Determinants of Firm Profitability in Africa

Abstract

Using a large firm-level data set of 896 firms selected from 27 African countries between 2005 and 2017 and the generalized method of moments (GMM) technique, this study investigates the firm-specific, industry-level, and macroeconomic factors affecting firms’ profitability in Africa. Unlike existing studies that adopt non-standard measures of a firm’s managerial efficiency, this study introduces the standard measure of managerial efficiency into the determinants of a firm’s profitability. The empirical results show that managerial efficiency, size, age, leverage, tangibility, and firm’s growth are significant firm-level determinants of a firm’s profitability in Africa. Similarly, an industry-specific factor of competition exercises a significant effect on a firm’s profitability. However, the role of macroeconomic factors are not validated by the study. Policy recommendations follow the study.