is Sino-African trade exacerbating resource dependence in Africa?," Structural Change and Economic Dynamics, Elsevier, vol. 37(C), pages 1-12.
    5. Eifert, Benn*Gelb, Alan*Borje Tallroth, Nils, 2002. "The political economy of fiscal policy and economic management in oil exporting countries," Policy Research Working Paper Series 2899, The World Bank.
    6. Jakob Svensson, 2003. "Who Must Pay Bribes and How Much? Evidence from a Cross Section of Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 207-230.
    7. Muwonge, Abdu & Obwona, Marios & Nambwaayo, Victoria, 2007. "Enhancing contributions of the informal sector to national development: The case of Uganda," Occasional Papers 54711, Economic Policy Research Centre (EPRC).
    8. Hallward-Driemeier, Mary, 2001. "Firm-level survey provides data on Asia's corporate crisis and recovery," Policy Research Working Paper Series 2515, The World Bank.
    9. Reinikka, Ritva & Svensson, Jakob, 1999. "How inadequate provision of public infrastructure and services affects private investment," Policy Research Working Paper Series 2262, The World Bank.
    10. Fisman, Raymond & Svensson, Jakob, 2007. "Are corruption and taxation really harmful to growth? Firm level evidence," Journal of Development Economics, Elsevier, vol. 83(1), pages 63-75, May.
    11. Svensson, Jakob, 2000. "Is the bad news principle for real?," Economics Letters, Elsevier, vol. 66(3), pages 327-331, March.

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