Investment in Africa's Manufacturing Sector: A Four Country Panel Data Analysis

Firm level data for the manufacturing sector in Africa, presented in this paper, shows very low levels of investment. The importance of profit effects on investment is investigated using a flexible accelerator, a specification based on the Euler equation and a simple generalisation of these specificiations. There are controls for firm fixed effects. It is shown that the profit effect is very similar for both the accelerator and Euler equation specifications. A comparison with other studies shows that, for small firms, the effect is much smaller in Africa than for other countries. Reasons for the relative insensitivity of investment to profits in African firms are suggested. For the most general specification tested there are no significant differences in the size of the profit effect across the four countries in the study.     

Credit Constraints in Manufacturing Enterprises in Africa

We investigate the question of whether firms in Africa's manufacturingsector are credit constrained. The fact that few firms obtaincredit is not sufficient to prove constraints, since certainfirms may not have a demand for credit while others may be refusedcredit as part of profit maximising behaviour by banks. To investigatethis question, we use direct evidence on whether firms had ademand of credit and whether their demand was satisfied in theformal credit market, based on panel data on firms in the manufacturingsector from six African countries. Of those firms with a demandfor credit, only a quarter obtained a formal sector loan. Ouranalysis suggests that while banks allocate credit on the basisof expected profits, micro or small firms are much less likelyto get a loan than large firms. We also find that outstandingdebt is positively related with obtaining further lending. Therole of outstanding debt is likely to be a reflection of inefficiencyin credit markets, while the fact that size matters is consistentwith a bias as well, although we cannot totally exclude thatthey reflect transactions costs on the part of banks. We presentan analysis showing how much more profitable small firms mustbe to obtain a loan than large firms.     

What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?

In the early 1990s the World Bank launched the Regional Programon Enterprise Development (RPED) in several African countries,a key component of which was to collect data on manufacturingfirms. The data sets built by these and subsequent enterprisesurveys in Africa generated considerable research. This articlesurveys the research on the African business environment, focusingon risk, access to credit, labor, and infrastructure, and onhow firms organize themselves and do business. It reviews theresearch on enterprise performance, including enterprise growth,investment, and exports. The article concludes with a discussionof policy lessons.      

Are Manufacturing Exports the Key to Economic Success in Africa?

The poor performance of many African economies has been associatedwith low growth of exports in general and of manufacturing exportsin particular. The two most successful countries in Africa havebeen Botswana and Mauritius. In Botswana, rapid export growthfollowed the discovery of diamonds; in Mauritius, manufacturingexports played a major role. In this paper we draw on both macroand micro evidence from nine African countries to investigatewhether manufacturing exports are the key to success in Africa.We do this by posing three questions. First, how close is thelink between export and income growth? Second, is there evidencefrom these African countries that manufactured exports haveled to greater economic success? Third, what has limited thesuccess of firms in the manufacturing sector? We argue thatexport and income growth are very closely linked. However, thereis, for this sample of countries, no evidence that if theirexports are manufactures, growth rates are higher. We show thatthe factors that limit the success of African manufacturingfirms in exporting are their levels of efficiency and smallsize. We argue that the key to success in an area where Africahas a potential cost advantage — labour-intensive garments— is to enable large firms to use a more labour-intensivetechnology than is the case at present.     

Risk Sharing in Labor Markets

Empirical work in labor economics has focused on rent sharingas an explanation for the observed correlation between wagesand profitability. The alternative explanation of risk sharingbetween workers and employers has not been tested. Using a uniquepanel data set for four African countries, we find strong evidenceof risk sharing. Workers in effect offer insurance to employers:when firms are hit by temporary shocks, the effect on profitsis cushioned by risk sharing with workers. Rent sharing is asymptom of an inefficient labor market. Risk sharing, by contrast,can be seen as an efficient response to missing markets. Ourevidence suggests that risk sharing accounts for a substantialpart of the observed effect of shocks on wages.