在乌干达面对竞争投资的反馈和制约

tDP5 ,2e2 POLICY RESEARCH WORKING PAPER 2242 Confronting Competition While macroeconomic reforms are necessary, firms' investment response is likely Investment Response to remain limited without an and Constraints in Uganda accompanying improvement in public sector performance. Ritva Reinikka Jakob Svensson The World Bank Development Research Group U November 1999  I POLICY RESEARCH WORKING PAPER 2242 Summary findings Investment rates in Uganda are similar to others in Africa associated with transport, corruption, and utility services. - averaging slightly more than 10 percent annually, Several factors - including crime, erratic infrastructure with a median value of just under 1 percent. But the services, and arbitrary tax administration - not only country's profit rates are considerably lower. increase firms' operating costs but affect their These results are consistent with the view that perceptions of the risks of investing in (partly) Ugandan firms display more confidence in the economy irreversible capital. than their counterparts in other African countries. Thus, The empirical analysis suggests that firms - especially for given profit rates, Ugandan firms invest more. At the small firms - are liquidity-constrained in the sense that same time, increased competition (because of economic they invest only when sufficient internal funds are liberalization) has exerted pressure on firms to cut costs. available. But given the firms' profit-capital ratio, it is Many of those costs are not under the firms' control, hard to argue that the liquidity constraint is binding in however, so their profits have suffered. most cases, even though the cost of capital is perceived as Using firm-level data, Reinikka and Svensson identify a problem. and quantify a number of cost factors, including those 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. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Hedy Sladovich, room Mv[C2-609, telephone 202-473-7698, fax 202-522-1154, email address hsladovich@worldbank.org. Policy Research Working Papers are also posted on the Web at wwv.worldbank.org/research/ workingpapers. The authors may be contacted at rreinikka@worldbank.org or jsvensson@cbworldbank.org. November 1999. (33 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about | development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors, They do not necessarily represent the vietv of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  Confronting Competition Investment Response and Constraints in Uganda Ritva Reinikka Development Research Group World Bank 1818 Street, N. W., Rm. MC 2-507 Washington, DC 20433 Rreinikka@worldbank. org Jakob Svensson Development Research Group World Bank 1818 Street, N. W., Rm. MC 3-361 Washington, DC 20433 Jsvensson@worldbank.org The findings reported in this paper are based on data from the 1998 Uganda Enterprise Survey which was carried out by the Uganda Manufacturers Association Consultancy and Information Service (UMACIS) on behalf of the Ugandan Private Sector Foundation and the World Bank, and was managed by William Kalema and Frances Nzonsi. The survey design benefited from the Regional Program on Enterprise Development (RPED) and contributions from Andrew Stone. Alex Bilson- Darku and Mimi Klutstein-Meyer assisted in data analysis. Useful comments were received from participants in the annual seminar on the Ugandan economy organized by the Economic Policy Research Centre (Kampala) in May 1999, Catherine Pattillo, and Francis Teal. Generous financial support from the Governments of Austria and Sweden is gratefully acknowledged.   I. Introduction Despite major improvements in the policy environment, investmnent rates in Uganda are relatively similar to others in Africa-on average slightly over 10 percent annually, with a median value just under 1 percent. However, its profit rates are considerably lower. These results are consistent with the view that Ugandan firms are more confident about the economy than their counterparts in many other African countries. Thus, for a given expected return on capital, Ugandan firms invest more. At the same time increased competition, due to economic liberalization, has put pressure on firms to cut costs. Since many of these costs are not under their control, firms have not been able fully to meet the challenge of increased competition by reducing costs, with adverse consequences for profits as a result. Using finn- level data this paper identifies and quantifies a number of these cost factors, including those related to utility services, transport, and corruption. Apart from increasing the operating costs of firms, several of these factors-including erratic infrastructure services, arbitrary tax administration, and crime-also affect the firms' perceptions of the risks of investing in partly irreversible capital. The firm survey data reveal that during the first part of 1998, when the survey was carried out, most firms had experienced positive demand and value-added changes and the