Infrastructure quality and firm productivity in Africa
| Date | 12 November 2018 |
| Pages | 367-384 |
| Published date | 12 November 2018 |
| DOI | https://doi.org/10.1108/WJEMSD-11-2017-0091 |
| Author | Edward Bbaale |
| Subject Matter | Strategy,Business ethics,Sustainability |
Infrastructure quality and firm
productivity in Africa
Edward Bbaale
School of Economics, Makerere University, Kampala, Uganda
Abstract
Purpose –The World Bank (2017) ranks poor infrastructure, particularly electricity, as the second topmost
obstacle (after access to finance) affecting enterprises in Sub-Saharan Africa. The purpose of this paper is to
investigate the effect of infrastructure quality on firm productivity in Africa.
Design/methodology/approach –The author used the World Bank Enterprise Survey (WBES) for
26 African countries and employed both descriptive and ordinary least squares techniques during the
analysis. The author circumvents the endogeneity of infrastructure in the productivity model by using
firm-level measures of infrastructure quality rather than the stock of infrastructural capital.
Findings –On an average, 80 percent of manufacturing firms in Africa reported having experienced
electricity outages in the financial year preceding the survey. Power outages are negatively associated with
the productivity of small, medium, young, domestically owned firms and non-exporters. On the other hand,
the author observes a substitution effect of generators for the unreliable power from the public grid and this
effect positively influences the productivity of large, old, foreign-owned and exporting firms.
Practical implications –The author argues that in addition to infrastructure capital at an aggregate level,
dealing with quality issues at firm level is required to enhance productivity. More attention needs to be put to
the elimination of power outages so as to improve the productivity of all firms particularly those that cannot
afford to use generators in the place of electricity from the public grid.
Originality/value –The author notes that there exists scanty empirical literature on the effect of
infrastructure quali ty on productivity for the case of Afri ca despite the existence of WBES for at lea st two
waves for both develope d and developing count ries. The uniqueness of t his paper in comparison t o the
previous literature i s that the author undertakes the anal ysis according to some important fir m categories:
size, age, ownership and e xport status. Additiona lly, the author uses the inf rastructure quality t o
understand its effect on firm-level efficiency levels rather than the stock of infrastructural capital. The use
of aggregate indicato rs of infrastructure introduce s an endogeneity problem which th e author circumvents
in this study.
Keywords Infrastructure, Quality, Productivity
Paper type Research paper
1. Motivation
Good-quality infrastructure is crucial for enlisting efficiency gains at firm level which is
very important for fueling overall economic growth (Escribano et al., 2010; World Bank,
1994). Good-quality infrastructure not only “greases”the production space at firm level
but also enhances the participation of firms in the global trading arena by lowering
transaction or logistical costs (Helpman and Krugman, 1985; Escribano et al., 2010; Holl,
2006; Roller and Waverman, 2001) as well as fostering access bigger labor markets
(Duranton and Turner, 2012). Reinikka and Svensson (2002) designate infrastructure
capital as complementary capital because it offers support services necessary for the
operation of prod uctive private capital. On the o ther hand, poor quality infras tructure and
lack of connectivity partly accounts for the low competitiveness of many products from
developing countries in the global markets as well as the low competitiveness of rural
producers in the urban markets leading to low returns per unit hence dampening the
speed of growth and poverty reduction (Escribano et al., 2010; Mitra et al., 2016). From an
indirect viewpo int, infrastruc ture is argued to promote agglomeration of enterprises and
businesses with productivity enhancing effects from technology spillovers and utilization
of a common pool of resources including specialized labor (Wan and Zhang, 2017; Fujita
and Thisse, 2013).
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 14 No. 4, 2018
pp. 367-384
© Emerald PublishingLimited
2042-5961
DOI10.1108/WJEMSD-11-2017-0091
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5961.htm
367
Infrastructure
quality
and firm
productivity
Indeed, early studies using aggregate data found that infrastructure such as
electricity, water, roads and telecommunications were important drivers of economic
growth not only in Sub-Saharan Africa but also elsewhere like in USA and India
(Aschauer 1989a, b; Easterly and Rebelo, 1993; Easterly and Levine, 1997; Munnell, 1992;
Loayza et al., 2002; Mitra et al., 2002; Estache et al., 2005). These studies sought to
understand the degree of responsiveness of economic growth to changes in the
infrastructure capital of countries. The path-breaking works of Aschauer found
that infrastructure capital stock had positive and significant efficiency effects in
the USA and other developed countries as early as the 1950s and 1960s while Mitra et al.
(2002) found a similar effect in India. Easterly and Levine (1997) used telephones per
worker rather than spending to proxy infrastructure constraints and found that
infrastructure drives growth. Additionally, Bougheas et al. (1999) and Röller and
Waverman (2001) found that transport infrastructure greatly dampened trade cost in the
European Union and in 21 Organisation for Economic Co-operation and Development
countries, respectively. Li and Li (2013) agreed with previous authors by providing
evidence that a dollar in road investment saved two cents in inventory costs in the
manufacturing sector. However, all these authors did not pay particular attention to the
quality of infrastructure probably because of lack of data that could provide a good
measure of quality.
Another strand of literature using firm-level data assessed the impact of infrastructure
on firm-level productivity (Reinikka and Svensson, 2002; Deichmann et al., 2002;
Escribano et al., 2010; Commander et al., 2011; Shiferaw et al., 2012; Bertschek et al., 2013;
Bogetićand Olusi, 2013; Moyo, 2013; Velde, 2015; Mitra et al., 2016; Wan and Zhang, 2017).
Reinikka and Svensson (2002) used data on 243 Ugandan firms surveyed in 1998 where
information on infrastructure services and private investment were collected. They
provide evidence that poor complementary public capital significantly reduces private
investment and that firms substituted for deficient public services by investing in
complementary capital themselves. Deichmann et al. (2002) used firm-level data from the
Mexican manufacturing sector and used external characteristics such as infrastructure
quality and regulatory environment in explaining productivity differentials. They find
that access to markets through improvements in transport infrastructure linking urban
areas have significant efficiency gains at firm level.
Escribano et al. (2010) provided an empirical assessment of the impact of infrastructure
quality on the total factor productivity (TFP) of African manufacturing firms using
Investment Climate Surveys from 1999 to 2005. The authors find mixed results according
to the income class of countries considered. For example, poor quality electricity provision
affects mainly poor countries, whereas problems dealing with customs while importing or
exporting affect mainly faster growing countries. Commander et al. (2011) use data on
manufacturing firms in both Brazil and India to estimate the effect of ICT on productivity.
The authors find a strong positive association between ICT capi tal and productiv ity in
both countries. Shiferaw et al. (2012) combined GIS-based panel data on the road
accessibility of towns with a unique panel of Ethiopian manufacturing firms for the period
1996-2009. They find that better road access significantly increases a town’s
attractiveness for manufacturing firms.
Bertschek et al. (2013) sought to provide empirical evidence for the causal impact of
broadband internet on firms’labor productivity and process and product innovations.
They find no support for the broadband internet and firm productivity linkage.
However, they show that broadband internet drives innovation activity. Bogetićand
Olusi (2013) used a rich Amadeus database as well as the recent EBRD/World
Bank Business Enterprise and Performance surveys to study drivers of firm-level
productivity in the Russian manufacturing sector for the period 2003-2008. They find
368
WJEMSD
14,4
To continue reading
Request your trial