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. This paper investigates determinants of capacity utilization from 848 firms collected by the World Bank in 2018 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 utilization. A seemingly unrelated (SUR) model result of bivariate 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 (lninputcost), the percentage share of domestic inputs for the establishment (lndomesticinput), fuel cost(lnfuelcost) and access to credit (creditdummy) were contributing positively and significantly. However, foreign exchange constraint (EXCGdummy) and foreign input (FRGNINPT) were attributed to affect significantly but have adverse effect for capacity utilization and number of hours of operation per week. Moreover, capacity utilization and number of hours of operation have positive interdependency. The major contribution of this paper is it employs 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.