Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing

Admasu Shiferaw ()

No 2, Courant Research Centre: Poverty, Equity and Growth - Discussion Papers from Courant Research Centre PEG

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.

Keywords: Investment; Uncertainty; Irreversibility; African Manufacturing; Ethiopia (search for similar items in EconPapers)
JEL-codes: D21 D81 O16 (search for similar items in EconPapers)
Date: 2009-04-01, Revised 2013-06-30
New Economics Papers: this item is included in nep-afr
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