Which Firms Invest Less Under Uncertainty? Evidence from Ethiopian Manufacturing
This paper investigates the investment behavior of firms under uncertainty. Its main focus is the heterogeneity of firm level investment responses to both demand and supply side sources of uncertainty. Accordingly, the investment-uncertainty relationship is examined across groups of firms with varying degrees of investment irreversibility defined on the basis of market structures and access to secondary markets for capital goods. Consistent with theories of irreversible investment, we find evidence that uncertainty undermines the investment responses of firms in less competitive markets and in industries with little or no secondary markets for capital goods. In comparison with small firms, investment by large firms is more responsive to changes in demand and more in-line with models of partial irreversibility.
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