private sector in Uganda was fairly confident that good macroeconomic management would continue in the future. The empirical analysis suggests that firms, in particular small firms, are liquidity constrained in that they can only invest when sufficient internal fimds are available. However, given the relatively high profit-capital ratio, it is hard to argue that in most cases the liquidity constraint is binding.' Other factors than finance must therefore explain the low levels of investment at the firm level. Investment or physical capital accumulation has played a central role in the literature on economic growth and development for a long time. It is fair to say that few economic ideas are as intuitive as the notion that increasing investment is a good way to raise output and income. Recent empirical research also provides supporting evidence for this view-the rate of investment is robustly and positively correlated with the rate of economic growth in cross-country, long-run growth regressions (Figure 1). 2 Early research on growth and investment took a rather mechanical approach to this relationship: growth was constrained by a lack of investment which, in turn, was constrained by a lack of finance (see Easterly 1997). Consequently, if financing was made available, it was argued, physical capital investment and ultimately growth would follow. l Although profit rates are low relative to several other African countries, they are high compared to the rest of the world. 2 Recent research based on data for a cross-section of countries during 1970-97 show that public investrnent has not been correlated with growth in Africa (Devarajan, Easterly, and Pack 1999). Similarly, private investment has not been correlated with growth, unless Botswana is included in the sample. This result is not surprising, given the poor policy and institutional environment in most of these countries during most of the sample period.  Figure 1: Cross-Country Relationship between Investment and Growth, 1970-92 Growth Real GDP per Capita 0.08 T Uganda 0.08 (1992-98) 0.04 4,~ 0.02 44 * * *+ -0.04 0 10 20 30 40 50 60 Real Investment share of GDP % Note: The Ugandan data for 1992-98 was added for comparison. Source: Penn World Tables 5.6. The underlying assumption for this study is broader. We assume that both investment and growth, and innovation and technical change are driven by the prevailing policies and economic, social, and legal institutions. While some of these polices, in particular macroeconomic policies, can be measured directly, the effect and efficiency of other policy areas are much more difficult to assess. By studying the determinants of private investment at the firm level, we can study a larger set of institutional and policy issues that affect firms. The basic idea in the initial wave of the so-called endogenous growth theory is that growth differences could be sustained indefinitely because the return to capital would not diminish as economies develop (Romer 1986; Lucas 1988; Rebelo 1991). Unlike the growth theory of the 1960s, recent research reflects closer attention to the relationship between theory and data. In fact, a large empirical literature has developed in the 1990s in which virtually every possible variable has been invoked and used to explain this divergence in growth over time within the cross-country framework (Barro 1991; and see Barro and Sala-i- Martin 1995 for a review). Most of this work explains cross-country differences in growth, but a few studies have also attempted to explain the poor performance of Africa (Easterly and Levine 1997; Sachs and Warner 1995, 1996; and see Collier and Gunning 1999 for a review). While the explanatory power of many of the proposed variables has been shown to depend on specification, sample or measurement, a few variables appear to be robustly correlated with growth (see Levine and Renelt 1992, for a critical review). These variables include investment rate (Mankiw, Romer, and Weil 1992; DeLong and Summers 1991), level of initial income, human capital stock, openness to trade, financial depth, and fiscal stance. The African growth "tragedy" has been explained by additional factors, including high volatility (high incidence of shocks originating from external terms of trade, climate or policy), deficient public infrastructure, and ethnic fragmentation. 