Inventories and risk in African manufacturing

Marcel Fafchamps, Jan Willem Gunning and Remco Oostendorp

No 1999-19, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: This paper analyses the effects of risk on the holding of inventories and liquid assets by manufacturing firms. Using a panel data set for Zimbabwe which includes firm-specific measures of contractual risk, we show that contractual risk has a major effect on the holding of stocks of inputs and, to a lesser extent, the constitution of cash reserves. This is consistent with the role of inventories as a hedge against stockout risk. By contrast, we find that firms facing more inter-annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long-term market fluctuations as they materialize rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilization rate.

Date: 1999
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Journal Article: Inventories and Risk in African Manufacturing (2000)
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