Inventories, Liquidity, and Contractual Risk in African Manufacturing

Marcel Fafchamps Jan Willem Gunning and Remco Oostendorp
Authors registered in the RePEc Author Service: Marcel A Fafchamps and Jan Willem Gunning

Working Papers from Stanford University, Department of Economics

Abstract: This paper tests whether the stockout/precautionary motive applies to inventories and liquid assets held by Zimbabwean manufacturing firms. The evidence indicates that involvement in imports and exports is a major source of contractual risk. Concerns about the timeliness of input deliveries and late payment by clients are primary motives behind the accumulation 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. We find little evidence of inventory and liquidity build-up against market risk, but this may be an artifact of the way fluctuations in sales are measured in the data. Perfect fungibility between various inventories and between inventories and liquid assets is rejected. Implications for policy are discussed.

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