Inventories and Risk in African Manufacturing

Abstract

Using a panel data set for Zimbabwe which includes firm‐specific measures of contractual risk, we show that contractual risk has a major effect on the holding input stocks and, to a lesser extent, the constitution of cash reserves. This is consistent with inventories being a hedge against stockout risk. By contrast, firms facing more inter‐annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long‐term market fluctuations as they materialise rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilisation rate.

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