2  This paper has two objectives. First, using new microeconomic data from Uganda, we examine the extent to which the profound macroeconomic and structural reforms implemented in the late 1980s and in the 1990s are translating into higher private investment. We believe that a strong private investment response following the reforms is essential for sustaining the rapid growth that Uganda has experienced over the past decade. Second, while households are, at present, important economic agents in agriculture and a number of other sectors, growth of firms is important as households cannot achieve significant economies of scale necessary for sustaining high growth. Using quantitative and qualitative survey data, the paper analyzes factors that constrain investment and the growth of Ugandan firms. II. Macroeconomic Evidence on Investment Uganda has been growing rapidly during the past decade, with an average growth rate of 7 percent over the past 12 years and close to 8 percent in the last 5 years, with particularly strong growth in the industrial sector. Thanks to prudent fiscal policy, inflation has been in single digits since 1993/94. The exchange rate has been market-determined since 1993, with the central bank smoothing fluctuations; current and capital account are completely liberalized. As shown in Table 1, price and real exchange volatility has been relatively limited since 1993/94. Despite financial liberalization, lending rates and particularly the spread between the lending and saving rates remain high, reflecting inefficiencies and bad loan portfolios in the banking sector. Trade liberalization has been extensive, including a complete removal of quantitative restrictions and reduction of import duties gradually over time (World Bank 1996). As a result, Uganda's tariffs are now among the lowest in Africa, the highest official rate being 15 percent on consumer goods. Raw materials carry a rate of 7 percent and capital goods are zero-rated. Regional tariffs are even lower. Hence, compared to many other African countries, Uganda's macroeconomic policy environment is good. According to cross-country evidence, this should attract increased private investment and economic growth.3 One obvious explanation for the high growth rates in Uganda is the preceding economic contraction, which resulted from a long period of mismanagement of the economy during 1972-85 when the capital stock shrunk. Hence, much of the subsequent growth has resulted from increased use of capacity, improved allocation of existing resources, and return of both human and financial flight capital. As such opportunities become increasingly scarce, significant private investment is required to stimulate the economy. 3 See Bigsten et al. (1999) for growth rates and macroeconomic indicators in Cameroon, Ghana, Kenya, and Zimbabwe. 3  Table 1: Selected Macroeconomic Indicators for Uganda GDP Real effective Real lending Fiscal years growth Inflation exchange rate rate 1987-90 6.3 140.1 163.8 -40.5 1991-93 5.8 32.3 71.5 0.6 1994-95 8.9 6.3 88.9 10.2 1996-98 6.8 7.0 88.4 13.4 Note: Fiscal year July 1 - June 30. Source: World Bank and International Financial Statistics (IMF). What is the macroeconomic evidence on investment to date? According to the national accounts, private investment increased, on average, by 13 percent per annum in the past decade. The coffee boom in fiscal years 1994 and 1995 created a peak during which private investment (in constant prices) grew by alnost 40 percent, while its share of the gross domestic product (GDP) increased from 9.9 to 12.4 percent (Table 2). The largest increase was in machinery and equipment investment. Since then, growth in private investment has slowed, but the level of investment achieved during the coffee boom has been maintained and even surpassed in 1997/98. Following the initial rehabilitation phase of the late 1980s, the share of public investment in GDP has fallen to about 6-7 percent, while the share of total fixed investment has ranged between 15 and 20 percent of GDP. For comparison, until recently the share of investment was about 30 percent of GDP in the fast growing East Asian economies. Such high levels were maintained for more than two decades. Table 2: Investment as a Share of GDP at Market Prices, Fiscal Year 1986/87-1997/98 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95 96/96 96/97 97/98 Current Prices Fixed investment 9.7 10.8 11.1 12.7 15.2 15.9 15.2 14.6 15.4 16.6 15.5 15.5 Public 4.3 5.6 5.4 6.2 7.4 7.4 6.7 5.4 5.4 6.3 5.6 5.6 Private 5.4 5.2 5.7 6.5 7.8 8.5 8.5 9.1 10.0 10.3 9.9 9.9 Machinery & vehicles 3.8 4.5 4.4 5.2 6.1 6.0 5.3 4.7 5.6 5.4 3.7 3.4 Construction 5.9 6.3 6.7 7.5 9.0 9.9 9.9 9.9 9.8 11.2 11.8 12.0 Constant Prices Fixed investment 17.8 20.2 18.1 17.2 16.8 15.5 15.1 15.5 19.5 20.2 18.8 19.3 Public 10.2 12.4 10.4 9.3 8.3 6.9 6.3 5.7 7.1 8.0 6.8 5.9 Private 7.6 7.8 7.6 7.9 8.5 8.6 8.8 9.9 12.4 12.2 12.0 13.5 Machinery & vehicles 8.5 9.6 8.1 7.4 6.8 5.6 5.0 4.9 7.6 7.1 5.1 4.8 Construction 9.3 10.6 10.0 9.9 10.0 9.9 10.1 10.7 11.9 13.1 13.7 14.6 Source: Statistics Department, Ministry of Finance, Planning and Economic Development. The high GDP growth rates in the past decade and the relatively modest (although increasing) share of investment in GDP place Uganda well above the long-term cross-country regression line depicted in Figure 1. Given that considerable reallocation and rehabilitation of the existing capacity has already taken place, it is unlikely that growth rates can be sustained in the future without a higher share of investment. Thus, a challenge for Uganda's future economic growth is to implement policies that are conducive to technological change and private investment, while at the same time ensuring that both private and public capital are efficiently employed. 