Confronting Competition Investment Response and Constraints in Uganda

36 Pages Posted: 20 Apr 2016

See all articles by Ritva Reinikka

Ritva Reinikka

The World Bank

Jakob Svensson

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Date Written: November 1999

Abstract

While macroeconomic reforms are necessary, firms' investment response is likely to remain limited without an accompanying improvement in public sector performance.

Investment rates in Uganda are similar to others in Africa - averaging slightly more than 10 percent annually, with a median value of just under 1 percent. But the country`s profit rates are considerably lower.

These results are consistent with the view that Ugandan firms display more confidence in the economy than their counterparts in other African countries. Thus, for given profit rates, Ugandan firms invest more. At the same time, increased competition (because of economic liberalization) has exerted pressure on firms to cut costs. Many of those costs are not under the firms' control, however, so their profits have suffered.

Using firm-level data, Reinikka and Svensson identify and quantify a number of cost factors, including those associated with transport, corruption, and utility services. Several factors - including crime, erratic infrastructure services, and arbitrary tax administration - not only increase firms' operating costs but affect their perceptions of the risks of investing in (partly) irreversible capital.

The empirical analysis suggests that firms - especially small firms - are liquidity-constrained in the sense that they invest only when sufficient internal funds are available. But given the firms' profit-capital ratio, it is hard to argue that the liquidity constraint is binding in most cases, even though the cost of capital is perceived as a problem.

This paper - a joint product of Macroeconomics 2, Africa Region, and Public Economics and Macroeconomics and Growth, Development Research Group - is part of a larger effort in the Bank to study economic policy, public service delivery, and growth. The authors may be contacted at rreinikka@worldbank.org or jsvensson@worldbank.org.

Suggested Citation

Reinikka, Ritva and Svensson, Jakob, Confronting Competition Investment Response and Constraints in Uganda (November 1999). Available at SSRN: https://ssrn.com/abstract=629178

Ritva Reinikka (Contact Author)

The World Bank ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-2893 (Phone)

Jakob Svensson

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 8 163 060 (Phone)
+46 8 161 443 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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