Determinants of African Manufacturing Investment: The Microeconomic Evidence

Journal of African Economies (Impact Factor: 0.57). 09/2001; 10(suppl 2). DOI: 10.1093/jae/10.Suppl2.48
Source: OAI


In this survey paper we consider the microeconomic evidence on investment in African manufacturing. <?Pub Caret>We analyse both the determinants of investment behaviour and the return to that investment. In the 1990s market selection — the process by which the capital stock is reallocated in favour of more efficient firms — has been as strong in Africa as elsewhere. While the macroeconomic literature has focused on low returns to investment as an explanation for Africa's poor growth performance, the micro&hyphen;data indicate high potential returns. However, investment rates remain quite low, presumably as a result of risk, but the surveys currently available are not suitable for testing this.

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Available from: Taye Mengistae, Jan 23, 2014
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    • "Also in the same issue Jan W. Gunning and Taye Mengistae (2001) surveyed microeconomic evidence on manufacturing investment in Africa during the 1990s. They uncovered that the market processes have selected the survival of efficient firms in African countries as strongly as they did elsewhere, so that while macroeconomic literature show that low returns of investment in Africa explain poor economic growth there, microeconomic evidence suggest high returns. "
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    ABSTRACT: This paper develops an empirically-relevant framework (a) to examine whether or not the African business environment hinders or promotes the knowledge economy (KE), (b) to determine how the KE which emerges from such an environment affects economic growth, and (c) how growth in turn relates to the ‘inclusive development’ of 53 African countries during the 1996-2010 time period. The framework provides a modest guide to policymaking about, and further research into, such relationships. We implement the framework by building a three-stage model and rationalizing it as five interrelated hypotheses. To allow greater concentration on the issues that are themselves already complex, our model is very simple, but clear. For example, we make neither an attempt to evaluate causality nor to test for it, even though we suspect the links to be multi-directional – opportunity costs are everywhere. Instead we focus on fundamental relationships between the dynamics of starting business and doing business as expressed in the state of KE, and through it to the inclusive development via the economic growth of those countries. Estimation results indicate that the dynamics of starting and doing business explain strongly a large part of variations in KE. The link between KE and economic growth exists, but it is weak, and we provide plausible reasons for such a result. Despite the weak association between KE and economic growth, KE-influenced growth plays a very important role in inclusive development. In fact, growth of this kind has stronger effects on inclusive development and by implication on poverty reduction, than some of conventional controls in this study such as FDI, foreign aid, and even private investment. There is clearly room for further research to improve the results, but just as clearly practical policy is best served by not neglecting the relationships examined in this paper.
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    • "Y could be log labor productivity (or TFP), the rate of sales growth, export intensity, or 16 There is inconclusive evidence about whether investment in Africa is efficient. Devarajan et al. (1999) argue for inefficiency based largely on cross-country data, while Gunning and Mengistae (2001) argue for efficiency based on firm-level African data. the investment rate. "
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    ABSTRACT: Africa’s economic performance has been widely viewed with pessimism. This paper uses firm-level data for 89 countries to examine formal firm performance. Without controls, manufacturing African firms do not perform much worse than firms in other regions. But they do have structural problems, exhibiting much lower export intensity and investment rates. Once the analysis controls for geography and the political and business environment, formal African firms robustly lead in sales growth, total factor productivity levels and productivity growth. Africa’s conditional advantage is higher in low-tech than in high-tech manufacturing, and exists in manufacturing but not in services. While geography, infrastructure, and access to finance play an important role in explaining Africa’s disadvantage in firm performance, the key factor is party monopoly. The longer a single political party remains in power, the lower are firm productivity levels, growth rates, and sales growth for manufacturing. In contrast, the business environment and firm characteristics (except for foreign investment) do not matter as much. The paper also finds evidence that the effects of the political and business environment are heterogeneous across sectors and firms of various levels of technology.
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    • "The collapse in the height of the bars corresponding to entry and exit reveals that new and dying establishments are rather small in size, while the increased concentration around zero growth rate shows that large incumbents expand or contract rather slowly as compared to small establishments. Such an inverse relationship between firm size and growth is a widely recognized empirical regularity (Evans, 1987; Bigsten and Gebreeyesus, 2007; Gunning & Mengistea, 2001; Van Biesebroeck, 2005 "
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