4  III. Firm-Level Evidence Firm surveys have proven a useful tool to explore private-sector responses to macroeconomic reforns and to increase our understanding of microeconomic constraints to investment. Such surveys can also help policymakers prioritize policies and interventions to improve the business environment. In Africa, the Regional Program on Enterprise Development (RPED), initiated by the World Bank, has produced valuable quantitative data on manufacturing firms over time for Burundi, Cameroon, C6te d'Ivoire, Ghana, Kenya, Tanzania, Zambia, and Zimbabwe (Biggs and Srivastava 1996). Enterprise Survey in Uganda A private-sector enterprise survey for Uganda was carried out between February and July 1998 jointly by the World Bank and the Ugandan Private Sector Foundation. The survey design benefits from the RPED model, particularly the Ghana and Zimbabwe surveys, but it is more limited in scope, focusing mostly on physical investment, exports, infrastructure services, taxation, policy credibility, regulation, and corruption. However, the survey in Uganda covered a wider range of industrial sectors than the RPED. Apart from manufacturing, which was divided into agro-processing and other manufacturing, the survey included firms representing tourism, commercial agriculture, and construction, as these sectors are expected to have substantial growth potential. Data were collected for 1995-97. Given that the survey required confidential infornation-such as the firm's costs, sales, and tax payments-interviews were carried out by the Uganda Manufactures Association to obtain maximum cooperation of the firms. Enumerator training was emphasized, and a questionnaire was carefully piloted beforehand. In addition to quantitative data, the survey also collected information on firms' perceptions on various constraints to investment. The latter component was modeled on a similar survey carried out in 1994 by the World Bank, allowing an examination of dynamics of the business environment and constraints, as perceived by the private sector. The latest complete industrial census in Uganda dates back to 1989. An updated industrial census was carried out in 1996 but it included only eight (out of 45) districts. Despite its limited geographical coverage, the districts included in the 1996 update actually represent 80 percent of value added in the private industrial sector and 70 percent of employment, based on the 1989 census. It was thus decided to base the sampling frame of the survey on the 1996 update instead of the complete but much older census, particularly as the number of new enterprises has increased dramatically in the past decade. Based on the 1996 update, 37 percent of the firms active today were established since 1990. Although the district of Mbarara was not included in the census update, it was added to the survey because of its importance as a regional business center today. The firm survey was confined to five sectors-commercial agriculture (includes fishing), agro-processing, other manufacturing, construction, and tourism. Table 3 shows the distribution of establishments and employment by firm size and sector in the 1996 updated industrial census. Firm size is defined by employment. Neither the update nor the 1989 census includes firms with less than five employees, so the initial size breakdown was small (5-20 employees), medium (21-100 employees), large (101-500 employees) and very large (over 500 employees). Subsequently, large and very large firms were treated as one group. The five sectors selected for the survey comprise 52 percent of all enterprises included in the census update and almost 80 percent of employment. 5  Table 3: Private Sector Enterprises Based on the 1996 Updated Industrial Census Enterprises Employment Share Share Number (percent) Number (percent) By firm size Small (5-20) 1,957 79.8 16,893 24.9 Medium (21-100) 405 16.5 16,980 25.0 Large (> 100) 89 3.6 34,048 50.1 Total 2,451 100.0 67,921 100.0 By sector Five chosen sectors 1,282 52.3 52,535 77.3 Mining 17 0.7 1,024 1.5 Wholesale and Retail 753 30.7 9,565 14.1 Transport 94 3.8 1,796 2.6 Financial Intermediation 23 0.9 344 0.5 Business activities 98 4.0 1,861 2.7 Other 184 7.5 796 1.2 Total 2,451 100.0 67,921 100.0 Source: Statistics Department, Ministry of Finance, Planning and Economic Development. Table Al in the Annex shows the distribution of establishments and employment within the five selected industrial sectors by firm size and sector. The within-sector distribution of employment shows large variations across sectors. Most of the employment within commercial agriculture and construction is concentrated in two to three very large firms, while most of the employment in tourism is in the small firms. Employment in agro- processing and other manufacturing is relatively evenly distributed across firm size. The following criteria were taken into account when we constructed a stratified random sample for