Working Paper #2009-061
Inactions and Spikes of Investment in Ethiopian Manufacturing Firms: Empirical Evidence on Irreversibility and Non-convexities
This paper provides empirical evidence on the effect of irreversibility
and non-convexities in adjustment costs on firm investment decision
based on 1996-2002 firm level data from the Ethiopian manufacturing. It
relies on a rich census based panel data set that gives the advantage of
disaggregating investment into different types of fixed assets. We
document evidence of a large percentage of inaction intermitted with
lumpy investment, which is consistent with irreversibility and fixed
costs but not with the standard convex adjustment costs. The inaction is
higher and investment lumpier for small firms. We complement the
descriptive analysis with two econometric methods: a capital imbalance
approach and a machine replacement model. With the capital imbalance
approach we estimate the investment response of firms to their capital
imbalance using a non-parametric Nadaraya-Watson kernel smoothing
method. With the machinery replacement approach using a proportional
hazard model that takes unobserved heterogeneity into account, we
estimate the probability of an investment spike conditional on the
length of the interval from the last investment spike.
- Keywords
-
- Investment
- irreversibility and adjustment costs
- manufacturing
- Ethiopia JEL-Classification: C14
- E22
- O12
- N67 UNU-MERIT Working Papers ISSN 1871-9872
Cite this as
APA 7th ed.Gebreeyesus, M. (2009). Inactions and Spikes of Investment in Ethiopian Manufacturing Firms: Empirical Evidence on Irreversibility and Non-convexities (UNU-MERIT Working Paper No. 2009-061). UNU-MERIT. https://unu-merit.nl/publications/working-papers/abstract/?id=3861