Investment in Fixed Capital Stock: Testing for the Impact of Sectoral and Systemic Uncertainty

23 Pages Posted: 25 May 2004

See all articles by Johannes W. Fedderke

Johannes W. Fedderke

University of the Witwatersrand - School of Economics and Business Sciences; University of Cape Town

Abstract

This paper applies current theory recognizing the irreversibility of investment, in order to test for the impact of uncertainty on investment expenditure for a middle income country. The contribution of the paper is unique in two respects. First, it employs dynamic heterogeneous panel estimation techniques not previously applied to investment functions. Secondly, it explicitly tests for the impact of both sectoral and systemic uncertainty on investment expenditure. We find that both sectoral (as measured by output volatility) and systemic uncertainty (as measured by political instability) have a negative impact on investment rates in a middle income country context. Liquidity constraints and growth in total factor productivity are found to have no impact on investment, while trade liberalization has the impact predicted by Heckscher-Ohlin trade theory. Finally, we find complementarity effects between physical capital and skilled human capital, suggesting that South African educational policies may have hampered investment in physical capital, as well as, the growth performance of the economy. Policy implications emphasize the importance of lowering uncertainty for investors, and the need for sound human capital investment.

Suggested Citation

Fedderke, Johannes, Investment in Fixed Capital Stock: Testing for the Impact of Sectoral and Systemic Uncertainty. Oxford Bulletin of Economics and Statistics, Vol. 66, No. 2, pp. 165-187, May 2004. Available at SSRN: https://ssrn.com/abstract=526855

Johannes Fedderke (Contact Author)

University of the Witwatersrand - School of Economics and Business Sciences ( email )

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University of Cape Town ( email )

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