the survey: o The sample should be reasonably representative of the population of establishments in the five specified industrial categories. - The establishments surveyed should account for a substantial share of national output in each of the industrial categories. * The sample should be sufficiently diverse in terms of firm size. . There should be enough representation outside Kampala to draw conclusions about industrial activity in Uganda as a whole. The final sample consisted of 243 surveyed firms and was similar in size and regional distribution to the stratified sample constructed initially (see Reinikka and Svensson 1998). The characteristics of the sampled firms are set out in Table A2 in the annex by firm size, sector, location, and ownership. Over 80 percent of large firms, about 30 percent of medium- sized firms and about 10 percent of small firms in the five sectors were surveyed. Five different geographical areas were covered: Kampala, Jinja-Iganga, Mbale-Tororo, Mukono, and Mbarara. The first four make up 98 percent of total employment in the five selected sectors reported in the 1996 census update. In terms of ownership-which was not a criterion for sample selection-70 percent of firms were Ugandan-owned, 16 percent foreign-owned and 14 percent jointly owned. Table A3 in the Annex presents the distribution of establishments and employment in the final sample by sector and size of the firm. 6  The survey typically consisted of at least two visits to each firm by one or two enumerators. While the manager's perceptions were relatively easy to obtain during a single interview, quantitative data on costs, sales and taxation, which were collected for three years, usually required another visit to consult the accountant. During the course of the survey it was found that a number of firms had changed business activity since 1996, for example, by shifting to trading instead of manufacturing. Similarly, a number of firms were difficult to locate; either they had gone out of business since 1996 or moved to another address, or the 1996 industrial census update may have contained firms from the 1989 census which had gone out of business before 1996. A few firms refused to participate in the survey. For all these reasons, 39 percent of the firms in the final sample were randomly chosen alternates to the initially drawn random sample. Investment Data Before analyzing the regression results, it is useful to examine the Ugandan investment data and compare them to similar data for four other African countries: Cameroon, Ghana, Kenya and Zimbabwe. We have data on employment, capital stock, investment, sales, and value added for 192 Ugandan firms for a three-year period (1995-97). Since we use changes in some of the variables, we lose one year of observations in levels (1995). Thus, data permitting, each firm has two observations, and the total number of observations is 367. Initial inspection of the data led us to discard 14 of these observations as outliers, leaving a sample size of 353.4 As shown in Table 4, about half of the Ugandan firms made an investment in machinery and equipment in both 1996 and 1997. This is similar to the African country average listed in the table. For individual countries where comparable information exists, the percentage of Ugandan firms that invested is somewhat higher than that in Cameroon, Ghana, and Kenya, but lower than in Zimbabwe (Bigsten et al. 1999). While large firms are more likely to invest (77 percent of large and 45 percent of small firms in Uganda), they invest less relative to their capital stock than smaller firms. For the Ugandan firms that invested, the value of investment relative to the capital stock (investment rate) was, on average, 11 percent for large firms and 30 percent for small firms. For all Ugandan firms, the investment rate was 13 percent in 1996 and 11 percent for 1997. Again, this pattern is quite similar to the African comparator country average. With respect to individual comparator countries, the investment rate for the firms that invested in Uganda is lower than that in Cameroon and Ghana, about the same as in Kenya, and higher than in Zimbabwe. Averages, however, can be misleading when the underlying distribution is skewed. At the median firm, the Ugandan investment rate is very low: it is less than 1 percent for all firms and 4.7 percent for those firms that invest. The picture is similar in the four comparator countries; that is, median investment rates for all firms range from zero in Cameroon and Kenya, less than 1 percent in Ghana, to 3 percent in Zimbabwe. 4 We dropped observations with reported value added-to-capital above 1,000 percent or below -100 percent. A closer inspection of the data revealed that rmisreported or erroneous recording of capital stock data was the source of these extreme values. 