Determinants of Firms’ Capacity Utilization in Ethiopia

Abstract

Under-utilization of firms in Ethiopia is an overriding problem which requires empirical evidence pertinent to capacity utilization policy formulation and implementation. Capacity utilization of firms in developed countries ranges from 85 to 100% while in developing countries it is about 65 to 84%. In spite of these, firms’ capacity utilization of less developed countries ranges from 50 to 64% while Ethiopian firm’s capacity utilization is only 36% which is by far the lowest compared to the other world. This under-utilization of firms is the quest for knowing triggering factors. This paper investigates determinants of capacity utilization of firms where the data was collected by the World Bank from 848 firms in 2015 in all regions of the country. Capacity utilization (%) and number of hours of operation per week were measured to capture the determinants of overall capacity maneuver. A seemingly unrelated regression (SUR) model result of multiple equation estimation of the two measures suggested that about 73.64% and 53.57% of the variation, respectively, in capacity utilization and number of hours operated per week were explained by SUR model. The determinant factors which are idiosyncratic to both measures were cost of input measured in monetary terms as a proxy variable for quantity of intermediate goods and raw material, the percentage share of domestic inputs for the establishment, annual fuel cost and access to credit were contributing positively and significantly. However, foreign exchange constraint and foreign input were attributed to affect significantly but have adverse effect for both of the outcome variables. Moreover, capacity utilization and number of hours of operation have positive interdependency. The major contribution of this paper is to employ econometric estimation of capacity utilization and number of hours of operation per week and measures their interaction as well as identifies its determinants at firm level.

Keywords: capacity utilization, number of hours of operation per week, seemingly unrelated Regression (SUR), multiple equation models

DOI: 10.7176/JESD/13-3-02

Publication date: February 28^th 2022