7  Table 4: Investment in Machinery and Equipment by African Firms (Means) Investment- Investment- Proportion of capital stock capital stock firms investing for aDl firms if firms invest Cameroon 1993-94 0.125 0.059 0.479 1994-95 0.347 0.132 0.382 Ghana 1992 0.363 0.090 0.428 1993 0.536 0.136 0.254 Kenya 1993 0.357 0.072 0.202 1994 0.459 0.127 0.277 Zimbabwe 1993 0.621 0.069 0.111 1994 0.738 0.142 0.193 Comparator average All firms 0.535 0.128 0.239 Large firms 0.738 0.113 0.152 Small firms 0.458 0.134 0.291 Uganda 1996 0.506 0.134 0.263 1997 0.529 0.111 0.208 Large firms 0.765 0.083 0.109 Small firms 0.445 0.133 0.300 Note: Large firms have more than 100 employees, while small firms have 100 or less employees. Source: Bigsten et al. (1999) and the Ugandan survey data. By and large, the survey data seem to be consistent with the trend depicted by Uganda's macroeconomic data. As shown in Table 2, private investment was relatively stable during the survey period of 1995-97, while the overall share of investment in machinery and equipment in GDP fell somewhat after the 1994-95 coffee boom. As shown in Table 5, there are obvious differences between firms that invest and those that do not invest. Investing firms, orn average, have higher profits, tend to experience positive changes in demand and value added, are larger in tenns of value added and employment, and are somewhat more recently established. Uganda and Ghana are the only countries that experience a positive change in value added (and gross sales for Uganda) at the median, reflecting a growing economy and relatively good economic policies. For Ugandan firms that invest the sales-to-capital stock ratio increased by 42 percent, on average (9 percent at the median), while for firms that did not invest, the change in sales was negative (zero at the median). Another notable characteristic of African firms is that the mean and median profit rates are very high, that is, profit as a share of the installed capital stock is high. These are gross profits that are calculated as the firm's value added less wages and interest payments. Compared to the rest of the world, the high profit-to-capital ratios are likely to be driven by the very low level of installed machinery and equipment. 8  Table 5: Summary Statistics for Uganda, Pooled Data for 1996-97 Firms that invest Firms that do not invest All firms Variable mean mean mean [median] [median] [median] Profit rate 0.914 0.565 0.747 [0.306] [0.177] [0.256) Change in sales-to-capital stock 0.418 -0.023 0.207 (0.090] [0.0011 [0.0281 Change in value added-to-capital 0.214 0.012 0.117 stock [0.027] [-0.001] [0.007] Value added-to-capital stock 1.39 0.890 1.149 [0.5011 [0.330] [0.414] Size (employment) 150 51 103 [501 [19] [28] Age 12 14 13 [9] [11 [0] Investment rate 0.234 0.122 [0.0471 [0.0021 Note: There were 184 observations with positive investment and 169 with zero investment. Mean values with median values are in square brackets. Variables expressed as ratio of lagged capital stock, except for size and age. For the four comparator countries, Bigsten et al. (1999) report an average profit rate of 198 percent and a median of 40 percent for all firms. While the Ugandan investment rates do not differ much from the African average, its average profit rates are clearly lower. They are also lower than in any individual comparator country. In fact, profit rates in Uganda, both at the median and the mean, are only about one-half of those reported for the pooled African sample: for those Ugandan firms that invested, the mean profit rate was 91 percent (31 percent at the median), while for all firms the mean was 75 percent (26 percent at the median). We will return to these stylized facts in the next section. Flexible Accelerator Model To what extent is investment across Ugandan firms driven by changes in demand? Are firms in general constrained by liquidity? Does age and size matter? Are there any clear geographical or sectoral differences in investment behavior? To answer these questions we estimate a simple flexible accelerator model. In this model, fluctuations in demand are assumed to motivate investment. Given the weaknesses of the financial sector in African economies, we adopt a model where firms do not have access to credit and simply allocate current profits to investment (for details see Tybout 1983). A similar approach has been applied to four other African countries, namely Cameroon, Ghana, Kenya, and Zimbabwe (Bigsten et al. 1999). By replicating their specification, we can explore whether Uganda, with its better macroeconomic record, differs in any way from the other countries in terms of firms' investment response. As in the case of the comparator countries, we use data on investment in machinery and equipment. The flexible accelerator model of investment for a profit maximizing firm i, which is liquidity constrained, can be written as follows:5 See annex A4. 9  li (t) = (x,i + aQ AQi (t) + c,7ri (t) + otIli (t-1) + a, Xi + dt + si (1) where Ii (t) is the level of investment for firm i at time t, aci is the constant for firm i, AQi denotes the change in sales, 7ti is the level of profits, Xi denotes firm-specific characteristics (age, size), dt is a time dummy, and